You may have just written a cheque and handed it over to your distributor towards an investment in a mutual fund (MF) scheme. This may be your first investment in an MF scheme or you may be a seasoned investor.
In either case, you would have hopes of garnering healthy returns some time in the future, given your investment horizon.
But what route does your investment take in its way of making money for you? Here, we explore how your investment is processed after you have handed over the cheque.
After you have short-listed the desired scheme(s) for investment, you have the option of investing directly with the fund house or enlisting the services of a distributor. Once you make the investment, your details are forwarded to the Registrars and Transfer Agent (RTA).
These entities maintain investor records by converting the information from physical to electronic form. It is the RTA which determines the applicable net asset value (NAV) to your investment request and also determines the number of units that will be allotted to you.
Once the asset management company (AMC) receives the invested amount and unit allotment details from the RTA, it makes the investment according to its defined strategy.
To make this happen, a team of fund managers, research analysts, dealers and risk managers collaborate, putting their respective expertise into practice.
The result of their efforts can be seen in the scheme's NAV which is the total value of all securities in a scheme's portfolio divided by the number of units.
Next comes the custodian, who is responsible for keeping safe physical securities and cash while the de-materialised securities are kept with a depositary participant.
The custodian keeps records of various corporate actions declared by companies whose securities a mutual fund has invested in. It also plays a role in ensuring delivery of securities in which an MF has made an investment and paying out the money for the same.
Now with so many entities working in tandem to operate a scheme, it is fair to assume that all of them would be charging a fee for their services. This fee is termed as expense ratio and is expressed as a percentage of a scheme's average net assets. A lower expense ratio is favourable to you since it indicates that more of the investors' money is being invested in securities.
Industry regulator Sebi has capped the maximum amount that can be charged to a scheme. For instance, in equity funds, on the first Rs 100 crore of the daily net assets, the expense ratio is capped at 2.50% per annum, on the next Rs 300 crore at 2.25% and thereafter it keeps decreasing up to a certain level. It is important to note that the NAV is arrived at after deducting these expenses.
If you intend to sell your units, you will need to place a sell order post which the applicable NAV will be determined by the RTA and, given your period of investment, an exit load may be charged. This load, which is charged as a percentage of the NAV, diminishes the redemption amount. So, if you are redeeming your investment in a scheme at the NAV of Rs 100 per unit and the mutual fund levies an exit load of 1.5%, the applicable value after paying the load will be Rs 98.50 per unit.
After the successful execution of a sell order, the proceeds will either be credited directly to your account or a cheque will be handed over to you. According to regulations, an AMC is required to despatch the redemption or repurchase proceeds within 10 working days.
Finally, when you get the money in your account, the entire cycle from investment to redemption is completed.
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