Mutual funds 2003

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Mutual funds 2003

  1. 1. What Are Mutual Funds?A mutual fund is a managed group of owned securities of several corporations. These corporations receive dividends on the shares that they hold and realize capital gains or losses on their securities traded. Investors purchase shares in the mutual fund as if it was an individual security. After paying operating costs, the earnings (dividends, capital gains or loses) of the mutual fund are distributed to the investors, in proportion to the amount of money invested. Investors hope that a loss on one holding will be made up by a gain on another. Heeding the adage "Dont put all your eggs in one basket" the holders of mutual fund shares are able collectively to gain the advantage by diversifying their investments, which might be beyond their financial means individually. A mutual fund may be either an open-end or a closed-end fund. An open-end mutual fund does not have a set number of shares; it may be considered as a fluid capital stock. The number of shares changes as investors buys or sell their shares. Investors are able to buy and sell their shares of the company at any time for a market price. However the open- end market price is influenced greatly by the fund managers. On the other hand, closed-end mutual fund has a fixed number of shares and the value of the shares fluctuates with the market. But with close-end funds, the fund manager has less influence because the price of the underlining owned securities has greater influence.
  2. 2. Advantages of Mutual FundsA Mutual Fund can be defined as a trust wherein the savings of theinvestors with the same financial goal are pooled in. The collectedmoney then goes for investment in capital market instruments.These can include debentures, shares and other such securities.These investments in turn yield an income. The income and capitalappreciation are distributed amongst its unit holders. Theadvantages of mutual funds are many. Some of the advantages ofmutual funds in India are listed below:Mutual Funds AdvantagesThere are several advantages of investing in a Mutual Fund and thatis why more and more people are taking to it. Some of the majorbenefits of mutual funds in India are as follows: • Diversification: The top Indian mutual funds create their portfolio designs in such a manner that the interested individuals who invest in mutual funds react differently even under similar economic conditions. This can be explained with an example. An increase in the rates of interest may lead to the diminishing of the asset value of securities in the portfolios. Again, an increase in the value may result to the appreciation in value of the other set of portfolio securities. Over time, a balance is created in the portfolio which leads to an overall increase of the portfolio, even if some security values diminish. • Professional Management: A majority of the mutual funds in India employ the leading professionals in their investments management. These managers make decisions on what securities, the buying and selling of the funds will take place. • Regulatory oversight: There are certain rules and regulations framed by the government which every Mutual fund are required to follow. This is to protect the investors from any fraudulent activities.
  3. 3. • Liquidity: Getting your money out from the mutual fund is no difficult task. All you have to do is just write a check, make a telephone call and you are done. • Convenience: Mutual fund shares can be bought via phone, mail, or even over Internet. • Low cost: The expenses of the Mutual fund seldom cross the 1.5 % mark of the investment you make. The Index Funds expenses are usually lesser. Instead, the company stocks are bought by them which are found on the specific index. • Ease of process: Investing in a mutual fund is easy if you are a bank account holder and you posses a PAN card. All you will need to do is fill up the application form, attach the PAN card (for transactions over Rs 50,000), sign the cheque and your Mutual Fund investment is complete. • Well regulated: The SEBI (Securities Exchange Board of India) regulates the India mutual funds for the security and convenience of the investors. SEBI ensures that a transparency is maintained by keeping a strict vigilance on the mutual funds. This keeps the investor informed and helps him/her to make his/her choice. To keep a track whether the investment in Mutual Fund is in line with the objective or not, SEBI demands the disclosure of portfolios once in every six months. Drawbacks of Mutual FundsMutual Funds, like every investment, have their own share ofadvantages and disadvantages. Before you venture out to makeyour investment in Mutual Funds, it is advisable that you do athorough study of the pros and cons of Mutual Funds. Just like youcan list a number of Mutual Funds advantages, you will finddrawbacks of Mutual Funds as well if you do a market research.Some of the common drawbacks of Mutual Funds in India are listedbelow:
  4. 4. Disadvantages of Mutual Funds in IndiaThere are several shortcomings of Mutual Funds in India. Some ofthese Mutual drawbacks are as follows: • No Guarantees: Every investment comes with some sort of risk. If the value of an entire stock market falls, it will directly affect the mutual fund shares as its values will also decline, irrespective of the portfolio balance. However, the risks involved in mutual funds are much lesser than buying and selling of stocks on your own. This is because when you are investing through a mutual fund you do not have this risk of money loss. • Taxes: In a typical year, the mutual funds which are most efficiently managed have the capacity to sell anywhere from 20 - 70 % of their portfolio securities. If the money you invest in Mutual Fund earns a profit, you will be required to pay the taxes on the dividend received by you. You have to pay the taxes even if you make your money reinvest in Mutual Fund. • Fees and Commissions: An administrative fee is required by all kinds of funds to meet the expenses. There are many funds which even charge commission on sales or "loads" to pay financial consultants, brokers, financial institutions or financial planners. If you buy stocks or shares from Load Fund, you have to pay a commission on sales irrespective of the fact that you are consulting a financial advisor or a broker. • Risk Management: It depends on the right decision of the fund manager that you will get a satisfactory return or not. This is unlike Index Funds where there is no management risk involved because of the absence of managers.Association of Mutual Funds in IndiaWith the rise in mutual fund companies, a requirement for mutualfund association in India was experienced to operate as a non-profit
  5. 5. organization. This led to the establishment of Association of MutualFunds in India in 1995. Association of Mutual Funds in India is animportant organ of all Asset Management Companies that areregistered with Securities and Exchange Board of India. Till today,all the Asset Management Companies with Mutual Fund schemes arethe members of Association of Mutual Funds in India. AMFI operatesunder the superintendence of its Board of Directors.Association of Mutual Funds India, also referred to as AMFI, hashelped the Indian Mutual Fund Industry to enter into a healthy andprofessional market, maintaining the market ethics and standards.It attempts to promote the interests of both Mutual Funds and unitholders.Aims of Association of Mutual Funds in IndiaThe aims of Association of Mutual Funds in India are as follows: • Association of Mutual Funds endeavors to maintain high standards in all fields of operation within the industry. • Association of Mutual Funds maintains an interaction with Securities and Exchange Board of India, and functions in accordance with the guidelines established by SEBI (Securities and Exchange Board of India). • Association of Mutual Funds in India takes up all India awareness program on behalf of the investors. This is done to facilitate proper comprehension of the concept and functioning of Mutual Funds. • At last but not the least association of mutual fund of India also circulate information related to Mutual Fund Industry.Association of Mutual Funds in India: SponsorsSome of the major sponsors of Association of Mutual Funds in Indiainclude: • SBI Fund Management Ltd. • BenchMark Asset Management Company Pvt.
