"Mutual Fund", The complete description.


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"Mutual Fund", The complete description.

  1. 1. Introduction of Mutual Fund -Arun Singh (M.Sc Financial Mathematics)(M.S.University, Faculty of Technology and Engineering)
  2. 2. MUTUAL FUND• What is Mutual Fund?• A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people /corporate investor and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.• Mutual funds are considered as one of the best available investments as compare to others they are very cost efficient and also easy to invest in,
  3. 3. How many types of Mutual Fund?• No matter what type of investor you are, there is bound to be a mutual fund that fits your style. According to the last count there are more than 10,000 mutual funds in North America! That means there are more mutual funds than stocks.• Its important to understand that each mutual fund has different risks and rewards. In general, the higher the potential return, the higher the risk of loss. Although some funds are less risky than others, all funds have some level of risk - its never possible to diversify away all risk. This
  4. 4. Each fund has a predetermined investmentobjective that tailors the funds assets, regionsof investments and investment strategies. At thefundamental level, there are three varieties ofmutual funds:1) Equity funds (stocks)2) Debt funds (bonds)3) Balance funds (stocks & bonds)
  5. 5. (1) Equity fund:• These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund manager’s outlook on different stocks. The Equity Funds are sub- classified depending upon their investment objective, as follows:-• Diversified Equity Funds• Mid-Cap Funds• Sector Specific Funds• Tax Savings Funds (ELSS)• Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.
  6. 6. (2) Debt funds: The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:-• Gilt Funds: Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. These Funds carry zero
  7. 7. Invest a major portion into various debtinstruments such as bonds, corporate debenturesand Government securities.MIPs:Invests maximum of their total corpus in debtinstruments while they take minimum exposure inequities. It gets benefit of both equity and debtmarket. These scheme ranks slightly high on therisk-return matrix when compared with other debtschemes.Short Term Plans (STPs):Meant for investment horizon for three to sixmonths. These funds primarily invest in short termpapers like Certificate of Deposits (CDs) and
  8. 8. Liquid Funds:Also known as Money Market Schemes,These funds provides easy liquidity andpreservation of capital. These schemesinvest in short-term instruments likeTreasury Bills, inter-bank call moneymarket, CPs and CDs. These funds aremeant for short-term cash managementof corporate houses and are meant foran investment horizon of 1day to 3months. These schemes rank low onrisk-return matrix and are considered tobe the safest amongst all categories of
  9. 9. (3) Balanced funds:As the name suggest they, are a mix of bothequity and debt funds. They invest in both equitiesand fixed income securities, which are in line withpre-defined investment objective of the scheme.These schemes aim to provide investors with thebest of both the worlds. Equity part providesgrowth and the debt part provides stability inreturns.
  10. 10. How can you make money through Mutual Fund? (Types of Return)• You can make money from a mutual fund in three ways:-(1) Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution.(2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.(3) If fund holdings increase in price but are not
  11. 11. Risk Return Matrix
  12. 12. The risk return trade-off indicates that if investor is willing to takehigher risk then correspondingly he can expect higher returns andvise versa if he pertains to lower risk instruments, which would besatisfied by lower returns. For example, if an investors opt forbank FD, which provide moderate return with minimalrisk. But as he moves ahead to invest in capital protected fundsand the profit-bonds that give out more return which isslightly higher as compared to the bank deposits but therisk involved also increases in the same proportion.Thus investors choose mutual funds as their primary means ofinvesting, as Mutual funds provide professional management,diversification, convenience and liquidity. That doesn’t meanmutual fund investments risk free. This is because the moneythat is pooled in are not invested only in debts funds which areless riskier but are also invested in the stock markets whichinvolves a higher risk but can expect higher returns. Hedge fundinvolves a very high risk since it is mostly traded in the derivativesmarket which is considered very volatile.
  13. 13. Some Important Information:-(1) Which was the First Mutual Fund to be set up in India? The first introduction of a mutual fund in India occurred in 1963, when the Government of India launched Unit Trust of India (UTI). Until 1987, UTI enjoyed a monopoly in the Indian mutual fund market. Then a host of other government-controlled Indian financial companies came up with their own funds. These included State Bank of India, Canara Bank, and Punjab National Bank. This market was made open to private players in 1993, as a result of the
  14. 14. above. All the mutual funds must get registered withSEBI. The only exception is the UTI, since it is acorporation formed under a separate Act of Parliament.(3) How do mutual funds diversify theirrisks?According to basis financial theory, which states that aninvestor can reduce his total risk by holding a portfolioof assets instead of only one asset. This is because byholding all your money in just one asset, the entirefortunes of your portfolio depend on this one asset. Bycreating a portfolio of a variety of assets, this risk issubstantially reduced.(4) Can mutual funds assumed to be risk-free investments?No. Mutual fund investments are not totally risk free. Infact, investing in mutual funds contains the same risk as
  15. 15. Disadvantages of Investing Mutual Funds:-• 1. Professional Management- Some funds doesn’t perform in neither the market, as their management is not dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or not the so-called professionals are any better than mutual fund or investor him self, for picking up stocks.• 2. Costs – The biggest source of AMC (Asset Management Company) income, is generally from the entry & exit load which they charge from an investors, at the time of purchase. The
  16. 16. few investments often dont make much differenceon the overall return. Dilution is also the result of asuccessful fund getting too big. When moneypours into funds that have had strong success, themanager often has trouble finding a goodinvestment for all the new money.4. Taxes - when making decisions about yourmoney, fund managers dont consider yourpersonal tax situation. For example, when a fundmanager sells a security, a capital-gain tax istriggered, which affects how profitable theindividual is from the sale. It might have beenmore advantageous for the individual to defer thecapital gains liability.
  17. 17. What to Know Before You Shop:-• 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
  18. 18. The major fund houses which areoperating in India today include:There are 43 Mutual Funds companyoperating.Fortis, Birla Sunlife, Bank of Baroda, HDFC,ING Vysya, ICICI Prudential, SBI MutualFund, Tata, Kotak Mahindra, Unit Trust ofIndia, Reliance, IDFC, Franklin Templeton,Sundaram Mutual Fund, Religare MutualFund, Motilal Oswal , LIC, L&T, PrincipalMutual Fund etc.
  19. 19. Mutual funds are an under tapped market in India:
  20. 20. than 10% of Indian households have invested inmutual funds. A recent report on Mutual FundInvestments in India published by research andanalytics firm, Boston Analytics, suggests investorsare holding back from putting their money intomutual funds due to their perceived high risk and alack of information on how mutual funds work.The primary reason for not investing appears to becorrelated with city size. Among respondents with ahigh savings rate, close to 40% of those who live inmetros and Tier I cities considered suchinvestments to be very risky, whereas 33% ofthose in Tier II cities said they did not how or whereto invest in such assets. On the other hand, among those who invested,close to nine out of ten respondents did so because
  21. 21. For Example:-Reliance Diversified Power Sector Fund - Retail Plan (G)56.5220.88 (1.54%), NAV as on Mar-19-2012
  22. 22. Growth Comparison with other funds:-
  23. 23. Most Important Thing:- “Mutual Fund Investmentsare subject to market risks.Please read the Statement ofAdditional Information (SAI)and Scheme InformationDocument (SID) carefullybefore investing.”