Understand your salary structure

 “The number of INR 50,000 per month that the company has offered to pay you is it the in-hand number or your CTC?” I could not help but ask my friend, Leesha this question (and ruin her excitement) when all she wanted me was to be happy for her new job at a leading fashion house in Mumbai.

She obviously did not understand the term CTC.  She told me that she was offered INR 50,000 per month and reckoned it was sufficient to live a decent life in Mumbai. What she didn’t understand was that the amount of INR 50,000 was the CTC amount and the actual amount she would receive in hand each month would be lower.

I asked her ‘Have you heard about the IIT students getting a package of INR 24,00,000 and more?’ After she answered in affirmative, I further questioned her ‘How much do you think, that person would be getting each month in his/her bank account?’ My friend answered with a bit of jealousy that the amount would be INR 200,000. I told her that it is not so, the student would get anything between INR 100,000 to INR 135,000 as his/her in-hand salary. The amount of INR 24,00,000 is their CTC and various components get deducted before receiving the final salary.

I explained to her that the industry generally discusses salary in terms of CTC and not in-hand (which are not the same thing). By looking at her face, I realized either she has assumed the worst or is absolutely clueless about anything that I just said. Then I started to explain to her exactly in detail what I meant.

In-hand salary (also known as take-home salary) is the amount that you actually receive in your bank account at the end of each month whereas CTC (also known as Cost to company) is the total salary amount before any taxes, insurance amount, bonus and other various deductions. This amount is generally printed on the offer letter issued to an employee.

Salary is always offered on per annum basis. It is generally never negotiated or discussed on a per month basis. My friend would be expecting an amount of INR 600,000 (50,000*12) annually in-hand but the amount is actually INR 600,000 CTC.

When you see your compensation structure

 In short, in-hand salary = CTC minus Deductions

CTC is always a higher number than the in-hand salary number.

The general deductions which are subtracted from the CTC amount to arrive at the final ‘ in-hand’ or ‘take-home’ salary of an individual can include:

  1. Telephone, car, and other allowance Many employers reimburse their employees’  telephone & internet bills,  children’s education and uniform allowance up to a specific limit. This amount is also included in the CTC as a part of your salary. However, this payment is not made at the end of each month but is made only when the bills (up to the limits specified in the offer letter) are submitted to the company. Thus, one can collect bills over 6 months and claim their reimbursements once in 6 months or not claim anything until the end of the year. Where an employee does not submit any bills throughout the year, the employer shall pay the amount due to an employee after deducting relevant taxes on the same at the end of the year. Where bills are submitted to the extent of the limits specified, no taxes are deducted by the employer while making these payments.
  2. Leave Travel Allowance (LTA) – LTA is similar to the allowances mentioned above. The same is paid to you only after you submit the relevant bills and documents to your employer. There is a detailed article, written on How to save tax through LTA