  6. 6. • UTI Asset Management Co Pvt. Ltd. • JM Financial Mutual Fund • Canbank Investment Management Services Ltd. • Jeevan Bima Sahayog Asset Management Company Ltd. Top Mutual funds in IndiaMutual Funds NAV - The Net Asset Value or NAV is the currentmarket value of a funds holdings that decrease the funds liabilitieswhich are usually expressed as a per share amount. For most funds,the NAV is determined on a daily basis after the closing of sometrade on certain financial exchanges. Mutual funds NAVs arecalculated after the trading day is over. If the NAV increases, itimplies the value of the Shareholders holdings increase. The FundCompany will then sell the shares at the particular price along withthe sales fees. The open-ended mutual funds NAV are publishedeveryday while close -ended mutual funds NAV are publishedweekly. To calculate the mutual funds NAV, one must take thecurrent market value of the funds net assets. Divide this by thenumber of shares that are outstanding.Best Mutual Funds - Some of the best mutual funds include:Reliance Mutual Fund has reaped a lot and has regained the thirdposition among fund houses after a change in fund managementteam. Reliance Vision Fund has returned 47.7% and 66% CAGR inthe past three and five years respectively. This was against thecategory average of 43.6 and 45.!% CAGR. They have come outwith the top two schemes and managed their risk elements well,outdone the Sensex and the category average too. Its strong focusis one equities and its knack for picking the winning stocks on thestreet.SBI Magnum Contra Fund is a diversified equity scheme thatadheres to the Contrarian strategy. SMCF is aims to invest in scripsand those sectors which are currently out-of-fashion and hold
  7. 7. potential. These scrips and sectors are available at cheapervaluations and are appreciative when markets realize theirpotential. SMCF has outperformed the category average across alltime periods and has returned a good 65.3 %in the past five yearsas against 45.1% by the category average and 34.1% by Sensex.DSP Merill Lynch Opportunities Fund (DMOF) is a diversified equityfund that invests in scrips in various market caps. This company hasbeen a fairly consistent player over time.The DSP ML Tiger Fund has been one of the best schemes from thefund house and has performed better than DSPML OpportunitiesFund. This is a more thematic fund and carries a high risk factor ascompared to DMOF which is more diversified and better equippedfor the next three years.Franklin India Flexi Cap is all about multi cap funds that aim toinvest in scrips across all market capitalization. When large-capstocks start doing well, these schemes tilt towards large-cap stocks.When mid cap scrips do well, they invest more in mid-cap stocks.FIFCF in the past has returned 64.4% while the Sensex returned64%. It had one of the lowest downside risk figures of all schemes.This scheme has grown by 66% in one and a half years. The fundsize is of trivial importance as this fund house can manage 4 largeschemes like Franklin India Blue chip Fund (Rs 2,546.01 crore) andFranklin India Prima Fund (Rs 1,790.39 crore).HDFC Equity Fund has been in the top two quartiles owing to itssuperior risk adjusted return. HEF invests in large cap stocks thathave a lower risk compared to mid-cap stocks. The large capcompanies are well-established with a relatively sound, long termrecord. As compared to the small and medium companies, they areless volatile. HEF has limited its exposure to the mid-cap stockssegment to just 25% and has remained a large cap oriented equityfund. It has just 34% of the corpus in mid-caps and 54% in largecaps.Prudential ICICI Dynamic Fund has 34% of the corpus in mid-capsand 54% in large caps. PIDF follows the strategy of a bottom-upstock picking strategy and prefers investing in those companies that
  8. 8. have the potential to compound cash flows over the several years.Considering the past two years, PIDP comes fifth on the list of 86schemes. It has returned 6.5% against 50% by category averageand 51% by Sensex.SBI Mutual Fund is a fully owned subsidiary of the State Bank ofIndia. It is Indias premier bank with the largest banking operationin the country. SBI Mutual Fund incorporates certain workingphilosophy in their strategy while they put in investors money in itsstable in order to have a full control of the risks concentrating forgrowth at a reasonable price. It does locate certain competitiveadvantage before investing. The strategy of top down and bottomup approaches are followed. While the former is for sectorallocation, the latter is for stock selection.While looking at investment opportunities and scenario, SBI MutualFunds employ a multi stage filtering process that includes a firstlevel look at liquidity, the second level is at management quality,the third level is for competitive position and the fourth is for theshare price evaluation. It aims at the risk adjusted returns based onthe investors risk tolerance level in the debt sector. The followingfour steps are followed : 1. To Manage the schemes on the basis of a portfolio 2. An Active management of interest drawn rate risk. 3. A Credit risk management using the conservative approach 4. A Continuous and consistent monitoring.Reliance Mutual Fund (RMF) - this was established under theIndian Trusts Act, 1882. The sponsor of Reliance Mutual Fund isReliance Capital Limited and Reliance Capital Trustee Co. Limited isthe trustee. RMF was formed for launching the various schemesunder which units were distributed to the Public. This aims at thecapital market and provides investors the opportunities to makeinnumerable investments in diversified securities.How mutual funds earn money
  9. 9. A mutual fund is a means of investing that enables individuals to share the risks of investing with other investors. All contributors to the fund experience an equal share of gains and losses for each dollar invested. A mutual fund owns the securities of several corporations. A mutual fund pools money from hundreds and thousands of investors to construct a portfolio of stocks, bonds, real estate, or other securities, according to the kind of investments the mutual fund trades. Investors purchase shares in the mutual fund as if it was an individual security. Fund managers hired by the mutual fund company are paid to invest the money that the investors have placed in the fund. Heeding the adage "Dont put all your eggs in one basket" the holders of mutual fund shares are able to gain the advantage of diversification which might be beyond their financial means individually.Performance of Mutual FundsMutual Funds are professionally run companies which collect moneyfrom various investors and invest or deploy those funds indiversified portfolios like stocks, shares, bonds and various othersecurities for returns. The portfolio administrator has the duty toinvest underlying security of the fund, pulling in capital gains orlosses and transposing proceeds to the investors. Unit Trust of Indiahappens to be the first organization to introduce the idea of MutualFund in India. The performance of mutual funds began rising withthe liberalization of India.Performance of Mutual Funds: Unit Trust of IndiaUnit Trust of India Mutual Funds governed the Indian mutual fundmarket for about 50 years. It had no competitors till the year 1988.It is only in 1988 that few mutual fund companies were set up to
