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Mutual Funds FAQ

Growth, Dividend or Dividend Re-investment

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Growth, Dividend or Dividend Re-investment



When investing in mutual funds, there are three options that are available in which you could invest: growth, dividend and dividend reinvestment. One is normally expected to select one of the three options when filling an investment form, however, in case if you do not fill any of the option, the fund house selects the default option for the scheme as mentioned in its Scheme Information Document (SID), which is most often the growth option. Investors have the flexibility to change the investment option at a later date to suit their convenience.

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Growth Option:



In this option, the scheme does not pay any dividend, but continues to grow. Therefore, nothing is received by you as a unit holder and hence, there is nothing to reinvest in the scheme. Any gains made by selling the fund holdings are invested back into the scheme, which can be seen in the NAV (net asset value) of the scheme, which rises over time. But, the number of units with the investor remains the same.

Dividend Payout:



In this option, the mutual fund scheme pays you from the profits made by the scheme at regular periods which could be monthly, quarterly, half-yearly or yearly in case of debt funds and at irregular intervals in case of equity funds. A liquid fund also provides for a daily or weekly dividend option. However, you should be aware that dividends are not guaranteed, which means a fund is not bound to pay out a dividend; it may or may not pay a dividend.

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Dividend Reinvestment

Dividend Reinvestment:



In this option, the dividend is not paid to you, instead it is reinvested in the fund scheme itself by buying more units on your behalf.

Each of the three options has its share of pros and cons, which will vary depending on your needs. As investors, the treatment of gains and taxes are the two essential features that differentiate these options. If evaluating the returns from an investment at a point of time, there is no difference among the three options. The difference emerges in an implicit form with respect to the applicable taxes.

Further, it is important to consider the tax impact when selecting between the growth, dividend payout or dividend reinvestment options as the post-tax returns' differs between the options. This difference occurs because, the tax treatment is different for long-term and short-term holding period. The tax treatment also differs for equity and debt funds.

Mutual fund application form

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Mutual fund application form - Investing for Minors



Each mutual fund scheme has a form that investors need to fill. If you start investing in the systematic investment plan (SIP), you need to fill in two forms: one to open an account with the mutual fund and the other to specify your SIP details such as frequency, monthly instalment amount, and date on which the SIP sum is to be invested.



Investing for Minors



If you wish to invest in the name of a minor, you need to fill in a third-party declaration form.

:- Only parents are allowed to invest on behalf of their children

:- Documents that establish the parent's relationship with the child should be submitted (Passport, birth certificate or any other ID proof)

:- If the child has no parents in case of an eventuality, then a court-appointed guardian can invest if necessary documentary proof is submitted to establish the relationship between the minor child and the guardian

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Where and How to Buy Funds?

Where and How to Buy Funds?



Like the many mutual fund schemes to choose from, there are several ways in which one can invest in them. One can invest online or offline or in direct as well as regular plans. Like everything else, each option has its limitations and advantages, which vary for each investor.



● Direct Plan
● Through intermediaries
● Through IFAs
● Directly with the AMC
● Through Online Portals
● Through your bank
● Through Demat and Online Trading Account
● Electronic Money Transfer
● Electronic Clearing Service (ECS)
● National Electronic Fund Transfer (NEFT)
● Electronic Funds Transfer (EFT)
● Real Time Gross Settlement (RTGS)
● Interbank Mobile Payments Service (IMPS) Facility

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Direct Investing Plan

Direct Plan:



Since January 1, 2013, all mutual fund houses have rolled out a new plan under all of their existing fund schemes-the Direct Plan. These plans are targeted at investors who do not make their mutual fund investments through distributors and hence have a lower expense ratio compared to existing fund schemes of the AMC.

This means that you, as an investor, will get an opportunity to earn a slightly higher return from your mutual fund despite it having the same portfolio. The direct plans will not charge distribution expenses or commission, resulting in these plans having lower annual charges and eventually, a different (higher) NAV compared to the regular plans.



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Through Intermediaries:

Through Intermediaries:



Here is a wide variety of intermediaries available. These include most banks, distribution companies having national or regional presence, some stock brokers (including online brokers) and a large number of individuals and small financial advisory companies. All intermediaries have to be registered with the Association of Mutual Fund in India (AMFI), which also maintains a searchable online directory at www.amfiindia.com. The website also lists intermediaries who have been suspended for malpractice to protect investors from going back to them.

The intermediary, normally brings the required mutual fund application form, helps you fill the forms, submit the forms and other documents to the Mutual Fund office and sometimes even brings in the Account Statement. But, all these services come to you for a fee. Typically, agents charge a flat fee for these services.

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Investing in the Mutual Funds - Through IFAs

Through IFAs:



IFAs are independent Financial Advisors, who are individuals who act as agents to facilitate a mutual fund investment. They help you fill the application form and also submit the same with the AMC.