Components of a salary structure

  1. Gratuity –  Gratuity is payable to an employee on the termination of his /her employment after they have rendered continuous service for not less than 5 years. It is important to know that gratuity is payable only on resignation (after 5 years of service), retirement or death. Thus, even where the same is included in your CTC, it is not paid to you until you serve 5 years. If you leave the company before completion of 5 years of service, this amount is not paid to you even though it formed a part of your CTC.
  2. NPS (Employer Contribution) – An employer may contribute a % of your basic salary towards NPS – National Pension Scheme. Any money from NPS is received only post-retirement. There are certain conditions for withdrawing money before retirement. We have discussed in detail about NPS in our articles What is NPS and How can you withdraw money from NPS. The NPS amount is a part of your CTC but not paid each month to you and instead deposited with PFRDA each month to be paid to you on your retirement.
  3. Employees’ Provident fund (EPF)– An employer contributes 12% of the basic salary payable to the employee towards EPF. Where an employee opts for EPF, the employee contributes 12% of his basic salary in addition to the Employers Contribution. A total of 24% of your Basic salary is deducted from your CTC resulting in a lowered in-hand amount. There are many things to know about EPF apart from the impact on the in-hand amount. We have discussed the same in detail in our series of Article under EPF
  4. Taxes All employers are required to deduct taxes on the salary that they pay to the employees. If you are under the belief that you are hardly earning anything and should not be paying any taxes, you are mistaken. If an employee is earning more than INR 2.5 lakhs per annum (this amount is the CTC amount), the employer shall deduct appropriate taxes on the same. Apart from EPF, the major impact on the in-hand salary is the taxes which are deducted by the employer. Refer to our Articles Ways to reduce taxes without any investments and Investments which help you reduce taxes.
  5. Health Insurance or medical-claim Many employers provide their employees with health insurance cover and the premium amount of the same is included in the salary CTC amount. However, that amount is not received in-hand each month by the employee but is directly paid by the employer to the respective health insurance providers.
  6. BonusThe Bonus component in one’s Salary is completely dependent on the performance and targets achieved. The maximum bonus that an employee is eligible to receive is included in the CTC. However, it is received only once a year and depends on your performance which is assessed by your employer. Where your offer letter states a bonus of INE 300,000 you may receive anything less than INR 300,000 based on the targets achieved by you and after deducting the applicable taxes on the bonus.
  7. House Rent Allowance (HRA)- The amount paid as rent when the employee is settled in a new city. This is received in hand each month until you are living in accommodation provided by the employer.

In conclusion, the deductions from the CTC can broadly consist of five parts:

  • Contributions: Amount that is contributed by the employer on behalf of the employee towards EPF, Insurance, a gratuity fund or a pension fund. It is a part of your salary but is received by you only after you have completed a few years of service and on the fulfillment of certain conditions.
  • Taxes: Income-tax – the same is deducted when your income is more than INR 250,000 subject to some investments and profession tax  – this is deducted for all professional employees.
  • Employer Expenses: House Rent and Health Insurance – Expenses incurred by the employer for your benefits but not paid in-hand to you. 
  • Reimbursements and allowances: Amount that you receive as reimbursements/allowances (without taxes) after the relevant expenses proofs are submitted. Where you do not submit the proofs, the same is paid to you at the end of the year after deducting taxes from the same.
  • Variable salary: Amount that you receive as performances based incentives, profit-based bonus or sales based targets (Bonus).

By the end of this discussion, Leesha was not very happy as now she realised that she will receive only INR 40,800 in-hand each month and not the INR 50,000 CTC she was offered by her employer.

For a fresher, this can be an anxious phase as you do not want to be considered unaware by your new employer and yet know how much exactly you are going to earn. We, through are articles are educating you about your income as understanding and knowing your income is the first step towards financial wellbeing.

Why a Systematic Investment Plan(SIP)?

SIPs have become the most favoured route of investments for not only the investors but also Financial Advisors in India. That is not surprising, since they come with considerable benefits.

Become a Disciplined Investor

A SIP helps you discipline yourself. You can commit a fixed amount each month to investments, and the amount gets invested at the pre determined date. This ensures that money does not lie in your savings account @ a meagre 3.5% and there is no temptation to to spend that amount as it is not there to spend.

BIT BY BIT…You can build a large corpus.

 

Rupee Cost Averaging

Enormous sums of money have been lost by investors in a bid to time the market. But no one has been able do it consistently. When experts have failed, what about a rookie investor. Its useless, even attempting to time the increasing volatile markets. SIPs ensure that a fixed amount is invested irrespective of the ups and downs in the market and hence the cost of acquisition of investments is averaged out.

The timeless principle is “Buy Low Sell High”. However, investors tend to sell out when there is a fall in the markets due to panic. A rising market tempts them to enter the markets at high levels. SIPs help over come this problem. 

Achieve your Financial Goals

Your future financial goals like buying a car, buying a house, child’s education can can be converted into the required monthly SIPs. For example, if you need INR 6 lakhs after 4 years to purchase a car. Assuming that your investments earn 15% per annum, you will need to save INR 9,198 per month to achieve a corpus of INR 6 lakhs. By converting your goals into monthly investments, you can view the achievability of your goals clearly and this also motivates you to stay on track with your investments.