  10. 10. compete the Unit Trust of India. Despite the emergence of variousMutual Fund companies in 1988, UTI Mutual Fund remained in hetopmost position. UTI Mutual Funds consistently exhibitedexcellence in this field, and this contributed to the performance ofMutual Funds in India . Back in 1992, 24 million UTI Mutual Fundshareholders were promised high returns. UTI Mutual Fundsschemes sold the thought of gaining profits by investing in mutualfunds to Indian people. This happened to be an extremely helpfulmeasure in drawing more and more investors. Moreover, there wasno risk in investing in mutual funds.Performance of Mutual Funds: Current ScenarioDifferent Indian mutual fund companies have plans of introducingpension schemes. They are also planning to introduce open-endedmutual funds. According to experts, if certain restrictions areremoved, the system will become more beneficial and flexible. Types of Mutual Funds in IndiaThese days, different types of Indian Mutual Fund Schemes havecome up which cater to your various financial needs like financialposition, return expectations, risk tolerance and others. Here is alist of the different types of Mutual Fund in India.Indian Mutual Fund Schemes • Open-ended Mutual Fund Schemes in India - There is no fixed maturity for the open-ended mutual fund schemes. One has to deal directly with the Mutual Fund for his/her redemptions and investments. Liquidity is the key feature here. Buying and selling of the units becomes convenient at the related prices of the NAV (net asset value). Some of the open-ended fund schemes in India are ING OptiMix Active Debt Multi - Manager FoF Scheme, ICICI Prudential Very Cautious Plan and Birla Sun Life AAF - Aggressive Plan.
  11. 11. • Close-ended Mutual Fund Schemes in India - Close -ended schemes are those which have a specified maturity period (which generally ranges from 2 - 15 years). At the time of initial public issue one can make direct investment in the scheme and can also get the benefit of buying and selling of the units. Due to demand and supply in the market plus the policy holders expectations and various other market factors, the market price may vary from NAV (Net Asset Value). Some of the close-ended fund schemes in India are ING Vysya Dynamic Asset Allocation Fund and Kotak Dynamic Asset Allocation Scheme. • Tax-saving Mutual fund Schemes in India - Individuals, companies, partnership firms, and body corporate are some of the investing parties in the various Mutual Funds available in the market primarily to enjoy the benefits of tax saving. The Indian Mutual Funds are guided by principles of general contract framed by SEBI. It provides certain tax benefits to the fund holders. It is mandatory that tax benefits should be declared in a column which reads "objects of the offering". SBI Mutual Funds, Prudential ICICI and Bajaj Capital are some of the tax saving Mutual fund companies in India. Open-ended Mutual Fund SchemesWhat are Open-ended Mutual Fund Schemes?Open-ended Mutual Fund Schemes is one of the types of MutualFunds in India. An Open-ended Mutual Fund does not restrict itselfto a given set of number for the shares. In other words, the numberof shares remains non-confined and thereby technically it serves asan open ended instrument. A majority of the Mutual Funds in Indiaare open-ended. The Open-ended Mutual Fund Schemes in India aremore common than the closed-ended Mutual Fund Schemes.Features of Open-ended Mutual FundThese are the following characteristics of the Indian open-endedMutual Funds:
  12. 12. • This type of fund permits the investors to purchase the shares or sell the shares directly, any time. • Based on the current NAV (Net Asset Value), this type of fund issues fresh shares to the investors and redeem them once the investor makes a decision to sell the shares. • The open-ended Indian mutual fund schemes have high liquidity as the investors can put and take out their many as and when they require. • The total assets of the open-ended Mutual Fund fluctuate with the in and out flow of money. • The fund can issue limitless shares and individual share value remains unaffected by the shares outstanding. • The net asset value (NAV) of the fund determines the value of each share.Benefits of Open-ended Mutual Fund Schemes in IndiaOpen ended Mutual Funds provide a number of benefits which areas follows: • These funds maintain a lot of flexibility. This is to say that one can draw your money out any point of time. • The funds can be diversified under the various kinds of investment opportunities. This way you can reap the fruits of different investment options. • Most of the open mutual funds do not charge any fees while transferring various funds within the same family.Risks of Open-ended Mutual FundThere are also some risks involved with the open-ended MutualFund, which are as follows: • The returns are affected when sudden redemptions result in a decline in the value of portfolio. • The fund returns may also get affected by the various types of market forces.
  13. 13. • Open ended Mutual Funds cannot be traded in the stock market. Close-ended Mutual Fund SchemesThere are different types of mutual fund schemes that are availablein India. These include open-ended mutual fund schemes, close-ended mutual fund schemes and tax-saving mutual fund schemes.Opting for the close-ended mutual fund schemes in India willprovide you with certain advantages that other types of mutual fundschemes would not. An increasing number of Indians are now optingto invest their money in close-ended mutual fund schemes.What is a close-ended mutual fund scheme?A close-ended mutual fund scheme clearly stipulates the maturityperiod, which could be anywhere between 2 to 15 years of time.You can make investments on a close-ended mutual fund scheme assoon as they are issued. Later on, you are free to buy or sell close-ended mutual fund scheme units when they are listed on the stockexchange.Important detailsOnce the units are listed on the stock exchange, the market price ofthe close-ended mutual fund scheme units could vary depending onfactors like: • The expectations of the unit holders • Demand for and supply of scheme unitsGenerally, the units of the close-ended mutual fund schemes aretraded on the stock exchange at a price less than its Net AssetValue or NAV. On nearing maturity, the difference between thescheme units trading price and NAV may narrow significantly.
