Your Money’s Journey After You Invest in Mutual Funds

Before investing in a mutual fund, you must have carefully analyzed the schemes, read the offer document and listed sources to track the Net Asset Value (NAV). But, ever wondered what happens to your mutual fund investment ‘behind the scenes’ after you have put your money in it? There is a very systematic process that your mutual fund investment goes through from the time you invest till you exit. 

Here is an account of what happens after you have invested in mutual funds.

First Stage: NAV and Allocation of Units 

The investor can invest in mutual funds either through an Asset Management Company (AMC) or distributor. After the investment is made, the details of the investor are forwarded to Registrars and Transfer Agents (RTAs) who store and maintain the details of investors in the electronic form. RTAs also determine the applicable NAV to your investment and allot units of fund accordingly.

Second Stage: Investment as per the Fund Strategy

The AMC receives the amount invested and details of units allotted against such investment to a particular investor from RTAs. The amount is now invested by the fund manager in accordance with objectives and strategy of the fund in target asset base. Fund managers work with a team of analysts, researchers and experts to make sound investment decisions. 

Third Stage: Safekeeping of Securities and Cash

There are Custodians who is responsible for safekeeping the physical securities and cash. Dematerialized securities are maintained by the Depository Participants registered either under National Securities Depository Limited (NSDL) or Central Depository Services Limited (CDSL). Custodian ensures that securities in which the fund has invested in are delivered to the fund and money for the same is paid out.

Fourth Stage: Fees and Charges

To run its operations, an AMC has to incur significant costs and one its major revenue stream is fees and charges it recovers from its clients. This fee is expressed in terms of percentage of the scheme’s net asset value which is known as the expense ratio. The asset management fee is adjusted from the total investment amount that an investor puts in. Different types of standard charges that a fund charges on its investor are annual maintenance fee, transaction fee, entry load, exchange fee or swap fee. The ceiling on rates to be charged is regulated by the Securities and Exchange board of India (SEBI) which ensures that investors are not charged unfair and a hefty amount depleting their actual investment.

Fifth Stage: Income Generation, Redemption or Exit

Income on mutual fund units is derived from NAV. Total NAV divided by number of units gives the value of each unit which reflects the appreciation or loss per unit held by an investor. Following are the different ways in which an investor earns income from mutual funds:

* Dividend: Funds declare dividends from time to time, and if an investor has opted for dividend option, then he shall be paid dividends as and when they are declared. 

* Growth: For an investor who has opted for growth fund, the dividends shall be re-invested in the fund thereby expanding the investment size.

* Redemption: Another way to earn income on the fund or if you want to exit the fund is to either redeem fund units when the fund matures or sell the units prematurely by placing sell order. The RTAs shall arrive at the amount to be paid to investor considering NAV of the units held. An exit load charge may be deducted from the proceeds depending on the terms of the fund.

Sixth Stage: Income Credit

The proceeds from selling units are either sent by cheque or credited directly into the bank account of investor. As per the regulations, an AMC must dispatch the proceeds within 10 working days from the date of redemption. 

So, as you can see, there are several activities, organizations and people involved in handling your mutual fund investment.