Compounding Benefits

The biggest advantage of regular long term investments, Compounding Benefit. The investments made continue to grow year on year and the invested profits participate in growth in future years.

Effortless Investments

Once initiated an SIP can go on for as long as you want it to run with no further intervention required from your side. With a simple instruction the SIP can be stopped at anytime.

Should you invest in Sectoral Funds?

First of all, what is a Sectoral Fund?

A Sectoral Fund is a Mutual Fund that restricts its investments in stocks of a particular sector. For example: Reliance Pharma Fund invests only in stocks of Pharma companies. UTI Banking Sector Fund invests only in Banks.

An extension of a Sectoral Fund is a Thematic Fund that invests in stocks based on a  particular theme. For example: Birla Sun life GenNext Fund invests in companies that are expected to benefit from the rising consumption patterns in India, which in turn is getting fueled by high disposable incomes of the young generation (Generation Next).

Sectoral and Thematic Funds are generally referred to as a single category. Some of the Sectoral funds available in India include Banking, Pharma, IT, Technology, Infrastructure, FMCG etc.

The reason Mutual Funds launch such schemes is that they believe a particular sector will outperform the broader index and generate higher returns.

 

Risk/Return Profile of Sectoral Funds

Sectoral Funds fall in the ‘High risk’ ‘High return’ category of funds. If the particular sector does well, then one can expect higher than market returns. The same is true vice versa.

For example: Franklin Infotech Fund invests in stocks of only IT companies. On April 30, 2011 the fund had an exposure of over 50% of the fund portfolio to Infosys Technologies and over 25% to TCS. When the March ’11 Quarter results of Infosys did not meet market expectations, its stock price fell and the value of this fund also fell be over 8% in just two days!

Sectoral Fund: The Pawn or the Queen?

Should you invest in Sectoral Funds?

Sector Funds add a flavour to your portfolio and hold the possibility of increasing the returns of your overall portfolio if they do well. Some of the best performing funds in the last five years have been Sectoral Funds in the Banking and Pharma space.

You should take exposure to Sectoral Funds only if you have the higher risk appetite. Again, you must ensure that investments in Sectoral Funds do not exceed 10% of your total portfolio.

Points to be kept in mind before investing in such funds

Firstly, you need to understand the objective of the Mutual Fund scheme properly. For example: Some Sectoral Funds invests only up to 65% of the portfolio in the stated sector. This can dilute your exposure to a sector.

What is included in the definition of a sector/theme also varies from fund to fund. For example: As on date, DSP T.I.G.E.R Fund and ICICI Infrastructure Fund have significant exposure ICICI bank. The logic being, as infrastructure grows, banks are going to be directly benefited by increased lending. This also needs to be studied.

Secondly, you need to check the exposure of your investment portfolio to a particular sector. For example: Most diversified equity funds already have a good exposure to the banking sector. One must take this into account before taking additional exposure to the banking sector through sectoral funds to avoid over exposure.

Thirdly, you must understand that the fund manager of a sectoral fund is restricted in his investment options and will have to continue to invest in a particular sector even if that sector is not doing well. A diversified fund manager has no such restriction and can easily make a switch.

Lastly, compared to a diversified Equity Fund, a Sectoral Fund is not held in the portfolio for a very long time, say 10-15 years. When a Sector is expected to do well, one buys such a fund and exits the fund once it starts going out of favour. The tenure for such funds generally is 3-5 years. Some amount of timing is required to enter and exit such funds.

For example: The Infrastructure sector in India did very well till the markets crashed in 2008. Even though the markets recovered from the crash, the sector has grossly underperformed the broad index till date.

In conclusion, take an informed decision before investing in a Sectoral/Thematic fund.

Most Essential Factor for a Successful Investor

Scores of articles have been written on this topic, what does it take to be a Successful Investor. A quick search on Google will give you results which include Fundamental Analysis, Technical Analysis, Economic data Analysis, Understanding the business of company, Timing the markets, monitoring Currency movements, and the list goes on and on. Then, what is the Most Essential Factor for a Successful Investor?