  14. 14. How a close-ended mutual fund scheme benefits thefund manager?Liquidity managementSince a close-ended mutual fund scheme has a fixed tenure beforeit matures, the fund manager does not have to worry about thecorpus at his disposal. In an open-ended scheme, the fund managerwill have to deal with inflow and outflow of money on a continualbasis, leaving the person with only a vague idea of how the corpuswould look over a certain period of time. In other words, a close-ended mutual fund scheme benefits a fund manager in terms ofefficient liquidity management.Security from short-term market fluctuationsClose-ended mutual funds offer a certain security from short-termmarket fluctuations vis-a-vis the investments managed by the fundmanagers. The fixed tenure for maturity allows fund managers towork with investments on a long-term perspective.Close-ended mutual fund schemes in IndiaSome of the companies offering close-ended mutual fund schemesin India has been listed below. • Kotak Mahindra Mutual Fund • Tata Mutual Fund • Standard Chartered Mutual Fund • ICICI Prudential Mutual Fund • HDFC Mutual Fund • LIC Mutual Fund • Sundaram Mutual Fund Tax-saving Mutual Fund Schemes
  15. 15. Investors in India opt for the tax-saving mutual fund schemes forthe simple reason that it helps them to save money. The tax-savingmutual funds or the equity-linked savings schemes (ELSS) receivecertain tax exemptions under Section 88 of the Income Tax Act.That is one of the reasons why the investors in India add the tax-saving mutual fund schemes to their portfolio. The tax-savingmutual fund schemes are one of the important types of mutualfunds in India that investors can opt for.Why its advisable not to be lured by tax benefits?The tax benefit that an investor derives from the tax-saving mutualfund schemes, should be looked upon as an add on feature.Investing in equities is a risky proposition and benefits aresusceptible to market fluctuations. Thus, an investment decisionsolely based on tax-benefits could prove to be harmful in the longrun. So its advisable to investigate other benefits before you decideto put your money on any tax-saving mutual fund schemes.What you should look for?A person who is planning to invest in tax-saving mutual funds inIndia, should judge a proposition based on the followingparameters: • Performance • Investment Approach • Volatility • ExpensesCompanies offering tax-saving mutual fund schemesThere are several companies in India that offer tax-saving mutualfund schemes in the country. Some of the famous organizationshave been listed below. • State Bank of India Mutual Funds • Prudential ICICI Mutual Funds
  16. 16. • Franklin Templeton Mutual Fund India • Standard Chartered Mutual Fund India • Bajaj CapitalPopular tax-saving mutual fund schemes in IndiaSome of the popular tax-saving mutual fund schemes available inIndia have been listed below. • Franklin India Taxshield • HDFC Long Term Advantage Fund • HDFC Taxsaver • Magnum Taxgain • Prudential ICICI Tax PlanTypes of mutual fundsMost funds have a particular strategy they focus on when investing.For instance, some invest only in Blue Chip companies that are moreestablished and are relatively low risk. On the other hand, some focuson high-risk start up companies that have the potential for double andtriple digit growth. Finding a mutual fund that fits your investmentcriteria and style is important.Types of mutual funds are:Value stocks
  17. 17. Stocks from firms with relative low Price to Earning (P/E) Ratio, usually pay good dividends. The investor is looking for income rather than capital gains.Growth stock Stocks from firms with higher low Price to Earning (P/E) Ratio, usually pay small dividends. The investor is looking for capital gains rather than income.Based on company size, large, mid, and small cap Stocks from firms with various asset levels such as over $2 Billion for large; in between $2 and $1 Billion for mid and below $1 Billion for small.Income stock The investor is looking for income which usually come from dividends or interest. These stocks are from firms which pay relative high dividends. This fund may include bonds which pay high dividends. This fund is much like the value stock fund, but accepts a little more risk and is not limited to stocks.Index funds The securities in this fund are the same as in an Index fund such as the Dow Jones Average or Standard and Poors. The number and ratios or securities are maintained by the fund manager to mimic the Index fund it is following.Enhanced index This is an index fund which has been modified by either adding value or reducing volatility through selective stock-picking.
  18. 18. Stock market sector The securities in this fund are chosen from a particular marked sector such as Aerospace, retail, utilities, etc.Defensive stock The securities in this fund are chosen from a stock which usually is not impacted by economic down turns.International Stocks from international firms.Real estate Stocks from firms involved in real estate such as builder, supplier, architects and engineers, financial lenders, etc.Socially responsible This fund would invests according to non-economic guidelines. Funds may make investments based on such issues as environmental responsibility, human rights, or religious views. For example, socially responsible funds may take a proactive stance by selectively investing in environmentally-friendly companies or firms with good employee relations. Therefore the fund would avoid securities from firms who profit from alcohol, tobacco, gambling, pornography etc.Balanced funds The investor may wish to balance his risk between various sectors such as asset size, income or growth. Therefore the fund is a balance between various attributes desired.Tax efficient
  19. 19. Aims to minimize tax bills, such as keeping turnover levels low or shying away from companies that provide dividends, which are regular payouts in cash or stock that are taxable in the year that they are received. These funds still shoot for solid returns; they just want less of them showing up on the tax returns.Convertible Bonds or Preferred stock which may be converted into common stock.Junk bond Bonds which pay higher that market interest, but carry higher risk for failure and are rated below AAA.Mutual funds of mutual funds This funds that specializes in buying shares in other mutual funds rather than individual securities.Closed end This fund has a fixed number of shares. The value of the shares fluctuates with the market, but fund manager has less influence because the price of the underlining owned securities has greater influence.Exchange traded funds (ETFs) Baskets of securities (stocks or bonds) that track highly recognized indexes. Similar to mutual funds, except that they trade the same way that a stock trades, on a stock exchange.
