Frequently Asked Questions

1. How do I know which is the right time to invest?

The stock market is heavily affected by a number of different factors which make it very difficult to judge the ‘right’ time for investment, especially on a short term basis. The overall market direction is set by the short-term, medium-term and long- term potential of the concerned economy. The stock market is also heavily affected by the flow of investment. There are various other important fundamental factors like political situation, extraordinary factors like war, calamities etc., the international economy scenario, currency parity, oil prices etc that also affect stock prices and directions. Taking all these into consideration, one should consider the fundamentals of the market on all accounts and invest in a staggered manner. Since it is difficult to time the market on a short term basis, investment in a staggered manner is recommended. Through systematic (staggered) investment, one invests at different levels and this averages out the market lows against the highs over a long period.

2. Aren’t the risks of investing at market levels of 19,000+ much higher than normal risks associated with the equity market?

The valuation of stocks at 19000 plus on fundamentals is fairly high and poses higher risk than normal. However, these highs are not unjustified. Statistics show a GDP growth of 9.4% in 06-07 and expected GDP growth of 9% in 07-08. This along with several other factors bolsters investor confidence and boosts the share market. Considering the long term growth potential of Indian economy and the flow of funds coming to capital market both from domestic as well as from international investors, a long-term investor can consider entering / investing in staggered way.

3. How do I know which is the right time to book profits?

Timing the market is very difficult proposition as explained above. However, if one finds that long-term perspective of the economy has gone negative, one can start booking profits. In normal growth environments, one can consider booking profits in a staggered manner if there is an exceptional growth in a short time. However, a lot depends on the investor’s risk profile and his equity exposure compared to total assets

4. What tax benefits do you get from investing in mutual funds?

Mutual funds are generally more tax efficient than most other investment avenues. Long term mutual fund investments get indexation benefits that are not available in most of other modes of investments such as fixed deposits, bonds etc.

Illustration: Tax Comparison between FMPs and Fixed Deposits

 
Fixed Deposits
Fixed Maturity Plans
Indicative Returns
9.50%
9.50%
Rate Per Unit (Rs.)
10
10
Amount Invested (Rs.)
10,000
10,000
Value at Maturity (Rs.)
10,950
10,950
Cost of Investment (Rs.) (With Indexation)
10,000
10,500*
Income from Other Source(Rs.) 950  
Tax on Income from Other Source
@33.99%
323 -
Long Term Capital Gains (Rs.)
450
Tax on Long Term Capital Gains@22.66%
-
102
Post Tax Returns(Rs.)
10,627
10,848
Effective Post Tax Rate of Return (%)
6.27%
8.48%

*Assuming indexing growth of 5%
**Assuming the investor is in the maximum marginal tax bracket

5. What is the minimum amount I need to invest in a mutual fund?

While there is no fixed limit, most schemes require a minimum of Rs. 5,000 in the case of lump sum investments, and Rs. 500 for systematic investment plans (SIPs).

6. What is the procedure for investing in mutual funds?

Individual Investors
The investor must submit a completed application form of the scheme he wishes to invest in, along with a copy of his/her PAN card and a cheque drawn in favour of the scheme to a mutual fund distributor or to centers designated by each AMC. Application forms can be downloaded from the Application Forms section of our website. This is then sent in to the AMC and an investment statement issued to the investor confirming the transaction within 1-3 working days.

Corporate Investors
The procedure for investment by a company is similar to the above however copies of the Memorandum and Articles of Association, list of authorized signatories and a board resolution for investment is needed along with a completed application form, PAN card copy and cheque.

7. Which are the best funds to invest in?

T
here is no one fund that is most suited to every investor. Each investor has a different risk and return requirement based on his/her investment objective. This should be kept in mind when determining the class of mutual fund to invest in.

Even within an investment class, there are a number of factors that need to be studied before choosing the best mutual fund and scheme for an investor. These include: past performance, overall size of the fund, size of the scheme, track record of the fund manager, process of fund management, reputation of the fund, research back up of the fund, nature of the fund/manager, portfolio analysis, investment objective and strategy among others. Market conditions and economic factors such as interest rate also play an essential role in determining the most appropriate scheme to invest in. Therefore, careful research and due diligence is essential to create a sound investment strategy. This is generally done by your investment advisor on your behalf.