Directly with the AMC:



You can invest in a mutual fund scheme by investing directly through the AMC. The first time you invest in any Mutual Fund, you may have to go to the AMC's office to make your investment. Subsequently, future investments in different fund schemes of the same AMC can be made online (provided this facility is offered by the AMC) or offline, using the folio number in your name. Some AMCs may extend the facility of sending an agent to help you fill the application form, collect the cheque and send the acknowledgment.



Invest throw IFAs

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Investing in the Mutual Funds - Through Online Portals

Through Online Portals:



There are several third party online portals, from where you can invest in various mutual fund schemes across AMCs. Most of the portals have tie-ups with banks to facilitate easy fund transfer at the time of investing. These portals charge an initial fee to setup an account and facilitate future smooth online access to invest and redeem your investments.



Through your Bank:



Banks are also intermediaries who distribute fund schemes of different AMCs. You can invest directly at your bank branch into fund schemes that you wish to invest in.



Through Demat and Online Trading Account:



If you have a demat account, you can buy and sell mutual funds schemes through this account.

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Investing in the Mutual Funds - Electronic Money Transfer

Electronic Money Transfer:



The traditional way to transfer money from one bank account to another is to write a cheque and then deposit it. The advent of technology has ensured that one need not go through such a tedious process anymore. Over the years, the RBI has introduced several steps that has resulted in paperless transfer of funds through electronic funds transfer (EFT).



There are several other acronyms that one comes across, especially when transferring funds online or through electronic clearances such as RTGS, NEFT, IMPS and ECS. Each of these plays an important role in ensuring your investments are timely and you do not lose time when investing. Each of these options plays a role in the way your investments are treated in a mutual fund.



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Electronic Clearing Service (ECS)

Electronic Clearing Service (ECS):



ECS is an electronic mode of payment or receipt for transactions that are repetitive and periodic in nature. For this reason, ECS is most preferred and useful when investing through SIP. Essentially, ECS facilitates bulk transfer of money from one bank account to many bank accounts or vice versa.





Primarily, there are two variants of ECS-ECS Credit and ECS Debit. ECS Credit is used by an institution for affording credit to a large number of beneficiaries having accounts with bank branches at various locations within the jurisdiction of a ECS Centre by raising a single debit to the bank account of the user institution. ECS Credit enables payment of amounts towards distribution of dividend, interest, salary, pension, etc., of the user institution.





ECS Debit is used by an institution for raising debits to a large number of accounts maintained with bank branches at various locations within the jurisdiction of an ECS Centre for single credit to the bank account of the user institution. ECS Debit is useful for payment of mutual fund SIPs, because these are periodic or repetitive in nature and payable to the user institution by large number of investors.

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National Electronic Fund Transfer (NEFT)

National Electronic Fund Transfer (NEFT):



This is a nationwide payment system facilitating one-to-one funds transfer. Under this scheme, individuals, firms and corporate can electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the Scheme. Individuals who do not have a bank account (walk-in customers) can also deposit cash (up to ₹50,000) at the NEFT-enabled branches with instructions to transfer funds using NEFT. At present, NEFT operates in hourly batches - there are eleven settlements from 9 AM to 7 PM on weekdays and five settlements from 9 AM to 1 PM on Saturdays.



Invest throw NEFT

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Electronic Funds Transfer (EFT)

Electronic Funds Transfer (EFT):



This is a paperless method by which money is transferred from one bank account to other bank account without the cheque or currency notes. The transaction is done at bank ATM or using Credit Card or Debit card. In the RBI-EFT system you need to authorize the bank to transfer money from your bank account to other bank account that is called as beneficiary account. Funds transfers using this service can be made from any branch of a bank to any other branch of any bank, both intercity and intra-city.

RBI remains intermediary between the sender's bank called as remitting bank and the receiving bank and affects the transfer of funds. Using this method, funds are credited into the receiver's account either on the same day or within a maximum period of four days, depending upon the time at which the EFT instructions are given and the city in which the beneficiary account is located. Usually the transactions done in first half of the day will get first priority of transfer than the transaction done in second half.

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Real Time Gross Settlement (RTGS)

Real Time Gross Settlement (RTGS):



The real-time gross settlement is an instantaneous funds-transfer system, wherein the money is transferred in real time. With this system you can transfer money to other bank account within two hours. In this system there is a limit that you have to transfer money only above R1 lakh and for money below R1 lakh transactions, banks are instructed to offer the NEFT facility to their customers. This is because; RTGS is mainly used for high-value clearing. The RTGS facility is available only up to 3 PM and inter-bank transactions are possible up to 5 PM.



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Interbank Mobile Payments Service (IMPS) Facility

Interbank Mobile Payments Service (IMPS) Facility:



IMPS is a platform provided by National Payments Corporation of India (NPCI). IMPS allows existing unit holders to use mobile technology/instruments as a channel for accessing their bank accounts and initiating inter bank fund transaction in a with convenience and in a secured manner. It allows to invest 24*7 via mobile phone.