3. Contents Keeping Track Buying a Mutual Fund Selecting a Mutual Funds Equity Funds Investment Strategies Risk Behavior Types of Schemes Organization of Mutual Fund Terminologies Demystified Brief History Reference Websites Mutual Fund Defined Regulations Mutual Funds Comparision Warning Signals
15. Before declaration of dividend / bonus Growth Dividend payout Dividend reinvestment Bonus NAV 20 20 20 20 Units 100 100 100 100 Value (Rs) 2,000 Rs 2,000 Rs 2,000 Rs 2,000 After declaration of dividend / bonus NAV 20 19 19 18.1818 Units 100 100 105.2631 110 Value (Rs) 2000 1900 2000 2000 Dividend received in cash - Rs 100 - - Additional units - - 5.2631 10
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Editor's Notes
Professional Management: strong research Low Costs: relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors. Even 500 rupees in SIP start with. Transparency: investor gets regular information on the value of his investment in addition to disclosure on the specific investments made by the fund, the proportion invested in each class of assets and the fund manager's investment strategy and outlook
Still the largest is UTI- UTI Liquid Cash Plan has 8863 Cr Asset Size. Next is Birla Cash Plus at 8372. Standard Chartered Liquidity Manager Plus at 7910 Cr.
Sponsor: Establishes a MF, obtains Certificate of Registration from SEBI, forms a trust, appoints board of trustees & AMC, appoints Custodian Trustees: MF managed by body of individuals or a trust company (corporate body). Guardians of assets of Unitholders. Responsible. AMC: Investment Manager of Trust. Under the supervision of Board of Directors, Trustees, SEBI. Floates & manages different schemes. Mutual Fund: Formed under Indian Trusts Act, 1982. Invites subscriptions to units. Transfer agents: Issue and Redemption of units Custodian: For safekeeping of securities, participating in clearing system
AMFI: a forum where mutual funds have been able to present their views, debate and participate in creating their own regulatory framework. the body that is consulted on matters long before regulations are framed, and it often initiates many regulatory changes that prevent malpractices that emerge from time to time. Receive Unit certificates within 6 weeks from the date your request for a unit certificate is received by the Mutual Fund. Receive dividend within 42 days of their declaration Receive the redemption or repurchase proceeds within 10 days from the date of redemption or repurchase.
dividend is always a percentage of face value. Face value is the price of unit of a fund and is Rs 10. So 10% of face value would be Re 1 per unit. NAV of the growth option will always be higher than that of the dividend option because money is going back into the scheme and not given to investors. dividend is not guaranteed, fund distributes dividends at its discretion, guarantee or assurance- funds are not obliged to declare a dividend-no legal compulsion In the dividend re-investment option, the dividend is not paid to you. Instead, additional units are purchased at the revised NAV. The bonus option is similar to dividend re-investment, except that the fund announces the bonus ratio instead of dividend., the scheme declares a bonus of 1:10. This means an additional unit for every 10 units held. NAV- less due to – dividend option, contra option, give some time income earned, net of recurring expenses, subject to a maximum ceiling of 2.5% in equity schemes and 2.25% in debt schemes, is shared by way of dividends or capital gains. These recurring expenses include asset management fees not exceeding 1.25%, it also is due to other expenses such as Trustee Fees, Registrar Fees and Marketing expenses etc. Total Value of Securities (Equity, Bonds, Debentures etc.)Rs. 1000 Cash Rs. 1500 LiabilitiesRs. 500 Total outstanding units 100 NAV [(1000+1500-500)/100] Rs. 20 per unit
Entry Load: If you invest Rs1,000 in a mutual fund with a 2% front-end load, Rs20 will pay for the sales charge, and Rs.980 will be invested in the fund. Sales Purchase = Applicable NAV x ( 1 + Sales Charge ) Repurchase Price = Application NAV x ( 1 - exit load)
