Most important of all, there are certain precautions investors should take while investing in mutual funds:
- Always the investor should keep a photo copy of the application form. This can be filed to know the manner in which application was made (single, joint ownership and order of ownership). Investors will also be able to see how they have signed the forms (many investors change their signatures over time; some investors have different signatures for banking and investment transactions). Investors will also know the choice they have exercised (dividend and redemption option).
- The investor must preserve the counterfoil/acknowledgement issued by the collecting agency. This acknowledgement has the application number. If account statement or certificate is not received, the acknowledgement is the proof of purchase, with which investors can approach the registrar and the transfer agent.
- It is preferable to have joint ownership so that investments will pass on to the joint owner in the event of death of the first holder.
- It is important to fill up the nomination details in the application. This will enable legal heirs to claim the holdings without procedural delays. Nominations that do not indicate the guardian of a minor are not valid. Guardian indicated will have to be a person other than the holders of the investment.
- Cheques should be crossed and application number and name should be written on the back of the cheque. Most mutual funds do not accept outstation cheques, post-dated cheques or postal orders.
- Existing investors can quote their unique account numbers so that their holdings will be consolidated. This is helpful in tax matters and in keeping investment information in a consolidated manner.
There is a minimum period for which an investor has to stay invested in a mutual fund. Mutual funds usually do not have lock in periods, during which time investors cannot exit the fund. Mutual funds may create products with lock in periods. Repurchase information can be found in the offer document. There are two normal situations when investors are restricted from exiting the fund:
- An open-ended mutual fund may announce an initial offer period, during which time it will only sell units. There may be no repurchase during that period. The fund will announce a date from which further sales and repurchases will take place.
- Some special fund schemes can be designed to have a minimum period of investment. For example, investments in special ‘Equity Linked Savings Scheme’ are eligible for tax rebate. In order to enjoy the tax rebate, the investor is required to stay invested for a minimum period of 3 years. In an extraordinary situation, mutual funds can, with notice to the investors through a national daily, impose temporary lock in periods. Investors have to check the offer document to see if the mutual fund has sought such a right for itself.
If the fund is open-ended, the investor has to send the repurchase requisition slip, duly completed and signed, to the registrars and transfer agents. In modem times, it is possible to lodge repurchase requests on the internet also. If the fund is close-ended then the investor should send the original certificate, discharged by signing on the reverse, to the registrar and the transfer agent.
Investors have to provide bank details for all repurchase requirements, so that the amount can be directly credited. Where cheques are issued, they are issued with the bank details printed on them. This is to prevent fraudulent encashment of repurchase cheques. It is a mandatory SEBI requirement that redemption cheques are issued with bank account details of the investor printed on them. In an open-ended mutual fund the holdings of the investor are maintained in fractions, up to 4 decimal points. Mutual fund units can therefore be bought and sold by investors in fractional terms, subject to conditions if any, on minimum amounts to be invested. Mutual funds may also like to stipulate the. minimum lot in which repurchases have to be made. Investors should look for this information in the mutual fund offer document.
Investors can use the proceeds from a repurchase to buy units of another scheme of the same fund or units of another fund. Buying units of one scheme by repurchasing the units of another scheme is called switching. The switching options to an investor depend on how his account is serviced. If the account is serviced through a bank which specifically offers the services of inter-fund switch, investors can buy units of another mutual fund. In all other situations, repurchase is routed through the registrar and the transfer agent. Though the same registrar and transfer agent may be handling the accounts of many mutual funds, they usually treat inter-fund switches like separate repurchase and sale for which they require separate instructions from the investor.
If the investor wants to buy units of another scheme of the same fund, most funds allow such switch to take place easily. In many cases, there are lower loads or no loads at all on such switches. Many funds also provide option of automatic switches between schemes as special products to investors. Using these schemes, for example, investors can re-invest the periodic dividends from an income fund into an equity fund of the same mutual fund. Many mutual funds identify investors with account numbers/units, which help them to consolidate holdings and also effect switches quickly.
Credit: Investment Management-KU