8. So many funds are coming out with schemes investing in the same sector or with similar portfolios. How do I know which is the right one to choose?

Even though different schemes may be investing in the same sector or have similar portfolios, there are generally other differences (Refer Q.7) that must be analyzed to determine the scheme that is most suited to you. These could be investment objectives, strategy, investment pattern, AMC reputation, fund manager reputation, nature of the fund or fund manager, size of the scheme, etc.

9. Would my returns be higher if I invested in a fund with a NAV of Rs. 10 or Rs. 200? Which NAV is cheaper?

The important thing to be considered when looking at the returns of any scheme is the relative growth in NAV over a period of time rather than growth in absolute terms. This depends on the size of the scheme as well as the returns generated by its portfolio. Therefore the NAV at the time of investment in absolute terms does not affect the rate of return.

10. Is it safer to invest in NFOs or existing funds? Which offer better returns?

Comparing investments in NFOs to existing funds is inaccurate since they have very different risk-return ratios and features. NFOs tend to be slightly less risky and provide lower returns in the short run, since the investments are carefully timed by the fund manager over a period of 6 months. However since there is no track record of the schemes performances investors may be hesitant to invest. The returns of both depend on the future prospects of the scheme based on an analysis of the investment avenue, portfolio composition, fund manager, fund etc.

11. Are the returns on lump sum investments higher than returns on systematic investment plans (SIPs)?

Returns on lump sum investments are more volatile since the NAV at the date of investment and redemption determines the investor’s return. These cannot generally be timed and therefore the investor runs the risk of a high NAV on the date of investment and a low NAV at the time of redemption.

For SIPs however, since the investment is made periodically, the volatility is diversified or averaged across different dates of investment and therefore returns tend to be more stable.

Therefore while there is no rule that says lump sum returns would be higher than SIP returns, the latter do tend to be slightly lower due to the effect of averaging. The corresponding risk also tends to be lower for SIPs.

12. What is the difference between institutional and retail options?

The primary difference between these is the quantum of amount invested by the investor. Institutional schemes are for investors investing relatively large sums, generally over Rs.2 to 5 crores. They have a higher rate of NAV appreciation, and have a different entry and exit load structure. The retail option is for all investors irrespective of the size of their investment.

13. How much time do I need to spend to monitor my mutual fund investments?

The time required depends on how actively or passively you want to manage your investments. Mutual funds offer you the benefit of professional management of portfolios. This means that after the initial research into the type of scheme best suited to you based on your risk return objectives, you can simply invest the money and not have to actively manage your portfolio for long periods of time. Closed ended schemes, debt funds, systematic investment plans are best suited for passive investors. More active investors can invest in equity schemes and manage their portfolios on a regular basis if desired.

Choosing the right advisor that understands your needs and invests accordingly can limit the time required for managing your investments significantly. Even for active investors, the benefit of expert research offered by your advisor can have a significant impact on the profitability of your portfolio.

14. I don't have any knowledge about capital markets or finance. How can you help me invest my money?

At FSL, we endeavor to provide complete ease of investment without compromising on the client's control. We try to understand your investment objectives and return requirements, and advise you about the investment avenues and portfolio composition best suited to your needs. Therefore, we attempt to provide you with the advice necessary for you to invest your money effectively. We also strive to offer you up to date information about capital market trends, mutual fund performances, latest news and events, and your portfolio performance so that you can participate in your investment process as actively as you desire.

15. Would I have pay a fee or commission for investing through you?

No, you are only charged entry and exit loads on your investment by the concerned mutual fund. These differ from scheme to scheme.

16. How are you different from other mutual fund advisors?

We have several differentiators the most important of which are our research mechanisms. We have a strong software based research tool and an expert team of analysts who constantly watch the market as well as client portfolios to create optimum portfolio compositions. We also offer a wide range of financial services which makes us a one stop shop for all your investment needs. Our team of qualified professionals can offer you advice about not only your mutual fund investments, but also other aspects of investment such as tax planning and regulatory frameworks. Besides these we offer our clients constant access to their portfolio and returns through our website, along with other services such as complete back office support and picking up and dropping off application forms and other related documents.

Disclaimer: The views expressed above are solely those of Frontline Securities Limited and should only be treated as general guidance. Frontline Securities Limited cannot be held responsible for investments made based on the information given above.


For further queries or advice, contact us using the query form.