DISCIPLINE.

This one word overrides all other factors.

Discipline to stick to one’s investment plan.

Discipline to continue to contribute for one’s goals.

Discipline to book profits and re-allocate based on one’s Asset Allocation.

DISCIPLINE PAYS OFF

Studies have shown that more than 90% of the returns earned by an investor can be explained by Asset Allocation. That means, right Asset Allocation (for example, Debt or Equity) is more important than the selection of the actual instrument (say an HDFC Fund scheme or a Reliance Fund scheme). And it requires DISCIPLINE to maintain the Asset Allocation as time passes and as markets fluctuate.

Investors reaped enormous profits when the markets reached new peaks in January, 2008. This was followed by the famed crash in September, 2008 all across the globe. This led to panic redemptions on part of many many investors. Unexpectedly, the markets recovered quickly to reach the 2008 highs in November, 2010.

Investors who stayed invested were the ones’ who reaped maximum returns on the systematic investments made in the dips. Investors who exited in 2008 out of panic have only themselves to blame for missing out on the rally.

Again, the longer you stay invested in the equity markets, lesser is the probability of getting negative returns. A study of the Sensex returns for the past 30 years have shown that, if you were invested in the index for any period of 14 years or more, there is zero probability of earning negative returns. As one of the Investment gurus rightly said, “Time in the market is more important than timing the market”.

Successful investors from around the world swear by only one thing…DISCIPLINE. A Financial Plan helps you initiate and maintain that Discipline.

Weird (Non) Investing Reasons

My interactions with a cross section of investors has thrown up weird reasons for not investing and equally strange reasons for investing one’s money. Why I term them as weird is because there is no reasonable logic for the same. 

REASONS FOR NOT INVESTING

Lack of time!

Many people have all their savings lying in the bank account earning a meagre 3.5% only because they do not have the time to look at their Financial matters.

Lack of Understanding!

There are others who decide not to invest because they do not understand the various investment products. For them Investments mean Fixed Deposit. Major chunk of the individuals fall under this category.

Too many Investment Options!

Some are too perplexed with the various investments options available that they decide not to go through the Investment process at all. Thanks to inflation, the money keeps diminishing in the Savings bank account.

Why not take the Helping hand of an Advisor

 

Don’t want to pay Financial Advice Fees!

Many investors do a hit and trial, ask friends, search around for information and gather some details. This category makes an effort to invest, which is insufficient. But they are not ready to hire a Financial Advisor. Reason being, we in India are never used to paying fees for Financial Advice and want status quo to remain.

Investments is a specialised field and over a period of time you will realise that the growth in your investments far exceed the fees you pay to your Financial Advisor. 

 

REASONS FOR INVESTING

The Agent was a Friend or a Relative!

I rank this THE MOST WEIRD REASON for investing. Whether the agent is a relative or a friend, Do you earn money for yourself or so that the agent can fill his pockets at your cost? Many people invest without looking at the the suitablility of the investment, just to please the relative/friend agent.

Tax Saving!

While this is the least controversial reason for investing, in India it has become the most important one. Most people invest money only so that they can save taxes. Instead of tax saving being taken into account in the whole investments process, the entire investment process happens to save tax. That way the individual saves tax, but loses out on appropriate returns on his investments. 

You have worked hard to earn your money; it’s time to make your money work hard for you.

Risks Involved in Investing in Equities

As mentioned, Risk is the uncertainty involved in the expected returns. Risk associated with Equities are much higher compared to Debt instruments. So are the returns. This follows the universal principle, “Higher the Risk, Higher the Return”.

Market Risk

The biggest risk associated with Equities is Market Risk. Equity instruments are volatile and prone to price fluctuations on a daily basis due to changes in market conditions.

Financial Risk

This is the second biggest risk associated with investment in Equities. Disruption in the internal financial affairs of a company will have a direct impact on the share prices of the company and may cause a loss to the investor. A prime example of such an instance is the Satyam fiasco in the January 2009 or a recent example of management fights in SKS Microfinance.

 Investing Risks…there are a multitude of them.

