There are several articles spilled across the internet on Mutual Funds, their benefits, tax implications, charges, etc. Even I have one version of such article which you can read at What is a Mutual Fund.
However, I haven’t come across many articles which actually help an investor in answering the question on how can a person actually execute the step of investing into a Mutual Fund. The objective of this article is to discuss the steps involved around investing into this very importing investment instruments and the pros / cons of investing via each of these modes.
Before an investor can invest in a Mutual Fund, he / she needs to have some financial instrasture in place. They sound very simple, but can be horribly complicated for some types of people.
1. Bank account with a Cheque book: You need a bank account with Cheque facility from where your Mutual Fund investments would be made / funded. This can be any type of bank account such as Saving account or a current account. For Non Residents, it must be either NRE or NRO account (for details please read my article Types of Non Resident Bank Accounts – NRE, NRO & FCNR). This sounds easy, but I have come across many investors who are not able to open a bank account as they don’t have the required ID / Address proofs. For NRIs, the challenge is logistics involved in opening up a bank account from their respective foreign location.
2. Permanent Account Number (PAN) : Investments over a certain limit (Rs. 50,000) need to be supported by a PAN of an investors. If you are a salaried employee, most probably you would have a PAN. The issue mostly arises in case of NRIs who have to go through the difficulty of obtaining a PAN irrespective of the investment amount.
3. Address Proof : Investors need to comply with KYC requirements before investing into mutual funds. The basic requirement of a KYC is ID & address proof along with a PAN. In some cases investors do not have a valid address proof and hence they have to face the challenges of getting one before investing into Mutual Funds.
If you have all the above mentioned items, i.e a Bank account with a chequebook, PAN card and a valid address proof, you are all set to invest into a mutual fund. On a high level, the following three steps need to be done in order to invest in a fund :
STEP 1 – Know Your Customer (KYC) Compliance
In order to start investing, investors first need to be compliant with the KYC norms. It is a simple process whereby a KYC form needs to be filled and submitted along with self attested copies of your PAN & address proof. A detailed article on KYC shall follow shortly.
STEP 2 – Identify the fund in which you need to invest
This step requires an investor to shortlist the mutual funds in which he / she would like to invest in. This can be a tedious exercise given there are several hundred mutual fund schemes currently operating in India. You may need help from a mutual fund advisor / distributor to shortlist a good fund.
STEP 3 – Invest in the Fund
The last step is to fill up the mutual fund form with a supporting cheque. The form needs to be submitted with the respective Mutual Fund house or at CAMS / Karvy centres. Your form would be checked at the time of submission and an acknowledgement shall be handed over to you. The form will then be sent for processing and within next couple of days you shall see the cheque being encashed and a statement sent to your email id or your postal address. Congratulations – you have now successfully invested in a Mutual Fund !
Options Available While Investing in Mutual Funds
Let me now go into a bit more detail and discuss upon few options which an investor needs to decide upon while investing into a mutual fund. Each of the option discussed below has an important impact upon the type of investment, returns, mode of communication or logistics hassles. Hence it is vital that a correct option is being chosen by the investor.
(A) Direct vs Distributor
Investors have a choice to either do the entire investment process by themself and deposit the forms with the respective mutual fund house (DIRECT) or utilise the services of a Distributor or a Financial Advisor who are very handy in advising upon an appropriate mutual fund schemes based upon an investor’s risk profie, helping in form filling, KYC compliance and form submission. Pre 2009, investing via distributors attracted an entry load of around 2.5% which simply meant that out of every Rs. 100 invested, 2.5 Rs. was paid to the distributors as commission. Since 2009, entry load has been abolished and every penny invested by distributors is invested with no cost to the investors. However, from 2013 onwards, investments made via distributors would attract a slightly higher annual expense charge being deducted from the investments. Irrespective of the higher it is worth while to go via the distributors if you require their expert understanding of the investment options and take the hassle of investing away from your end.
(B) Paper vs Online
Just like stocks, mutual fund can either be purchased online or via paper form. The paper form is as mentioned above. For online purchases, investors have three options :
1. Online Stock Brokerage websites such as ICICI Direct, Kotak Securities, investment accounts of banks etc. – these website offer buying /selling of mutual funds along with shares;
2. Online Mutual Fund Distributors – some distributors have setup dedicated websites to allow for buying / selling mutual funds online;
3. Mutual Fund’s website – you can transact online on the respective mutual fund’s website. Some fund houses offer more online services than others. However, the first transaction needs to be via a paper based transaction. It is important to note that only investments via this option are classified as Direct investments (as mentioned in Point A above). Online investments via mode 1 and 2 will always be via a Distributor.
