Mutual funds can be complicated. Here are some answers to commonly asked questions on mutual funds:

I invested Rs 5,000 in an equity fund at an NAV of Rs 17.91. The fund house issued 279.173 units to me. My worry is that is it okay to accept units in fractions? Do all AMCs do this or my fund house is an exception?

-- Atanu Saikia

There is no need for you to worry. Your investment is perfectly alright. When you invested at an NAV of Rs 17.91, the price of each unit purchased stood at Rs 17.91. Dividing Rs 5,000 by per unit cost will give you a fractional number of units. The number of units one receives can also be a whole number.

However, it should be of least interest to you whether the units are in whole number or a fraction, since all units are issued in electronic and not in physical form. This means that when you sell (or buy) units, you can sell (or purchase) these 'fractional' units also.

Although there is no hard-and-fast rule on allotment of units, usually fund schemes allot units up to three decimal places.

What is an exchange traded fund (ETF)? How is it different from a normal equity fund?

--Dipika Sharma

Exchange Traded Funds (ETFs) were first launched in India in December 2001 by Benchmark AMC. ETFs are fundamentally different from normal funds and have thus developed something of a reputation for complexity.

While some of the details of how AMCs run ETFs are genuinely complex, they have nothing to do with investors. For the investors, ETFs are a straightforward instrument offering some interesting features. Let's see what makes ETFs different.

ETFs are index funds. An index fund is an equity fund, which tracks a particular index like Sensex or Nifty. The index fund holds the same stocks as the underlying index and in the same proportion as the index. From an investment point of view, ETFs are index funds that, unlike normal index funds, can be bought and sold at intra-day prices.

In this respect, they are more like shares rather than MFs. Normal index funds are, of course, available only at end-of-day NAVs from fund distributors. ETFs, since they need to be transacted upon throughout the day, are bought and sold through stockbrokers (using a demat account) just like shares.

However, behind the scenes, ETFs are very different from any other kind of funds. How an ETF really differs from an index fund is the manner in which it is created, bought and sold. In the case of normal mutual funds, investors pay cash to the fund, which in turn buys the stocks and bonds.

When ETFs are set up, the initial participants will give the fund the basket of stocks, which constitute the underlying index and take units of the fund in exchange. These market makers will in turn sell these units to investors just like a distributor does.

The market maker is usually a broker. Since ETFs are sold through brokers, you will pay brokerage in place of loads. ETFs tend to have lower brokerage than normal fund loads.

The NAV of an ETF is a fraction of the value of the index. Thus the NAV of an exchange-traded fund based on the Nifty can be one-tenth of the value of the Nifty. If the Nifty is at 3500 points the NAV will be Rs 350.

Effectively, this fractional pricing means that a basket of stocks on Nifty can be purchased by an investor with a much lower outlay than it would otherwise be possible. This also enables smaller initial investments than what most index funds offer. By comparison, most Nifty index funds require a minimum investment of Rs 5,000.

In the case of other MF schemes, a fund buys back and sells units. In a way, an ETF resembles a close-ended scheme, where the units are not sold back to the fund and investors buy and sell the fund units on the market.

However, there is obviously no discount to NAV like closed-end funds. Unlike a close-end fund, supply can be altered by creating additional units or extinguished by withdrawing existing ones. Trading of the units ensures underlying stocks do not have to be bought or sold. Investors entering and exiting do not also affect existing investors. An ETF has a much lower tracking error than an index fund.

I have been advised to invest directly in stocks rather than investIng through a mutual fund, as the loads and expenses make funds costlier. I feel I can do that with the help of your website. At valueresearchonline, I can compare the performance of the funds to identify the best performing ones and then simply look at their portfolio details to identify the stocks, which I need to buy on my own. By doing this, I can avoid the expenses of mutual funds. Isn't this a more cost- and tim- efficient way of investing?

--Arpit Sharma

Portfolio of a fund is not static but keeps changing. The details of a fund's portfolio are made public only at the end of a month. So, when a fund manager forms a view over a company and invests in it and say his targets are met, or due to any other reason if his view changes, he exits the stocks and looks for other options.

Now this could happen any time during that month. Given the volatility of equity markets, you may loose the opportune time to sell or buy a certain scrip. Consequently, you might end up getting stuck with stocks which the fund manager would have already exited. In the light of the recent volatility in the markets, this is quite a possibility.

Therefore, keeping a close track of the fund's portfolio on an individual basis and trying to closely follow the fund manager is a futile and time-consuming task. A fund manager has the muscle of a large corpus through which he can build a diversified portfolio. An investor in his individual capacity may not be able to build such a portfolio due to lack of such a huge investment amount, and hence lack diversity.

Given the element of diversification, a fund manager might once in a while take a risky bet on the stock. And if you are confident about a fund manager's moves, then why not let him make the investment decisions and utilise your time in picking robust funds.

However, fund managers have also made mistakes in the past in judging the valuation of stocks. Lastly, we don't think mutual funds are alarmingly expensive so as to deter you from investing in them.

In fact, you have missed out the fact that when mutual funds buy and sell stocks in their portfolio, they do not have to pay any capital gains tax. But when you as an individual churn your portfolio, you will be liable to pay a capital gains tax at the rate of 10 per cent.

What is the optimum frequency of instalments for investing through an SIP? Should I invest monthly, quarterly or half-yearly?

--Ajit Saran

The optimum frequency of an SIP should be a function of your convenience. You should first ascertain how frequently you can set aside funds for investment without pushing your finances to the edge.

While there is no doubt that SIP is the best way to invest in equity funds, there is no sound basis of saying that a particular frequency of investment is the most profitable. If you can invest comfortably every month, why not go for the monthly option? In this case, the concept of rupee cost averaging may also work better for you.

Moreover, whether you invest monthly or quarterly will not affect the performance of your portfolio as much as your discipline over the long term. Therefore, focus on investing in good and established funds over the long-term, and don't get carried away by tall claims.