Liquidity Risk

This refers to the ease with which a security can be sold at or near to its market value.

Securities, which are not quoted on the stock exchanges, are inherently illiquid in nature and carry a larger amount of liquidity risk in comparison to securities that are listed on the exchanges. While securities listed on the stock exchange carry lower liquidity risk, the ability to sell these investments at the market price is limited by the overall trading volume on the stock exchanges.

Settlement Risk

It is a risk that the counter party does not deliver the security purchased against cash paid for it or value in cash for the security sold is not received after the securities are delivered by us.

Such risk can be avoided by entering into transactions in the nature of delivery versus payment (DVP) or settlements via clearing houses where the Stock Exchange acts as the counter party to every transaction.

 Risks associated with investing in foreign securities

The biggest risk associated with investments in foreign securities is fluctuation in foreign exchange rates. If you invest in a US Stock which gives you 20% return over a period of time and the US Dollar depreciates by 10% during this period, your net return in domestic currency will be much lower than 10%.

Other risk involved include restriction on repatriation of capital and earnings under the exchange control regulations and transaction procedures in overseas market.

You will see that a some of the risks listed above also affect Debt Securities. It is very difficult to segregate risks which affect only one type of investment.

Risks Involved in Investing in Debt

Risk refers to uncertainty in returns. Debt instruments are considered less riskier than Equities because there is a lesser uncertainty in the returns one can expect from Debt Instruments. Never the less, following are the major risks are involved in investing in Debt Securities.

Interest-Rate Risk

Fixed income securities such as bonds, debentures and money market instruments face interest-rate risk. Generally, when interest rates rise, prices of existing fixed income securities fall and when interest rates drop, prices of fixed income securities increase.

For example: If a Rs. 100 par value security offers 9% rate of return, and the prevailing rate of interest increases from 9% to 10%, the values of the security will fall below Rs. 100 because it offers a lower rate of return(9%) compared to the market return(10%). The extent of fall or rise in the prices depends on the existing coupon rate, time to maturity of the security and the quantum of increase or decrease in the interest rates.

Before Investing, be informed of the risks involved…

Credit Risk

In simple terms this means that the issuer of a debenture/bond or a money market instrument may default on interest payment or in paying back the principal amount on maturity. Even if no default occurs, the price of the security may go down if the credit rating of the issuer of the debt instrument goes down.

Investment in Government securities has zero Credit Risk as the Government is not expected to default on its obligations.

Liquidity Risk

This refers to the ease with which a security can be sold at or near to its market value. Liquidity risk can be measured by the difference between the buy price (bid price) and the sell price (offer price) quoted by a dealer. Larger the difference, greater is the Liquidity Risk. Indian Debt market has a higher Liquidity risk compared to Global Debt market, because of low trading volumes in the Indian Debt market.

Reinvestment Risk

If interest rates fall, the coupon payments being received on fixed income securities will have to be re-invested at the lower prevailing interest rate. This is known as Reinvestment Risk.

For example: If you are receiving 9% coupon on a fixed income security, and the prevailing interest rates are 7.5%, the coupon payment received will have to be invested at the lower rate of 7.5%.

As zero coupon securities do not provide any periodic interest payments they do not have Reinvestment risk. However, they have a higher interest rate risk.

Types of Mutual Funds

There are over 1,400 Mutual Fund schemes in India across 40 Mutual Funds. The total number of options under all the schemes is over 5,000! Given such a large number of options, the investor is spoilt for choices.

An understanding of the classifications of the various categories of schemes will help sort clear the confusion to a certain extent.

EQUITY FUNDS

Any fund which invests not less than 65% of its corpus in equities is known as an equity fund.

 Large Cap Funds: Large cap funds are those funds which invest primarily in stocks of large blue chip companies. Different mutual funds have different criteria for classifying a company as a large cap company. Generally, companies with a market capitalisation greater than Rs. Rs 1,000 crores are considered as large cap companies.

