Lakshminarayanan Alaguraja Advocate Altacit Global
WHAT IS A MUTUAL FUND?
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal.
The money thus collected is then invested in capital market instruments such as shares, debentures and other securities.
The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them.
Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
History Of Mutual Funds
Started in Europe in the mid 1800
Massachuse Hs Investors Trust-First official Mutual Funds
First 27 years slow Growth& index funds were born in 1970
Major growth after IRA introduced.
MUTUAL FUNDS IN INDIA
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases.
1st Phase = 1964-1987
2nd Phase = 1987-1993
3rd Phase = 1993-2003
4th Phase = 2003
Mutual Fund Operation Flow Chart
TYPES OF MUTUAL FUNDS Type of Mutual Fund Schemes Structure Investment Objective Special Schemes Open Ended Funds Close Ended Funds Interval Funds Growth Funds Income Funds Balanced Funds Money Market Funds Industry Specific Schemes Index Schemes Sectoral Schemes
TYPES OF MUTUAL FUNDS SCHEMES
Open-Ended – anytime enter/exit
Close-Ended Schemes – listed on exchange, redemption after period of scheme is over.
By Investment Objective
Equity (Growth) – only in Stocks – Long Term (3 years or more)
Debt (Income) – only in Fixed Income Securities (3-10 months)
Balanced/Hybrid – Stocks + Fixed Income Securities (1-3 years)
Tax Saving Schemes
Funds based on Size of the Companies Invested:
Large cap funds
Mid cap funds
Small cap funds
SEBI (Mutual Funds) Regulations, 1996
Securities Exchange Board of India (“SEBI”), the mutual funds regulator has clearly defined rules, which govern mutual funds. These rules relate to the formation, administration and management of mutual funds and also prescribe disclosure and accounting requirements. Such a high level of regulation seeks to protect the interest of investors.
REASONS TO INVEST
EXPERT ON YOUR SIDE: When you invest in a mutual fund, you buy into the experience and skills of a fund manager and an army of professional analysts
LIMITED RISK: Mutual funds are diversification in action and hence do not rely on the performance of a single entity.
MORE FOR LESS: For the price of one blue chip stock for instance, you could get yourself a number of units across a number of companies and industries when you invest in a fund!
EASY INVESTING: You can invest in a mutual fund with as little as Rs. 5,000. Salaried individuals also have the option of investing in a monthly savings plan.
CONVENIENCE: You can invest directly with a fund house, or through your bank or financial adviser, or even over the internet.
INVESTOR PROTECTION: A mutual fund in India is registered with SEBI, which also monitors the operations of the fund to protect your interests.
QUICK ACCESS TO YOUR MONEY: It's good to know that should you need your money at short notice, you can usually get it in four working days.
TRANSPARENCY: As an investor, you get updates on the value of your units, information on specific investments made by the mutual fund and the fund manager's strategy and outlook.
LOW TRANSACTION COSTS: A mutual fund, by sheer scale of its investments is able to carry out cost-effective brokerage transactions.
TAX BENEFITS: Over the years, tax policies on mutual funds have been favorable to investors and continue to be so.
Identify ‘What to Buy’ HOW TO BUY?
HOW TO REDEEM?
RISK FACTORS OF MUTUAL FUNDS
THE RISK-RETURN TRADE-OFF: The most important relationship to understand is the risk-return trade-off. Higher the risk greater the returns/loss and lower the risk lesser the returns/loss.
MARKET RISK: Sometimes prices and yields of all securities rise and fall. Broad outside influences affecting the market in general lead to this.
CREDIT RISK: The debt servicing ability of a company through its cash flows determines the Credit Risk faced by you.
Inflation Risk: Inflation is the loss of purchasing power over time.
INTEREST RATE RISK: In a free market economy interest rates are difficult if not impossible to predict.
POLITICAL/GOVERNMENT POLICY RISK: Changes in government policy and political decision can change the investment environment.
LIQUIDITY RISK: Liquidity risk arises when it becomes difficult to sell the securities that one has purchased.
*Mutual funds are subject to market risk please read the offer document carefully before investing.