  20. 20. Future of Mutual Funds in IndiaFuture of Mutual Funds in India - An OverviewFinancial experts believe that the future of Mutual Funds in India willbe very bright. It has been estimated that by March-end of 2010,the mutual fund industry of India will reach Rs 40,90,000 crore,taking into account the total assets of the Indian commercial banks.The estimation was based on the December 2004 asset value of Rs1,50,537 crore. In the coming 10 years the annual compositegrowth rate is expected to go up by 13.4%. Since the last 5 years,the growth rate was recorded as 9% annually. Based on the currentrate of growth, it can be forecasted that the mutual fund assets willbe double by 2010.Indian Mutual Funds Future - Growth Facts • In the past 6 years, Mutual Funds in India have recorded a growth of 100 %. • In India, the rate of saving is 23 %. • In the future, there lies a big scope for the Indian Mutual Funds industry to expand. • Several asset management companies which are foreign based are now entering the Indian markets. • A number of commodity Mutual Funds will be introduced in the future. The SEBI (Securities Exchange Board of India) has granted the permission for the same. • More emphasis is put on the effective Mutual Funds governance. • There is also enough scope for the Indian Mutual funds to enter into the semi-urban and rural areas. • Financial planners will play a major role in the Mutual Funds market by providing people with proper financial planning.Future of Indian Mutual Funds- Conclusion
  21. 21. Looking at the past developments and combining it with the currenttrends it can be concluded that the future of Mutual Funds in Indiahas lot of positive things to offer to its investors. Open Ended FundsOpen ended funds:Open ended funds also called open ended mutual funds, is the most common type of mutual fundavailable in the financial market.Established by a mutual fund company, open ended funds are evaluated by the mutual fund company.The open ended funds are also evaluated by external evaluating agents. The mutual fund company assuresthat the issuing fund, or the fund that will be refund will be in the form of fund unit value.This implies that the investment of the funds are to be evaluated as per "fair market" price. "Fair market"price is the ultimate or the closing valuation in the market of the public listed securities.Assets of open ended funds are kept aside as securities in the money market as well as short terminvestment. This step is taken in order to make available the open ended funds for repurchase.Majority of the open ended funds are invested in the "liquid securities".This denotes that open ended funds can generate cash by disposing off the securities almost equivalent to avalue used for evaluations.Documentation of open ended funds allows for the temporary removal of unit repurchases( redemption)under "extraordinary conditions" like major interventions in the financial market or the demand to redeemfunds within a short period.Illiquid investments face restriction by the government regulation body because illiquid investment arenot active in the public markets and cannot be sold off within a short period .One important factor with regard to open ended funds is the evaluation of investments which are illiquid anddo not trade so frequently.The mutual fund company evaluates the funds retentions end of the day and totals up.The amount to be owed is deducted, whereas, the amount entitled to receive is added up. The net amount isthen divided by the units number scheduled to be the value of the unit for the same day.The purchase of units as well as the selling of units will take place according to the calculated rate or value. Close Ended Funds
  22. 22. Closed Ended Funds: Close ended funds also called closed ended mutual funds are referred to as financial sureties. Close ended funds or close ended mutual funds are merchandised in the stock market. Close ended funds makes available to the public fixed numbers of shares in the IPO also called initial public offering. These shares are traded on the stock exchange. Prices of the shares are determined by the demand of the individuals investing. Share prices are not ascertained by NAV or Net asset value. Mutual fund company also referred to as a sponsor by means of underwriting produces funds intended to be invested with a definite purpose. A fund managing personnel is assigned the job of handling the close ended funds. One cannot buy close ended funds by posting a check. The close ended funds are required to be bought from the open market similar to the stocks. The best time to purchase close ended funds is promptly after the close ended funds are issued in the market. Although, the NAVs (Net asset values)and prices are all mentioned on the stock exchange, one may find it difficult to provide liquidity to the same. There are times when there is an abrupt fall of the prices of the share. It may as well dip below the NAV, it is during this time that the close ended funds get sold for discounts. One may invest as much as $5000 but one should keep in mind that it is a commitment for a minimum period of 5 years. Advantages of close ended funds: There are certain advantages of close ended funds as mentioned below:• one can avail of the facility of buying closed ended funds at a discount rate.• Discount on the closed ended funds is calculated by ascertaining the difference between NAV and close ended funds value.• The main advantage of close ended funds lies in the fact that an individual intending to own stocks, can avail of the close ended funds at a discounted rate and at th same time possess quality stocks. Risks of close ended funds: There are certain risks associated with close ended funds.• Closed ended funds can change abruptly and drastically.• Closed ended funds are basically ever changing in nature.• Close ended funds should be invested in preferably by veteran investing individuals.• Shares of close ended funds can be discounted to such an extent due to which owner of the shares are unable to know the actual value of the shares.