Small and Mid Cap Funds: Small and mid cap funds are mutual funds which invest in small/medium sized companies. Again each mutual fund has its own criteria for classifying a company as a small cap or a mid cap company. Generally, companies with a market-cap between Rs. 500 and Rs. 1,000 crores are classified as mid cap companies and those with a market cap of lesser than Rs. 500 crores are classified as small cap companies. 

Multi Cap Funds: These are funds which are flexible with respect to their investments and invest across large cap, mid cap and small cap funds. Based on the market conditions they keep changing the proportion of the fund  invested in the different market cap companies. They are generally biased towards large cap companies with a major portion of the fund size invested such companies. 

 

PICK YOUR FUND…

Thematic Funds: These funds are also known as Sectoral Funds. They invest in companies of a particular sector or sectors based on the scheme mandate. Such funds can be focused on Infrastructure, Power, Banking sector, Pharma companies, only Public Sector Undertakings(PSUs) etc. 

Index Funds: An index fund is a mutual fund or exchange-traded fund(ETF) that aims to replicate the returns of a specific index. The fund manager does not have a major role as he has to only replicate the composition of the index.

DEBT FUNDS

Debt Funds are funds that invest in debt securities like debentures, commercial paper(CP), certificate of deposit(CD), government securities, etc.

Long Term Funds: Though there is no concrete definition, debt funds which invest in securities with a horizon of greater than four years are classified as long term debt fund.

Short Term Funds: Debt funds with a tenure greater than one year and less than four year fall under this category.

Gilt Funds: These are debt funds which invest only in Government Securities with maturities ranging from 91 days to ten years. Government securities are considered to be risk free.

Liquid Funds: Liquid funds invest in ultra short-term debt instruments with maturities of upto 91 days like money market instruments, short-term corporate deposits, commercial paper and treasury bills. They act as a good substitute to keeping money in a savings bank account as they offer a higher return and are liquid as well. 

Fixed Matutiy Plans(FMPs): As the name suggests, these are funds which have a fixed tenure like a fixed deposit. FMPs typically invest in debt securities and have maturities ranging from 3 months to 36 months. 367 days FMPs are extremly popular because of the double indexation tax benefit associated with them.

 

HYBRID FUNDS 

Hybrid funds are funds that invest in a mix of debt and equity based on their investment mandate.

Balanced Funds: are funds that invest about 65% of their corpus in equities and balance in debt securities. They are classified as Equity funds for tax purposes.

Monthly Income Plans(MIPs): These are predominantly debt funds and invest upto 25% of the corpus in equities. Though not guaranteed, MIPs are an avenue for individuals to park their retirement funds and earn regular income. The equity portion helps the fund deliver returns higher than traditional fixed deposits.

Debt Oriented Funds: These funds invest a very small portion of the corpus in equities(upto 10%). The equity portion helps adds a sweetener to the debt returns and delivers higher returns. 

Equity+Debt+Gold Funds: Innovation has led to launch of funds which invest their corpus in a mix of debt, equity and gold to try and capture the varying returns of the three investment categories in different market conditions.

So before making an investment, make sure you understand what the fund is and it fits into your portfolio.

Mutual Funds: Pros and Cons

Over a period of time Mutual funds have become a very popular investment vehicle in India. The reasons for the popularity of mutual funds among investors are many: 

Professional Management

Qualified Professionals manage the Mutual Funds and attempt to maximise the returns and minimise the risk within the stated objectives of the Mutual Fund Scheme. 

Diversification

This is the biggest advantage of investing in a mutual fund, especially for a small investor. This ensures that the investor is not exposed to the risk of a single sector and is not dependent on the performance of one company.

INNUMERABLE ADVANTAGES

Low Costs

An investor can get exposure to professionally managed Mutual Fund investments for as low as Rs. 500. They can get exposure to big tickets investments(like some Fixed income instruments) through Mutual Funds. Also, SEBI has capped the maximum amount that can be charged as an Expenses to the fund based on the fund size.

Liquidity

Mutual Fund Schemes held by an investor are very liquid. They can be redeemed at the NAV of the Scheme which is declared every day and the redemption proceeds are received by the investor in T+2 days i.e. within two days of the date of redemption. 

