INTERVIEW QUESTIONS FOR MUTUAL FUNDS

Ques1. What is a Load or no-load Fund?

A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells
units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and
distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%,
then the investors who buy would be required to pay Rs.10.10 and those who offer their units for
repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into
consideration while making investment as these affect their yields/returns. However, the investors
should also consider the performance track record and service standards of the mutual fund which are
more important. Efficient funds may give higher returns in spite of loads.

A no-load fund is one that does not charge for entry or exit. It means the investors can enter the
fund/scheme at NAV and no additional charges are payable on purchase or sale of units.

Ques2. How much should one invest in debt or equity oriented schemes?

An investor should take into account his risk taking capacity, age factor, financial position, etc. As already
mentioned, the schemes invest in different type of securities as disclosed in the offer documents and offer
different returns and risks. Investors may also consult financial experts before taking decisions. Agents
and distributors may also help in this regard.

Ques3. What is the history of Mutual Funds in India and role of SEBI in mutual funds industry?

Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s, Government
allowed public sector banks and institutions to set up mutual funds.

In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI
are � to protect the interest of investors in securities and to promote the development of and to
regulate the securities market.

As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect
the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual
funds sponsored by private sector entities were allowed to enter the capital market. The regulations
were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued
guidelines to the mutual funds from time to time to protect the interests of investors.

All mutual funds whether promoted by public sector or private sector entities including those promoted
by foreign entities are governed by the same set of Regulations. There is no distinction in regulatory
requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks
associated with the schemes launched by the mutual funds sponsored by these entities are of similar
type.

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Ques4. How is a mutual fund set up?

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company
(AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like
promoter of a company. The trustees of the mutual fund hold its property for the benefit of the
unitholders . Asset Management Company (AMC) approved by SEBI manages the funds by making
investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of
various schemes of the fund in its custody. The trustees are vested with the general power of
superintendence and direction over AMC. They monitor the performance and compliance of SEBI
Regulations by the mutual fund.

SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees
must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of
AMC must be independent. All mutual funds are required to be registered with SEBI before they launch
any scheme.

Ques5. What is Net Asset Value (NAV) of a scheme?

The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV).

Mutual funds invest the money collected from the investors in securities markets. In simple words, Net
Asset Value is the market value of the securities held by the scheme. Since market value of securities
changes every day, NAV of a scheme also varies on day to day basis. The NAV per unit is the market value
of securities of a scheme divided by the total number of units of the scheme on any particular date. For
example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund
has issued 10 lakhs units of Rs . 10 each to the investors, then the NAV per unit of the fund is Rs.20. NAV
is required to be disclosed by the mutual funds on a regular basis - daily or weekly - depending on the
type of scheme.

Ques6. What are the different types of mutual fund schemes?

Schemes according to Maturity Period:

Open-ended Fund/ Scheme

An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous
basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at
Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end
schemes is liquidity.

Close-ended Fund / Scheme

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A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for
subscription only during a specified period at the time of launch of the scheme. Investors can invest in the
scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on
the stock exchanges where the units are listed. In order to provide an exit route to the investors, some
close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase
at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the
investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes
disclose NAV generally on weekly basis.

Schemes according to Investment Objective:

Growth / Equity Oriented Scheme

The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes
normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These
schemes provide different options to the investors like dividend option, capital appreciation, etc. and the
investors may choose an option depending on their preferences. The investors must indicate the option
in the application form. The mutual funds also allow the investors to change the options at a later date.
Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of
time.

Income / Debt Oriented Scheme

The aim of income funds is to provide regular and steady income to investors. Such schemes generally
invest in fixed income securities such as bonds, corporate debentures, Government securities and money
market instruments. Such funds are less risky compared to equity schemes. These funds are not affected
because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited
in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If
the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However,
long term investors may not bother about these fluctuations.

Balanced Fund

The aim of balanced funds is to provide both growth and regular income as such schemes invest both in
equities and fixed income securities in the proportion indicated in their offer documents. These are
appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt
instruments. These funds are also affected because of fluctuations in share prices in the stock markets.
However, NAVs of such funds are likely to be less volatile compared to pure equity funds.

