Mutual Funds are investment instruments where a Mutual Fund company creates a fund that invests in certain kind of investment products which they have outlined in the prospectus of that particular MF scheme. Mutual Funds are directly sold by the MF company to the retail investor, and MF shares or units are not listed on any stock exchanges and thus the buying and selling is done through the MF company.

Here are some basic things to know about MFs:

• Prospectus:  A mutual fund prospectus is a document that details the investment objectives and strategies of the mutual fund, its risk profile, management, fees, the benchmark index (say S&P 500 Index, or the Russell 2000 Index etc.) which it tracks or compares its performance against, holdings of the fund, dividend distribution policy, if any, and the past performance of the fund if its an existing fund. Past performance would obviously not be available for new MF that is just being launched.

• NAV of a MF:  The price of a share / unit of a MF is called Net Asset Value or NAV for short. Total value of the MF is derived by calculating the total value of the holdings of that MF after close of markets for that day. So, if a fund held 10 shares of Apple, and the closing price of Apple shares for the day was $100 or Rs. 100 or Euro 100, then the total value of the MF at the end of day would be 10 x100 = $, Rs. or Euro 1000. If the MF had a total of 1000 units / shares of investment, then the Net Asset Value of each of its unit or share would be $/Rs./Euro 1000/1000 = $/Rs./Euro 1. And therefore, if you held 5 shares or units of the MF, then the value of your holding would be $/Rs./Euro 1×5 = $/Rs./Euro 5.

• Management Expense Ratio or Management Fees:  The MF charges a management fee, also called the Management Expense Ratio (MER), which is expressed in percentage terms, like 2% or 0.5% etc. This means that if your holding was valued at 100, then the MER that you would pay would be 100 x 2% = $/Rs./Euro 2 for your holdings. Of course, the lower the fee, the more of your money you keep. MER may be deducted from your account on a quarterly basis or some other frequency as stated in the prospectus.

• MF Buying and Selling Fees or Loads:  The mutual fund may charge you a fee for buying or selling units of the MF. This fee is also referred to as Load. There could be an Entry Load or an Exit Load, or both. Many funds, to encourage longer term holding over short term trading activity, waive the Exit Load after the units are held for more than a certain number of days, say 30 days or 90 days or even 12 months. Obviously, the lower the loads, entry or exit, are the better it is for you, with no-load funds being the preferred alternative.

• MF Distributions:  MFs may provide distributions in the form of dividends, which are similar to dividends you receive when holding Stocks of a company. These dividends can either be taken in cash, that the MF transfers to your registered bank account (that you have registered with the MF), or can be taken as more units of the MF which is also termed as dividend reinvestment, or a combination of cash and dividend reinvestment. Thus, if you receive a dividend of 10 $, Rs. or Euro, and the NAV of a unit of MF is $/Rs./Euro 4, then your MF account would be credited with $/Rs./Euro 10 which would then be converted to 2.5 units (10/4 = 2.5 units) that get credited to your account with the $/Rs./Euro 10 being used to buy these 2.5 units. You will notice these transactions in your MF account statement.
• Example of Mutual Fund companies:
  • Canada:  BMO Asset Management, TD Asset Management, Invesco, Manulife Financial, Fédération des caisses Desjardins du Québec.
  • USA:  Fidelity, Vanguard, T. Rowe Price, Gabelli Asset Management.
  • India:  SBI Funds Management, HDFC Asset Management, Motilal Oswal Asset Management, JPMorgan Asset Management India.
  • Europe:

If you want to read more about MFs, please go to Why people buy MFs?

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