Choice of schemes

An investors can make a choice from a large number of Schemes so that the investments match with his objectives and goals. 

Flexibility

Within Schemes, investors are provided with a number of options like Growth Option, Dividend Option, Reinvestment Option, Systematic Investment Plan (SIP), Systematic Transfer Plan (STP), Systematic Withdrawal Plan (SWP), etc.

Mutual Funds have come out with a number of innovative products like Trigger facility, transfer of equity gains to a debt scheme, etc. to satisfy the needs of the investors. 

Transparency

This has increased the confidence of investors in the Mutual Fund Structure. Information is available to investors through fact sheets, offer documents, annual reports, periodic investment statements, etc. on a periodic basis.

Taxation

Dividends received from equity schemes of Mutual Funds (i.e. schemes with equity exposure of more than 65%) are completely tax-free. Equity schemes held for more than one year do not attract any capital gains tax on redemption. 

Well Regulated

SEBI Regulations govern the mutual funds industry and protect the interest of investors. This also ensures transparency in the operating of the Mutual Fund. 

DISADVANTAGES

Though very less compared to the advantages, Mutual Funds suffer from the following disadvantages:

(a) In case the manager does not perform well, the fund may give returns lower than the index.

(b) The investor has to pay a management fees and other expenses even if the fund gives negative returns. Returns are not guaranteed.

(c) Investors have no say in their portfolio as the same is managed by the AMC as per the scheme objectives and customisation for an individual investor is not possible.

Understanding a Mutual Fund

A Mutual Fund is a TRUST that pools the savings of a number of investors who share a common financial goal.

The money collected is then invested in capital market instruments such as shares, debentures and other market securities. The investments of the mutual fund are driven by the investment objectives of the scheme.

The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them after recovery of the management expenses.

Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. 

About MF_1

FLOW OF FUNDS

The following are the parties to a Mutual Fund: 

Unit Holder: is a person who is holding the units in a scheme of a mutual fund. The term is comparable to shareholder in case of a company. Unit holder can be a resident individual, HUF, company, NRI, partnership, society etc. 

The Mutual Fund: As stated, the Mutual Fund is the legal entity in the form of a trust which holds investments of its Unitholders. 

Sponsor: A sponsor is the promoter who sets up the Mutual Fund, appoints trustees and the AMC in accordance with the SEBI Regulations. Generally the sponsor and the AMC are part of the same business house. 

Trustee: A trustee is appointed by the sponsor. The trustee holds the property of the mutual fund for the benefit of the unit holders and is responsible to the investors of the fund. The trustee is vested with the general power of superintendence and direction over the AMC.

About MF_2

INTER RELATIONSHIPS

Asset Management Company(AMC): AMC is the business face of the mutual fund as it manages all the affairs of the fund. Investment professionals employed by the AMC determine which securities to buy and sell in the fund’s portfolio, consistent with the fund’s investment objectives and policies. In addition to managing the fund’s portfolio, the AMC often serves as administrator to the fund with the support of the R&T agent and the Custodian. 

R&T Agent: The Registrar and Transfer Agent (R&T) helps investors with the purchase of units in the Mutual Fund schemes, redemptions and switches, change of address and bank details and resolving related queries and complaints. CAMS and KARVY are the key R&T agents in India.

Custodian: The securities which form a part of the mutual fund’s portfolio are usually held by an authorized custodian. The custodian is like the mutual fund’s demat account.

Distributor: A distributor acts as an intermediary between the mutual fund and the investor. He helps the investor choose the right fund as per the investor’s objectives. Mutual fund units can be distributed by only AMFI registered, certified distributors. 

AMFI: The Association of Mutual Funds in India(AMFI) is a body dedicated to developing the Indian Mutual Fund Industry on professional, healthy and ethical lines and to enhance and maintain standards in all areas with a view to protecting and promoting the interests of mutual funds and their unit holders. 

SEBI: SEBI is the market regulator in India which, apart from other functions,  overseas the functioning of the entire Mutual Fund industry with the objective of protecting the interest of investors.

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