Money Market or Liquid Fund

These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and
moderate income. These schemes invest exclusively in safer short-term instruments such as treasury

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bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc.
Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for
corporate and individual investors as a means to park their surplus funds for short periods.

Gilt Fund

These funds invest exclusively in government securities. Government securities have no default risk.
NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the
case with income or debt oriented schemes.

Index Funds

Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50
index (Nifty), etc These schemes invest in the securities in the same weightage comprising of an index.
NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly
by the same percentage due to some factors known as "tracking error" in technical terms. Necessary
disclosures in this regard are made in the offer document of the mutual fund scheme.

There are also exchange traded index funds launched by the mutual funds which are traded on the stock
exchanges.

Ques7. What are sector specific funds/schemes?

Sectoral Funds are the funds/schemes which invest in the securities of only those sectors or industries as
specified in the offer documents. e.g . Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG),
Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective
sectors/industries. While these funds may give higher returns, they are more risky compared to
diversified funds. Investors need to keep a watch on the performance of those sectors/industries and
must exit at an appropriate time. They may also seek advice of an expert

Ques8. What is a Fund of Funds ( FoF ) scheme?

A scheme that invests primarily in other schemes of the same mutual fund or other mutual funds is
known as a FoF scheme. An FoF scheme enables the investors to achieve greater diversification through
one scheme. It spreads risks across a greater universe.

Ques9. What is Investor Protection Fund (IPF)/ Customer Protection Fund (CPF) at Stock
Exchanges?

Investor Protection Fund is the fund set up by the Stock Exchanges to meet the legitimate investment
claims of the clients of the defaulting members that are not of speculative nature. SEBI has prescribed
guidelines for utilisation of IPF at the Stock Exchanges. The Stock Exchanges have been permitted to fix
suitable compensation limits, in consultation with the IPF/CPF Trust. It has been provided that the
amount of compensation available against a single claim of an investor arising out of default by a member

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broker of a Stock Exchange shall not be less than Rs. 1 lakh in case of major Stock Exchanges viz., BSE and
NSE, and Rs. 50,000/- in case of other Stock Exchanges.

Que10. Can a mutual fund impose fresh load or increase the load beyond the level mentioned in
the offer documents?

Mutual funds cannot increase the load beyond the level mentioned in the offer document. Any change in
the load will be applicable only to prospective investments and not to the original investments. In case of
imposition of fresh loads or increase in existing loads, the mutual funds are required to amend their offer
documents so that the new investors are aware of loads at the time of investments.

Ques11. What is a sale or repurchase/redemption price?

The price or NAV a unitholder is charged while investing in an open-ended scheme is called sales price. It
may include sales load, if applicable. Repurchase or redemption price is the price or NAV at which an
open-ended scheme purchases or redeems its units from the unitholders . It may include exit load, if
applicable.

Ques12. What is an assured return scheme?

Assured return schemes are those schemes that assure a specific return to the unitholders irrespective of
performance of the scheme. A scheme cannot promise returns unless such returns are fully guaranteed
by the sponsor or AMC and this is required to be disclosed in the offer document. Investors should
carefully read the offer document whether return is assured for the entire period of the scheme or only
for a certain period. Some schemes assure returns one year at a time and they review and change it at the
beginning of the next year.

Ques13. Can a mutual fund change the asset allocation while deploying funds of investors?

Considering the market trends, any prudent fund managers can change the asset allocation i.e. he can
invest higher or lower percentage of the fund in equity or debt instruments compared to what is
disclosed in the offer document. It can be done on a short term basis on defensive considerations i.e. to
protect the NAV. Hence the fund managers are allowed certain flexibility in altering the asset allocation
considering the interest of the investors. In case the mutual fund wants to change the asset allocation on a
permanent basis, they are required to inform the unit holders and giving them option to exit the scheme
at prevailing NAV without any load.

Ques14. How to invest in a scheme of a mutual fund?

Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of
the new schemes. Investors can also contact the agents and distributors of mutual funds who are spread
all over the country for necessary information and application forms. Forms can be deposited with

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mutual funds through the agents and distributors who provide such services. Now a days , the post offices
and banks also distribute the units of mutual funds. However, the investors may please note that the
mutual funds schemes being marketed by banks and post offices should not be taken as their own
schemes and no assurance of returns is given by them. The only role of banks and post offices is to help in
distribution of mutual funds schemes to the investors.