  23. 23. ETF, ETFs, ETF’s, Exchange Traded Funds ETF is an acronym for exchange traded fund. ETFs are investment vehicles that comprise of a number of securities or a basket of assets. They are traded just like stocks on a stock exchange. Most ETFs track an index such as the S&P 500 or the Dow Jones Industrial Average. Features such as tax efficiency, low cost and stock-like characteristics make ETFs a highly attractive investment option. Exchange traded funds have been available in the US financial market since 1993 and in the European market since 1999. Features of an ETF The undivided interest that an ETF offers in a pool of securities makes it similar to the traditional mutual funds. However, unlike a mutual fund, shares in an exchange traded funds:• Can be traded, just like the stocks, through a broker on a securities exchange throughout the day.• Are not sold or redeemed at their net asset value. ETF shares are purchased and redeemed directly from the exchange traded fund by financial institutions. This is done only in large blocks, varying from 25,000 to 200,000 shares. These are called creation units. The purchase or redemption of these creation units is generally in kind. Institutional investors contribute or receive a basket of securities of the same type and proportion that is held by the concerned ETF. In some cases, the substitution by cash may be required or permitted for purchase or redemption. The portfolios of existing ETFs are transparent. This facilitates institutional investors in deciding the portfolio assets they should assemble for purchasing a creation unit. The Trading of an ETF A share of an ETF can be obtained or redeemed directly from fund managers only by large institutional investors. Such institutional investors are also called authorized participants. They may either hold the ETF shares or act as market makers in the open market. Other individual investors use a retail brokerage for trading ETF shares in the secondary market created by these authorized participants. ETFs: Benefits and Risks An ETF gives the advantage of diversifying an index fund. It also provides the ability to buy on margin, to sell short and purchase as little as a single share. However, many ETFs use unknown and untested indexes. Also, ETFs depend upon the efficiency of the mechanism of the arbitrage. Since ETFs can be bought and sold just like stocks, their net asset value (NAV) is not calculated once a day by fund managers, but on a continuous basis throughout the day by investors. Thus, unlike mutual funds, ETFs are open to price fluctuations during the entire trading period. Since
  24. 24. ETFs are traded on the stock market through brokers, minimal interaction with fund houses isrequired. Fees associated with ETFs are also lower that the mutual fund fees.Additionally, ETFs afford greater tax efficiency than mutual funds. While these benefits do exist,the one driving the popularity of ETFs is liquidity.An ETF is an ideal asset allocation tool that significantly limits the investment risks associated with individualstocks. However, ETFs are not without shortcomings. As ETFs are a basket of funds from the sameinvestment category, investors have high exposure to any downturn in that specific category. Moreover, toomuch flexibility to move in and out of an ETF could tempt investors to jump often between sectors, resultingin missed opportunities, wrong decisions and reduced potential returns. Additionally, buying and selling ofETFs involve brokerage commissions, which can erode the low-expense advantage of ETFs, particularly whenthe sum being invested is limited.A History of Exchange Traded FundsThe bear market in the US in the first couple of years of the twenty-first century propelled investors towardsExchange Traded Funds, thanks to their combination of stability (similar to mutual funds) and ease oftrading as stocks.ETFs have been traded in the US since 1993 and in Europe since 1999. They owe their origin to a productcalled Index Participation Shares that was traded on the American Stock Exchange and the PhiladelphiaStock Exchange in 1989 as an S&P 500 proxy. This product had to be terminated on account of a lawsuit,but was soon followed by a similar product, namely the Toronto Index Participation Shares, trading on theToronto Stock Exchange. This product, which tracked the TSE 35 and later the TSE 100 stocks, becamehighly popular. In the US, Standard & Poors Depositary Receipts (SPDRs), or "Spiders," were the first ETFto hit the market. Since then, ETFs have flourished and form a significant portion of trading activity on USbourses. As of May 2008, there were 680 ETFs in the US, with $610 billion in assets, according towikipedia.org. Structured FundsA Structured fund is a kind of Bond that has a combination of Fixed Income products and equity products tolet the investors have the combination of both capital appreciation and capital protection together. All thesefunds generally use free income securities to provide the Structured Fund Capital protection by means ofprincipal repayment alongside the interest payment added gain. The Secured Fund also takes the help offutures, options and various other derivatives that are also based upon indexes in the market that are thereto allow vulnerability to capital appreciation.The investors who look to have downside protection normally go for these kind of Structured Funds andalso for those who generally look for certain amount of monetary gain from the market through the upsidemovements. The Guarantees and the exact products normally alter from time to time depending on thetype of Secured Fund.
  25. 25. One also gets the chance to change the Secured Fund options with the changing way of life. Though this is a false notion for those who deal with fixed annuity program. For this one does not have the chance to change the payment type at any stage of ones life after the fund is on. If we take an example of the S&P Structured Funds which saves nearly 80 percent of the principal of the Structured Fund. This would mean that the it would invest as many as 80 percent of the total Structured Funds and thus has very little chance of going below the total of the principal amount. The investor would gain money if the S&P 500 gains and loses money as the S&P 500 falls. But the Structured Fund would never go under the starting value of the Structured Fund. Structured Funds are not considered convincing for each and everybody. One needs to check elaborately before making any kind of investments in it. No Load Mutual Funds No Load Mutual Fund is described as a kind of Mutual funds that does not need any kind of fees and commissions while buying or redeeming any kind of shares in the Mutual Funds. Load is actually the fee or commission that is paid by a person who invests money to a mutual fund during the time of his redeeming and buying of a particular mutual fund. As the commission or the fees is charged during the redeeming of the shares of a particular mutual fund it is termed as the back-end loan and when the fees or the commission is charged at the time of buying the shares of the mutual fund it is known as the front end loan. Those who go for No Load Mutual Funds normally receive a higher rate of return as they do not have to pay any kind of commissions and fees from the money he has earned. One Can Have Various Advantages By Dealing Through No Load Mutual Funds• The Load Funds in spite of charging some amount of money does provide any special service to the investor as the money that is charged normally goes to the fund broker. This is not the case with No Load Mutual Funds as one gets the same kind of service by paying no amount of loads.• It has also been observed that not a great deal of difference in return amount between the load and No Load Mutual Funds which encourages the No Load Mutual Fund holders.• The No Load Mutual Fund actually lets one invest the whole amount of money and lets the investor to get return of that but for Load Mutual funds if one pays 10 percent as load and invests an amount of $1000, he is actually investing $900 as $100 is taken away as Load and thus the return decreases automatically. So it is better for one to invest in No Load Mutual Funds as it is effective and provides a higher rate of return. Funds Of Funds
