What are the top 5 mutual fund investing questions every investor has in mind

Looking at the recent trends, we can say that there is a rapid increase in the awareness about investments in mutual fund in India. However, a majority of the population in India still does not have an answer about mutual funds or have never experienced the investment in mutual funds. These prospective first-timers may have many doubts in mind when they start investing in mutual funds in India. Even the informed investors can have some doubts about the working of the mutual funds and may ask very basic questions.

Here we go with the commonly asked questions about mutual fund investments:

Is a Mutual Fund scheme with lower NAV better?

One of the myths in mutual fund investments is that investing in a fund with lower NAV is better than investing in a fund with higher NAV. NAV is defined as the price at which the investor buys the units of a mutual fund scheme. This price can be looked as the fund’s total assets remaining after providing for the liabilities and fund expenses. Investors can also define NAV as the market value of units of the fund.

You can check the NAV of your Mutual Fund Scheme here – Historical NAVs of Mutual Funds

While investing in a mutual fund, investors should never consider NAV, which is the price per share of a mutual fund. So it may not be wise if an investor chooses to invest in a fund with a lower NAV value of Rs.10, instead of the fund with higher NAV, thinking the fund with lower NAV will reward the investor with higher returns than the scheme having higher NAV.

Investors should understand that NAV isn’t an indicator of the intrinsic worth of a mutual fund scheme. Investors shouldn’t see this as criteria towards fund selection; instead an investor should be more concerned about factors like long term annualized returns, performance consistency and risk factor of a fund. This will help them to choose the fund which is more consistent and can deliver higher returns over a long period of time.

See the list of most consistent mutual fund schemes here – Top consistent mutual fund performers

It is advisable to analyze the performance of the scheme and whether it has been able to beat the benchmark and category returns, instead of just looking at the NAV value. This way an investor may well be able to understand the fund’s ability to generate high returns under various market situations and whether the fund’s objective is in line with the investor’s financial goals.

Check this – Mutual Fund Latest NAVs

What are the charges in a mutual fund investment?

Many people think that the mutual funds charge them at the time of investment. This is not true as the mutual funds do not charge any such amount. There is no entry load now and the investors don’t have to worry about any fee when they start investing. However, mutual funds charge an annual expenses (which is known as expense ratio) to manage the fund and meet other expenses like distribution cost, etc. The expense ratio is adjusted in the NAV and therefore, the NAV you see is post adjustment of such charges.

Total Expense Ratio of a mutual fund can be calculated using the following formula – TER = Total expense incurred in an accounting period X 100 / Total net assets of the fund. SEBI has placed a limit on TER of Debt schemes and Equity schemes, which are as follows –

In case of equity mutual funds, fund houses can charge TER of 2.50% for the first Rs 100 Crores of assets, 2.25% from Rs 100 Crores to Rs 400 Crores, 2% on the next Rs 400 Crores to Rs 700 Crores and 1.75% on any sum above Rs 700 Crores. Debt mutual funds can charge o.25% points lesser than that of equity funds.

Also, there is an Exit Load which an investor may have to pay if they redeem their investments within the exit load period.

Is this a right time to invest in Mutual Funds?

This is one of the most frequently asked questions by the herd of investors who think there is a specific season for investing. The first thing an investor should understand is that there is a difference in the mutual fund investment and share market trading and they both have completely different dimensions. The matter of timing the market is required when you are thinking about trading in the share market. However, there is no need to time the market when you invest in mutual funds, since you will get the expertise of fund managers who will be able to handle all ups and downs in the performance of the scheme on the basis of the market trend.

Therefore, start investing in mutual funds for meeting your long term and short term goals without worrying about markets levels, etc. Also read to know what are the benefits of investing in mutual funds in India

Is there any difference in performance of a dividend or a growth Plan?

Basically, there are two options to choose from when you invest in mutual funds – growth and dividend. The Dividend plan also has two options, which includes dividend payment or reinvestment.

Generally, investors lack basic knowledge and get confused about what these categories mean, and where they should invest. Let us understand the difference they make:

If an investor invests under growth option, he/she buys units of a scheme which they can have till the end or maturity period of the scheme. Since the Net Asset Value (NAV) of the scheme keeps changing on the basis of the performance, an investor makes profit as the NAV increases. In the dividend plan, the fund declares dividend that reduces the NAV as the same is paid out from the profit made by the fund manager or the surplus lying in the fund account.

If an investor chooses to reinvest the dividends, then he/she receives additional units on ex-dividend NAV. Therefore, there is no difference between growth option and dividend reinvestment option. In short, it all comes down to the need of the investor. If the investor is looking long term capital growth, growth option is the best option but if he or she is looking for regular return from their mutual fund investments then dividend payout could be a good option.

In case you want to invest in schemes with good dividend payout track record, check this –Top dividend paying mutual funds

Is there any tax benefit on investments in mutual funds?

An investor can avail tax benefits and even get higher returns on their mutual fund investments. This is possible with one category of mutual funds known as Equity Linked Savings Scheme or ELSS mutual funds. One of the benefits of the ELSS funds is that they have a lock-in period of 3 years only, which is the shortest among the instruments that qualify for income tax benefits under Section 80C of The Income Tax Act 1961. One can invest with an amount as low as Rs 500 in ELSS Funds.

Did you know what are tax saving mutual funds

Mutual funds in India have become one of the popular investment options. Investors should define their investing goal, know their risk taking ability and investment objective before selecting a mutual fund scheme and should not judge schemes based on high or low NAVs.

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