A mutual fund provides diversification, professional management and liquidity. An exact investment procedure helps you invest properly in your favourite Mutual Fund.
PURCHASING UNITS DURING THE IPO
Mutual funds advertise in newspapers when they come up with a new scheme. On reading the advertisement, contact your broker or the mutual fund office for an application form or download the form from the fund’s website. Fill in the application form and lodge it with your broker along with a cheque for the investment amount. You can also hand over the duly filled in application to the mutual fund office. On receiving the application form, the mutual fund’s registrar will issue an account statement showing you how much you have invested and the units allotted to you (for instance, if you invest Rs 10,000, you will receive 1000 units during the IPO at Rs. 10 per unit). The account statement is a record of your investment in the mutual fund scheme.
PURCHASING UNITS OF CLOSE-ENDED SCHEMES AFTER IPO
Units of close-ended mutual fund schemes are available for purchase from the mutual fund segment of the stock market. The unit will be available at the price at which it is quoted on the market. Contact your stockbroker and place a purchase order. The broker will buy the units for which you will have to pay him the purchase cost plus his brokerage. Brokerage charged will be about 0.5-2% of the purchase cost of the units.
For instance, if your purchase cost is Rs. 15 per unit and brokerage is 1%, you will pay the broker Rs.15.15 per unit (i.e. Rs. 15 plus 1% of Rs. 15). You also incur costs of stamp duty to have units transferred in your name. However, if you purchase units in dematerialized form no stamp duty is payable.
PURCHASING UNITS OF OPEN-ENDED SCHEMES AFTER THE IPO
Units of open-ended mutual funds are also available for purchase from the mutual fund itself. On the closure of the IPO, the mutual fund’s registrar processes the application received and issues the account statement. During this time, the fund does not accept any new applications. On completing the procedure, the fund reopens the scheme for the sale and repurchase of the investors.
Ask your broker for a form of the scheme. Fill it in and return it to your broker along with the cheque for the amount of investment. On receiving the application, the fund’s registrar processes it and issues you an account statement indicating amount of units allotted and the amount of investment made.
Units of the mutual fund will now be available at the current NAV and not the face value of Rs. 10.
HOW DO YOU REDEEM YOUR MUTUAL FUND INVESTMENT?
Should you want to exit a close-ended mutual fund scheme before closure of the scheme, you can do so by selling the units in the mutual fund segment of the stock market. Some mutual funds offer to repurchase units for short periods of time, during which, you can directly sell your units back to the mutual fund. On selling the units in the stock market, you incur a brokerage cost of 0.5-2%. This means that you get a lower amount on the sale. For instance, if you sell 1000 units at Rs. 15 per unit and you pay 1% brokerage; you will receive only Rs. 14.85 per unit.
You have to give a sell order to your broker, who will then sell your units in the stock exchange.
If the units are in the dematerialised form, you can instruct the Depository to transfer the units to your broker’s account. The broker will then pay you the sale proceeds minus the brokerage.
Selling close-ended mutual fund schemes on scheme closure date
Mutual funds inform you about the closure date of the scheme and the amount due to you. However, on closure date, some mutual funds choose to convert the close-ended scheme to an open-ended one, offering you two options:
Remain invested in the mutual fund in its new form.
Request for redemption of the amount due to you.
If you want to remain invested, you have to inform the mutual fund accordingly. If you want to exit, a redemption request forming part of the account statement has to be filed by you and sent to the fund or the registrar.
Selling units of open ended mutual fund
In the case of units of open-ended mutual fund schemes, simply fill in the redemption request on your account statement and lodge it with the mutual fund or your broker. You will receive your cheque within seven working days.
Think before investing in mutual funds
There are certain points about dividends that investors must appreciate before diving into a mutual fund for the dividend lure:
1. Dividends on mutual funds are not assured. Even if a dividend looks certain in the immediate future, there is no saying whether the mutual fund will be in a position to declare another one at the same frequency and for the same amount. As explained earlier, dividends are ultimately a result of performance, there can be a dividend only if the mutual fund has performed well enough.
2. Declaring a dividend by a mutual fund cannot always be interpreted as a healthy sign. It could mean that the fund manager just does not have enough investment opportunities and would rather return the money to investors. Or worse, the fund manager probably sold some of his best stocks to generate cash for the dividends. Either ways, the dividend spells bad news for investors. We are not saying this is the case all time, but investors must divorce mutual funds from stocks as far as dividends are concerned. With stocks a dividend could underline a strong balance sheet but it does not mean the same thing for a mutual fund.
3. When you withdraw money from a mutual fund investment by way of dividend, you lose out on the benefits of compounding. For compounding to work effectively, it’s important that you stay invested i.e. preserve your original investment and if possible add to it, but do not withdraw from it, unless it’s an emergency.
4. On hindsight, one scenario where pursuing a ‘dividend strategy’ could prove intelligent is during depressed market conditions. Investors who have collected dividends during a rally in stock markets will have something to show for during a prolonged depression, while investors who had relied only on capital appreciation will wish they had redeemed a portion of their investments during the rally. Mutual fund categories like thematic and sector funds that witness more cycles (than diversified equity funds) are apt candidates for the dividend option.
While dividends may be important for a category of investors, investing in mutual funds only for the dividends is perilous. It is more important that investors focus on the mutual fund’s performance, which is dictated mainly by the fund management processes and investment style of the mutual fund. A strong performance could lead to dividends in the future, but the opposite is not true.