  26. 26. Funds of Funds is a kind of investment fund which normally uses a particular strategy to hold a portfolio of several other investment funds instead of directly investing in various kinds of bonds, shares and different kind of other securities. The Fund of Funds is often termed in other words as multi-manager investment. One can find a great variety in Fund of Funds and all of these types have one thing in common and that is they are all investing in various types of collective investment scheme. One can find that the Fund of Funds has various advantages and disadvantages in its parts. Some of the advantages and disadvantages are: Advantages of Fund of Funds• Simplicity of the Fund of Funds: A person to achieve good results while can invest in one Fund of Funds rather than investing in several different funds. This helps the person to concentrate on only one thing and also helps the investor to take care of limited number of papers.• Cheap For the New Investors: One finds it very difficult to diversify initially as he has minimum number of accounts. For this problem the Fund of Funds become very popular for the new investors as this would help them to diversify among thousands of funds through this .• A mutual fund generally diversifies through a great number of stocks but a Fund of Funds goes through many different funds which provides the Fund of Funds double diversification.• One can also have the institutional advantages as one can make investments in various funds which are in other ways off-limit for the retail investors. One also gets the advantages of load funds and for that one does not have to pay the load. Disadvantages of Fund of Funds:• Expense Ratios: Nearly all Fund of Funds carry an expense ratio that are on the higher side. These higher ratios can bring down the amount of returns one was scheduled to get.• One also has to pay some extra charges for keeping the Fund of Funds in force and this can also curtail the amount of income one expected to get. Hedge Funds Hedge Fund are the indexes that are becoming more and more popular with every passing day among the hedge fund companies. Many of the hedge fund companies are formulating their own Hedge Fund. This serves as a great form of tracking the health of the sophisticated financial sector known as the hedge fund industry. The Hedge Fund of the different companies are at competition to out perform one another. The institutional investors find this Hedge Fund as very helpful because it acts as benchmark for the hedge fund. Construction of the Hedge Fund is done on the basis of a certain underlying. They differ from one another on the basis of choosing of the underlying fund and the method used in the construction of the hedge fund. Due to the variations involved in the methodology of constructing the Hedge Fund, the results of the different indexes differ from one another though the ingredients chosen are the same. The Hedge Fund includes those securities that are traded in the popular exchanges. The investors interested
  27. 27. in investing in the Hedge Fund do need to follow the terms and conditions that have been set by the hedgefund company that is constructing the index.The Hedge Fund is constructed by a hedge fund company through the adoption of certain strategies andspecialized instruments those act as reflector of the whole hedge fund. These funds are structured in such away that the tracking of the specific fund is done with minimum possibility of error.Another type of Hedge Fund is also available which is categorized under the section in which no investmentcan be materialized. These funds are only used for tracking a wide array of index fund through the utilizationof certain quantitative apparatus like mean, median, etc. Global Hedge Funds Hedge Fund Manager Hedge Fund Jobs Starting hedge fund Hedge Fund Accounting Hedge Fund Strategy Hedge Fund Investor Hedge fund Research Citadel Hedge Fund Money Market FundsMoney market funds can be defined as an investment fund that carry the purpose of earning interest forshareholders. Some suppliers of money market funds are brokerage firms, mutual funds, banks, etc.Most of the money market funds are not nationally insured, they are normally covered by privateinsurance. It is observed that a major amount of funds invest only in government-backed securities. Forthis reason, shareholders can think themselves as safe. Features of money market funds comprise of short-term securities that provide monetary instruments, quality etc.Money market funds allow the investors to attain the flexibility of switchig their money from one fund to theother. The other advantage is that it exerts no charge.Money market funds can be treated as a type of mutual fund that invests in short-term money market legaldocuments like commercial paper, government securities, CDs(certificates of deposit) etc. Some of themoney market funds purchase specifically the government securities like treasury bills, while the othergeneral purpose funds normally invest on short-term paper. People prefer these money market funds fortheir high yielding capacity, and security.Investment companies who are registered with the Securities and Exchange Commission, normallyhandle the money market funds.
  28. 28. FunctionsMoney market funds sell shares to the investors and they get interest payments on a regular basis. Thereare several factors which are responsible to acquire the interest amount. These are management fee, levelof interest rates, commissions etc.Factors and restrictions relating to money market fundsSome of the major factors responsible behind money market funds are maturity, quality and diversity. Onerestriction regarding money market funds investment is that money funds can invest up to 5% in any oneissuer. Money market securities needs to maintain a stable value and higher liquidity.Advice by economistsInvestors should cautiously observe the important information stated in the prospectus, which compriserisks, investment policies, expenses and charges before they decide to deal with money market funds.For further information regarding Money Market Funds, one can go through the following links: Vanguard Money Market Funds Top Money Market Funds High Yield Money Market Funds Tax Free Money Market Funds Fidelity Money Market Funds Treasury Money Market Funds Money Market Funds Rate Bond Fund, Bond Funds A bond fund collects money from several investors and has professional fund managers whoinvest this money in a range of debt instruments. This may include corporate bonds, municipalbonds, convertible bonds and a plethora of other financial instruments.Yield on Bond FundsA bond fund typically pays periodic dividends, including interest payments and capitalappreciation. Usually bond funds pay higher dividends than CDs and money market accounts.The calculation of yield depends on the selection of debt instruments. For example, corporatebonds may involve monthly payments, while in case of treasury bonds, strips and municipalbonds, returns are remitted on maturity, which could range from six months to 40 years.