Investors should not be carried away by commission/gifts given by agents/distributors for investing in a
particular scheme. On the other hand they must consider the track record of the mutual fund and should
take objective decisions.

Ques 15. What is a Tax Saving Schemes?

Tax Saving Schemes offer tax rebates to the investors under specific provisions of the Income Tax Act,
1961 as the Government offers tax incentives for investment in specified avenues. e.g . Equity Linked
Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These
schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks
associated are like any equity-oriented scheme.

Ques16. What is a Rolling Settlement?

In a Rolling Settlement trades executed during the day are settled based on the net obligations for the
day. Presently the trades pertaining to the rolling settlement are settled on a T+2 day basis where T
stands for the trade day. Hence, trades executed on a Monday are typically settled on the following
Wednesday (considering 2 working days from the trade day). The funds and securities pay-in and pay-
out are carried out on T+2 day.

Ques17. What is a Mutual Fund?

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing
funds in securities in accordance with objectives as disclosed in offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the
risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in
the same proportion at the same time. Mutual fund issues units to the investors in accordance with
quantum of money invested by them. Investors of mutual funds are known as unit holders.

The profits or losses are shared by the investors in proportion to their investments. The mutual funds
normally come out with a number of schemes with different investment objectives which are launched
from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India
(SEBI) which regulates securities markets before it can collect funds from the public.

Ques18. What is STT?

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Securities Transaction Tax (STT) is a tax being levied on all transactions done on the stock exchanges at
rates prescribed by the Central Government from time to time. Pursuant to the enactment of the Finance
(No.2) Act, 2004, the Government of India notified the Securities Transaction Tax Rules, 2004 and STT
came into effect from October 1, 2004.

Ques19. What is the pay-in day and pay-out day?

Pay in day is the day when the brokers shall make payment or delivery of securities to the exchange. Pay
out day is the day when the exchange makes payment or delivery of securities to the broker. Settlement
cycle is on T+2 rolling settlement basis. The exchanges have to ensure that the pay out of funds and
securities to the clients is done by the broker within 24 hours of the payout. The Exchanges will have to
issue press release immediately after pay out.

Ques20. What is the maximum brokerage that a broker/sub broker can charge?

The maximum brokerage that can be charged by a broker has been specified in the Stock Exchange
Regulations and hence, it may differ from across various exchanges. As per the BSE & NSE Bye Laws, a
broker cannot charge more than 2.5% brokerage from his clients. This maximum brokerage is inclusive
of the brokerage charged by the sub-broker. Further, SEBI (Stock brokers and Sub brokers) Regulations,
1992 stipulates that sub broker cannot charge from his clients, a commission which is more than 1.5% of
the value mentioned in the respective purchase or sale note.

Ques21. If schemes in the same category of different mutual funds are available, should one
choose a scheme with lower NAV?

Some of the investors have the tendency to prefer a scheme that is available at lower NAV compared to
the one available at higher NAV. Sometimes, they prefer a new scheme which is issuing units at Rs 10
whereas the existing schemes in the same category are available at much higher NAVs . Investors may
please note that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of
different mutual funds have no relevance. On the other hand, investors should choose a scheme based on
its merit considering performance track record of the mutual fund, service standards, professional
management, etc. This is explained in an example given below.

Suppose scheme A is available at a NAV of Rs.15 and another scheme B at Rs.90. Both schemes are
diversified equity oriented schemes. Investor has put Rs 9,000 in each of the two schemes. He would get
600 units (9000/15) in scheme A and 100 units (9000/90) in scheme B. Assuming that the markets go up
by 10 per cent and both the schemes perform equally good and it is reflected in their NAVs . NAV of
scheme A would go up to Rs . 16.50 and that of scheme B to Rs . 99. Thus, the market value of investments
would be Rs . 9,900 (600* 16.50) in scheme A and it would be the same amount of Rs . 9900 in scheme B
(100*99). The investor would get the same return of 10% on his investment in each of the schemes. Thus,
lower or higher NAV of the schemes and allotment of higher or lower number of units within the amount

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an investor is willing to invest, should not be the factors for making investment decision. Likewise, if a
new equity oriented scheme is being offered at Rs10 and an existing scheme is available for Rs 90, should
not be a factor for decision making by the investor. Similar is the case with income or debt-oriented
schemes.

