Over the course of time,I am having lots of people asking me lots of basic questions about Mutual Funds. Since I have less time go through each of their questions repeatedly, here is some info to help you in getting started with mutual funds. PS: I learned all this by actually going through the process of account opening with AMC, hence don’t consider me as an expert, I am just sharing my learning.

Organizational View

Lets get started with organizational view of Mutual Fund Industry. These are players in mutual fund industry.

  • The Mutual Fund Company is called as Asset Management Company or AMC for short. Ex: HDFC MF, ICICI Prudential AMC, Franklin Templeton, DSP BlackRock etc…
  • You can become customer of AMC by approaching them directly at their branch or can approach them via Advisers/Distributors (similar to insurance agents. Some examples are Finqa, Funds India, Funds Supermart, Scrip Box).
  • The connecting link between you and AMC is called as RTA (Registrar and Transfer Agents). The RTA’s job is to communicate ‘how much money you have put in?’/ ‘how much money you have redeemed?’ to the AMC. The monthly account statements of purchase and redemption are also sent by these RTA’s only. (Some of the RTA’s are CAMS, Karvy etc..)
  • To become customer of Mutual Fund, a person is supposed to complete “Know Your Customer”(KYC) formalities. To avert duplication of efforts of doing KYC with each AMC, Indian govt set up a special agency called KYC Registration Agency (KRA). Once you are registered with any one of KRA’s, you can show the registration letter to bypass KYC formalities being done at other AMCs. If you approach AMC directly then AMC itself will register you with a KRA (if you are not registered).
  • The AMC’s have one union of them called as Association of Mutual Funds of India (AMFI). This organization has a platform called MF Utility that allows you to create a centralized account for all your MF Investments.
  • There is regulator for these AMC’s. its SEBI – Securities and Exchange Board of India.
  • A newer platforms have emerged which allow one to invest in direct plans of the funds. These Direct Plan Portals instead of getting commissions from AMCs, they bill you directly. This direct billing helps in suggesting you best plans for your needs, where as advisers suggest only plans with higher commission to them.

So these are list of players in MF Arena. As an investor you are probable to run into only AMC, RTA, Direct plan portals and Advisers.

Getting Started with Mutual Funds: Approaching the AMC

Once you have selected which fund to invest, you can either approach an Adviser or AMC to invest.

  • After due KYC and registering Formalities are done, your Folio is created by AMC. This folio is like customer account. All the investments you do with the AMC has to be put into these folios only.The folio can be opened by either approaching Advisor or RTA or AMC. (Ex: If I am customer of ICICI Prudential and HDFC AMC’s, then I will have open 2 folios. One will be with ICICI and 2nd with HDFC. Also to open these folios I can either approach the AMC or their RTA or any of their advisors.)
  • Within this folio, a separate account is created for each of your mutual fund investments. (Ex: If I invest in Franklin Bluechip and Franklin Taxshield, then I will have 2 accounts to hold units of Franklin Bluechip and units of Franklin Taxshield.)
  • Whenever we invest in a fund, we purchase units of that fund in a predetermined price. The purchase price is called NAV (Net Asset Value) of that fund. The NAV is determined at the end of the day and that is the reason why account statements of investments come 1 day after the investment. Also NAV is determined after the various fund expenses are deducted.

Various Flavors of Mutual Funds

Each mutual fund has various sub-types of it to cater to various classes of investors. The various plans are

  • Growth Plan: Under this plan the NAV keeps on increasing as the dividends are not declared by AMC. Due to non-declaration of dividends this plan has the fastest growth.
  • Dividend Payout Plan (aka Dividend Plan): Under this plan AMC  declares dividends regularly and pays it to registered bank account of unit holders. On the date of declaration of dividend the NAV is reduced by dividend amount. Ex: If HDFC Prudence declares dividend of rs 4 per unit on 1st March then its NAV on 1st will be 4 rs less than 28th Feb’s NAV.
  • Dividend Reinvestment Plan: This plan is similar to dividend plan, but instead of paying dividends, more units of the same fund are purchased. Ex: If fund I had invested declares dividend of 4 rs per unit(me holding 100 units will get me 400 rs dividend). Lets assume the NAV of fund was 40 after declaration of dividend. instead of paying me dividends worth 400 rs, the fund would  add 10 more units to my account. So technically Dividend reinvestment is like growth plan itself.

The above plans namely Growth, Dividend, and Dividend Reinvestment are actually sub-plans of Direct and Regular Plans.

  • Direct Plan: To opt for this plan you have approach AMC or its RTA or atleast their Web portal. Its not possible to invest in this plan from any other places. This plan will have comparatively higher NAV than regular plan as the agent commission is not there.
  • Regular Plan: When you invest via an adviser or even your stock broker, then you get only this plan. This plan has slightly lesser NAV than direct plan as your agent is entitled to get commission from your investments. (SEBI has restricted the commission to be <1%)

In totality there are 6 types of sub-plans under each MF.

  • Direct Growth plan
  • Direct Dividend plan
  • Direct Div Reinvest plan
  • Regular Growth plan
  • Regular Dividend plan
  • Regular Div Reinvest plan

The various ways of investing in a Mutual Fund

Once you have decided which fund to invest and which sub-plan to invest, you will have various methods available under your disposal to invest in that fund.

  • Lump Sum Purchase: In this method you directly approach the AMC or RTA or Adviser write a cheque for large amount, (or login to their web portal and click on Buy button) and make a purchase. The AMC will consider it as “Initial Purchase” if you are investing in that fund for the first time and create account for it under the folio. The subsequent purchases are called as “Additional Purchase” and units are deposited into that account. This transaction is considered as one off transaction and AMC will not repeat it automatically. (Ex: If I write a cheque for HDFC Prudence Fund immediately after creating my folio, then its considered as Initial Purchase.)
  • Switch: In this method you switch units of one fund into another fund. In this transaction the AMC will calculate total value of your first fund, deducts any charges on it, based on remaining value it purchases the units of 2nd fund. This transaction is considered as one off transaction and AMC will not repeat it automatically. If you switch all the units of the fund, its considered as complete switch and 1st account get closed after switch transaction is completed. The other type of switch is called as partial switch where only some of the units are switched.
  • SIP (Systematic Investment Plan): In this method you create a mandate with AMC to debit your bank account regularly for purchasing units of fund of your choice. Once SIP is registered the AMC will regularly deduct money on predetermined SIP dates. SIP deductions are like LIC policy deduction, or Bank RD deductions, your account automatically gets debited monthly or quarterly based on SIP mandate.SIP’s are recurring transaction AMC will keep deducting money till the SIP duration expires. (Ex: If I set up a  500 rs SIP with Franklin Bluechip for duration 12months and set SIP date as 7th Monthly, on 7th of every month my bank account automatically get deducted 500rs for the purchase of Franklin Bluechip units.)
  • STP (Systematic Transfer Plan): This method is similar to SIP but instead of debiting the bank it debits another fund. This transaction is like automated partial switch transaction. Like SIP this is also a recurring transaction. (Ex: If I set set up 500 rs STP of Franklin Bluechip to Franklin Smaller Companies Fund, every month Franklin Bluechip Units worth 500rs get switched into units of Franklin Smaller Companies Fund.)

Like investments one off lump sum withdrawal is called as Redemption, regular withdrawal is called as SWP (Systematic Withdrawal Plan). Hope this helps you in understanding MF landscape. Do Post your questions in comments section.