  29. 29. The most commonly used measure is the 30-day annualized yield, which takes the yields of all the bonds in the bond fund and averages it over the past 30 days. However, this figure does not indicate the funds future yield. It does help in comparing bond funds from different companies. Benefits of Bond Funds Bond funds offer certain benefits vis-à-vis individual bonds. These can be seen against the following parameters: Professional Management• Time tested expertise and detailed security analysis by fund managers.• Relief from comparing maturity period, tax benefits and issuer creditworthiness. Diversification• Investment in a variety of bonds delivers better results. Liquidity and Convenience• Freedom to reinvest income dividends and undertake additional investments.• The initial amount of investment is relatively low.• Exemption from tax burden via municipal bonds.• Secured returns by treasury securities. Drawbacks of Bond Funds While opting for bond funds, an investor must be careful of the following:• Volatile return: An increase in interest rates reduces bond prices. There may be monthly variations in returns. A longer maturity period leads to a higher element of risk.• Credit risk: This refers to the risk of default when the issuing authority is unable to generate income.• Fluctuations: The value of a fund share (also known as the share price or net asset value) may fluctuate on a daily basis.• Call risk: Corporate bond issuers often declare the redemption of bonds. In doing so, they are obliged to pay only the par value to an investor. Equity Based Funds
  30. 30. Equity based funds can be referred to as the share an individual has in a particular corporate house. The shares of stock implies a portion of the corporate house. Equity based funds can contain several selectively chosen stocks. An equity based funds manager takes care of the stocks. The aim of the equity based funds manager is to choose those stocks which have the capability of achieving the equity based funds objectives. The objectives of equity based funds can be of capital appreciation, return as a whole , growth for a long term. There are times when a stock in conjunction with equity based funds may provide income along with growth. Equity based funds can be considered as performers. The equity based funds have the disadvantage of being highly volatile as compared to cash and bonds. The equity based funds are diverse and offers a variety of stocks. The equity based funds are volatile, the price of their shares fluctuating very frequently daily. Equity based funds are also affected by factors like• Changes in the rates of interest.• Changes in the economy• Changes in the functioning or working of a company. Equity based funds provide rewards on a long term basis. Rewards offered by equity based funds on a long term basis may include retirement solutions, purchasing a house or funding a childs education. As equity based funds involve considerable amount of risk it is often suggested that equity based funds need to be clubbed with investments involving lower risks for availing long term benefits. Types of equity based funds: Equity based funds can be categorized into:  Sector equity based funds and International equities Equity based funds under the category of sector equity based funds and international equities may include the undermentioned: 1. Technology equity based funds. 2. International Growth equity based Fund  Medium and Small Capitalization Equity based Funds The medium and small capitalization equity based funds may include the following: 1. Small Cap Growth equity based Funds 2. Small Cap Value equity based Funds 3. Growth Opportunities equity based Funds 4. Small Cap Index equity based Funds 5. Mid Cap Growth equity based Funds
  31. 31.  Large and Income Capitalization Equity based Funds The equity based funds under the category of Large and Income Capitalization Equity based Funds may include the types of equity based funds given below: 1. Large Cap Value equity based Funds 2. Select Equity equity based Funds 3. Growth Equity equity based Funds 4. Income Equity equity based Funds 5. Stock Index equity based Funds Opportunities of Mutual Funds Opportunities of Mutual Funds are tremendous specially when investment is concerned. For any individual who intends to allocate his assets into proper forms of investment and want to diversify his Investment Portfolio as well as the risks, Mutual Funds can be proved as the biggest opportunity. Investors gets a lot of advantages with the Mutual Fund Investment. Firstly, they are not required to carry on intensive research and detailed analysis on Stock Market and Bond Market. This work is done by the Fund Mangers of the Investment Management Company on behalf of the investors. In fact, the professional Fund Managers who handle the mutual funds of any particular company, are able to speculate the market trend more correctly than any common individual. Good Speculation about the trends of stock prices and bond prices leads to right allocation of funds in the right stocks and bonds resulting in good Rate of Returns. Investors also get the advantage of high Liquidity of the mutual funds. This means the investors can enjoy easy access to the funds invested in the mutual funds whenever they require the money. When the investors invest in any mutual fund, they are given some equity position in that fund. The investors can any time sell their mutual fund shares to get back the money invested in mutual funds. The only thing is that the Rate of Return that they will get may not be favorable as the return depends on the present market condition. The greatest opportunity that the mutual funds offer is the opportunity of diversifying their investments. Investment Diversification actually diversifies the Risk associated with investment. This is because, if at a time, if prices of some stocks are declining, deceasing the Value of Investment, prices of some other stocks and bonds may tend to rise and in this way the loss of the mutual fund is offset by the strength of the stocks whose prices are rising. As all the mutual funds diversify their investments in various common stocks, preferred stocks and different bonds, the risk to be borne by the investors are well diversified and in other terms lowered.• Mutual Funds Definition • Mutual Funds Definition refers to the meaning of Mutual Fund, which is a fund, managed by an investment company with the financial objective of generating high Rate of Returns. These asset management or investment management companies collects money from the investors and invests those money in different Stocks, Bonds and other financial securities in a diversified manner. Before investing they carry out thorough research and detailed analysis on the market conditions and market trends of stock and bond prices. These things help the fund mangers to speculate properly in the right direction. • The investors who invest their money in the Mutual fund of any Investment Management Company, receive an Equity Position in that particular mutual fund. When after certain period of time, whether long term or short term, the investors sell the Shares of the Mutual Fund, they receive the return according to the market conditions. The investment companies
  32. 32. • • receive profit by allocating peoples money in different stocks and bonds according to their Speculation about the Market Trend. Other than some specific mutual funds which carry certain Maturity Term, Investors can generally sell the shares of their mutual funds at any time they want. But, the return will vary according to market value of the stocks and bonds in which that particular mutual fund made investment. But, generally the share holders of mutual fund sell their share when the prices are up and Capital Gain is sure to happen. Challenges Facing Mutual Funds There are many Challenges Facing Mutual Funds which is of prime concern to the people who have an investment spree. People find mutual fund investment so much interesting because they think they can gain high rate of return by diversifying their investment and risk. But, in reality this scope of high rate of returns is just one side of the coin. On the other side, there is the harsh reality of highly Fluctuating Rate of Returns. Though there are other disadvantages also, this concern of fluctuating returns is most possibly the greatest challenge faced by the mutual fund. The Issue of Fluctuating Returns In spite of being a diversified investment solution, mutual funds investment in no way guarantees any return. If the market prices of major shares and bonds fall, then the value of mutual fund shares are sure to go down, no matter how diversified the mutual fund portfolio be. It can be said that mutual fund investment is somewhat lower risky than Direct Investment in stocks. But, every time a person invests in mutual fund, he unavoidably carries the risk of losing money. The Other Challenges• Diworsification or Over Diversification- In order to diversify the investment, many times the mutual fund companies get involved in Over Diversification. The risk of holding a single financial security is removed by diversification. But, in case of over diversification, investors diversify so much that many time they end up with investing in funds that are highly related and thus the benefit of risk diversification is ruled out.• Taxes-Every year, most of the mutual funds sell substantial amount of their holdings. If they earn profit by this sell, then the investors receive the Profit Income . For most of the mutual funds,the investors are bound to pay taxes on these incomes, even if they reinvest the income.• Costs- Most of the mutual funds charge Shareholder Fees and Fund Operating Fees from the investors. In the year, in which mutual fund fails to make profit and the investors get no return, these fees only blow up the losses.

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