On the other hand, it is likely that the better managed scheme with higher NAV may give higher returns
compared to a scheme which is available at lower NAV but is not managed efficiently. Similar is the case
of fall in NAVs . Efficiently managed scheme at higher NAV may not fall as much as inefficiently managed
scheme with lower NAV. Therefore, the investor should give more weightage to the professional
management of a scheme instead of lower NAV of any scheme. He may get much higher number of units
at lower NAV, but the scheme may not give higher returns if it is not managed efficiently.

Ques22. How to choose a scheme for investment from a number of schemes available?

As already mentioned, the investors must read the offer document of the mutual fund scheme very
carefully. They may also look into the past track record of performance of the scheme or other schemes of
the same mutual fund. They may also compare the performance with other schemes having similar
investment objectives. Though past performance of a scheme is not an indicator of its future performance
and good performance in the past may or may not be sustained in the future, this is one of the important
factors for making investment decision. In case of debt oriented schemes, apart from looking into past
returns, the investors should also see the quality of debt instruments which is reflected in their rating. A
scheme with lower rate of return but having investments in better rated instruments may be safer.
Similarly, in equities schemes also, investors may look for quality of portfolio. They may also seek advice
of experts.

Ques23. Is the higher net worth of the sponsor a guarantee for better returns?

In the offer document of any mutual fund scheme, financial performance including the net worth of the
sponsor for a period of three years is required to be given. The only purpose is that the investors should
know the track record of the company which has sponsored the mutual fund. However, higher net worth
of the sponsor does not mean that the scheme would give better returns or the sponsor would
compensate in case the NAV falls.

Ques24. How to know the performance of a mutual fund scheme?

The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in
case of open-ended schemes and on weekly basis in case of close-ended schemes. The NAVs of mutual
funds are required to be published in newspapers. The NAVs are also available on the web sites of mutual
funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual
Funds in India (AMFI) www.amfiindia.com and thus the investors can access NAVs of all mutual funds at
one place

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The mutual funds are also required to publish their performance in the form of half-yearly results which
also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and
since inception of schemes. Investors can also look into other details like percentage of expenses of total
assets as these have an affect on the yield and other useful information in the same half-yearly format.

The mutual funds are also required to send annual report or abridged annual report to the unit holders at
the end of the year.

Ques25. How to know where the mutual fund scheme has invested money mobilised from the
investors?

The mutual funds are required to disclose full portfolios of all of their schemes on half-yearly basis which
are published in the newspapers. Some mutual funds send the portfolios to their unit holders.

The scheme portfolio shows investment made in each security i.e. equity, debentures, money market
instruments, government securities, etc. and their quantity, market value and % to NAV. These portfolio
statements also required to disclose illiquid securities in the portfolio, investment made in rated and
unrated debt securities, non-performing assets ( NPAs ), etc.

Some of the mutual funds send newsletters to the unit holders on quarterly basis which also contain
portfolios of the schemes.

Ques26. When will the investor get certificate or statement of account after investing in a mutual
fund?

Mutual funds are required to despatch certificates or statements of accounts within six weeks from the
date of closure of the initial subscription of the scheme. In case of close-ended schemes, the investors
would get either a demat account statement or unit certificates as these are traded in the stock
exchanges. In case of open-ended schemes, a statement of account is issued by the mutual fund within 30
days from the date of closure of initial public offer of the scheme. The procedure of repurchase is
mentioned in the offer document.

Ques27. As a unit holder, how much time will it take to receive dividends/repurchase proceeds?

A mutual fund is required to despatch to the unitholders the dividend warrants within 30 days of the
declaration of the dividend and the redemption or repurchase proceeds within 10 working days from the
date of redemption or repurchase request made by the unitholder .

In case of failures to despatch the redemption/repurchase proceeds within the stipulated time period,
Asset Management Company is liable to pay interest as specified by SEBI from time to time (15% at
present).

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