(C) Demat vs Offline Units
Investors have an option to get their mutual fund units allotted to their respective demat account whereby they can see their mutual fund units in a centralised place along with their shares portfolio. Other than that, demat option doesn’t really come with any other advantage. Frankly, I fail to see why would an investor go for a demat option for Mutual fund. Unlike shares, mutual fund units are actually held in electronic form, irrespective of the fact that you hold them in demat or paper form. Loosing a Mutual fund certificate / statement doesn’t mean that you need to go through tedious formalities to get another one issued. Just go to any near by mutual fund office and get another one printed free of cost.
Investors should make sure that they add a nominee in the mutual fund folio. This would save tedious formalities to be complied by the legal hiers in case of an unfortunate demise of the mutual fund investor. Every mutual fund form has a section of Nomination and it has now become mandatory for investments being made in Single mode to have a nominee. For more information on Nomination, please read my article on Importance of Nomination.
(E) Mode of Holding – Single or Joint or Any or Survivor
The mode of investment followed in Mutual funds behaves in a similar manner as in case of a bank account. Generally the options are :
– Single : Only one person owns the units and can operate (buy / sell) the mutual fund investments.
– Joint : There are two or more owners of the units and both owners need to sign together in order to transact on the account. ‘Any or Survivor’ mode can be used by investors if they want any of the joint owner to transact on the account.
(F) Statement – Paper vs Email and Frequency
This option gives flexibility to the investor to save some trees by opting for statements to be delivered via email. Investors can choose to have statement on a month, quarterly, half yearly or yearly basis. Personally, I feel comfortable with email based e-statements as I don’t have to pile a stack of paper based statements. For investors who are travelling a lot or for NRIs, estatement works the best as it prevents the risk of statements being lost in post.
(G) Cheque Based Redemption or E-Redemption via ECS / Direct Credit
This is one of the best features offered by almost every fund house. Investors can opt for cheques to be sent to them in post on redemption of their investment or the funds can be credited directly in their bank account. The direct credit would only be made in the bank account registered in the folio of the investor. Direct credit generally is very efficient and the funds are credited in 1-3 working days from the date of redemption request. You would appreciate that this would be a convenient option compared to cheque based redemption whereby the cheques may be delayed in post and may often go missing.
(H) Power of Attorney (POA)
Investors have an option to nominate a power of attorney holder who can transact on their behalf. Generally this is a useful option whereby investors want to delegate the hassle of form filling, signing and related logistics to a trusted person. A classic example is in case of busy professionals and NRIs. While this option adds to the convenience, it adds to the risk as well. Investors should take extreme care in evaluating the POA holder as POA holder has full transaction access rights on the folio and mutual fund houses will obey all instructions from the POA holder.
(I) Growth versus Dividend Options
Investors have to choose from Growth, Dividend, Dividend reinvestment options while initiating their investments into a mutual fund. A detailed article describing each of these options and their implications can read at Payout Options in Mutual Funds.
(I) CAMS or Karvy
I made a slight reference in the initial paragraphs where investors can visit either CAMS or Karvy’s centres to transact on their mutual fund account. Instead of opening branches in each of the cities in India, mutual fund houses have authorised CAMS / Karvy to act as investor’s point of contact for any mutual fund transaction. They also process all transactions eventually for most of the Mutual Fund houses. The list mutual fund houses serviced by CAMS / Karvy is below :
Mutual Funds Serviced By KARVY (in ascending order):
1.Axis Mutual Fund.
2.Benchmark Mutual fund.
3.Bharati Mutual Fund.
4.Baroda Pioneer mutual fund.
7.JM Mutual Fund.
8.LIC Mutual Fund.
9.Mirae Asset Mutual Funds.
11.Principal Mutual Fund.
12.Peerless Mutual Fund.
13.Quantum Mutual Fund.
14.Reliance Mutual Fund.
15.Religare Mutual Fund.
16.Sahara Mutual Fund.
17.Sansui Mutual Fund.
18.Taurus Mutual Fund.
19.UTI Mutual Fund.
20.Paramerica Mutual Funds.
21.Bank Muscat India fund.
22.Tata Mutual Fund
Mutual Funds Serviced By CAMS (in ascending order):
1.AIG Mutual Fund.
3.BNP-Paribas Mutual Fund.
4.DSP Black Rock.
5.Fidelity(take over by L&T).
6.HDFC Mutual Fund.
7.HSBC Mutual Fund.
8.ICICI-Prudential Mutual Fund.
9.IDBI Mutual Fund.
10.IDFC Mutual Fund.
11.IIFL Mutual Fund.
12.ING Mutual Fund.
17.Tata Mutual Funds
While I have tried to discuss upon many options available for investors, it is at times confusing and requires investors to seek expert advise. I would strongly recommend to take assistance from a financial advisor to get the most out this investor friendly investment instrument.