Ultra Short term (180 days) debt funds called liquid funds or floating rate fund or cash funds, Bond funds– fixed return instruments, term papers, G-Secs, Corporate bonds, interest rate floating – depending on interest rate in economy – return of 5.5% per annum last year– aim: preserve the principal and earn a modest return. Savings bank rate= 3.5% p.a. Balanced funds for those who are not comfortable with 100% exposure to equity. B est of both worlds-Power of equities & stability of debt market instruments- 60:40 equity debt ratio. Performance ≈ average 30% return, Volatility (Risk) = Moderate Income: fixed income securities such as bonds, corporate debentures and Government securities. capital stability and regular income. Money Market: safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. easy liquidity, preservation of capital and moderate income. Unit Linked Insurance Plan - life insurance as well as an investment like a mutual fund. Part of the premium towards the sum assured (amount you get in a life insurance policy) and the balance invested whichever investments you desire - equity, fixed-return or a mixture of both. benefit under Section 80C. Gilt funds are those that only invest in government securities and are hence zero credit risk, very safe MIP - 5-25% in stocks, rest in fixed income instruments
Standard Deviation: how much the actual performance of a fund over a period of time deviates from the average performance. Low SD = good Sharpe Ratio : returns that a fund delivered were commensurate with the kind of volatility it exhibited; looks at both, returns and risk, and delivers a single measure that is proportional to the risk adjusted returns. High SR =Good Market Risk: overall stock or bond markets fall Non-Market Risk: Bad news about an individual company can pull down its stock price, which can negatively affect fund holdings. Credit Rate Risk: Bonds are debt obligations. corporate defaulting on their interest and principal payment obligations
Growth option : No change. Over time, the NAV will grow. Whenever you redeem the units, you get your entire earnings by way of capital appreciation. Dividend payout : The unit holder will get Rs 100 as dividend while the NAV falls to Rs 19. Dividend re-investment : The dividend of Rs 100 is not paid in cash but is used to purchase 5.2631 more units. Bonus option : You get 10 more units, because of which the NAV falls to Rs 18.1818.
Diversified equity fund - invests in the stocks of various companies of various sectors. invest across industries as well as various market segments i.e. large cap, mid cap and small cap. Index- sensex, nifty- same proportion of equity as the index Mid-Cap - mid-cap companies, appetite for risk ELSS- tax saving, mirror image of a diversified equity fund, lock-in period of three years. tax benefit under Section 80C Opportunity : by definition diversified, but are aggressive by nature. emphasis on generating superior returns rather than risk containment. Sector : invest based on a particular dominant “prime-mover of profitability”. Theme : diversified across sectors. “outsourcing” is a theme: IT companies make money from it, so do medical companies, so do automobile ancillary companies and even textile companies. invest in any of the above-mentioned industries or all of them themes underlying the current economic resurgence of India are outsourcing, services (as opposed to manufacturing), infrastructure, debt restructuring, mergers & acquisitions etc Dividend Yield Funds : A dividend yield fund invests in shares of companies having high dividend yield. Within the diversified equity funds space, dividend yield funds are considered to be the medium risk proposition Contra Fund: Invests in out-of-favour companies but at the same time have unrecognized value. The reasoning behind this approach is the belief that sooner or later other investors will realize the true value of these companies and buy their shares, thereby increasing the stock prices. Exchange Traded Fund (ETF) is a fund that combines the features of an index fund as well as stocks. These funds are listed on the stock exchanges and their prices are linked to the underlying index. Traded on exchange at prices that are expected to be closer to the NAV at the end of the day
spare cash languishing in your savings account, but don't want to block it in a fixed deposit or risk an investment in shares Cash funds are known as ultra short-term bond funds or liquid funds that invest in fixed return instruments of short maturities. aim is to preserve the principal and earn a modest return Safety : highly unlikely that your principal amount will get eroded
Age 25-35: 35-40 % debt, 60% in equity Age 35-45: 45-50 debt, less than 50% in equity Age 55: mostly in debt http://www.sbimf.com/portal/static/calculator/RiskAssess/RiskAssessCal1.asp IPO: Growth in the NAV depends on the quality of the portfolio, its exposure to various industries and segments of the market, strategy of the fund manager. Market timing – a strategy in which one tries to invest before the market goes up and sell before it declines remains one of the most tempting.
Contra with Contra… and not contra with SEBI -mandatory for funds to have a benchmark– lets say Sensex… fund should beat Sensex if the Sensex drops by 10% over a period of two months and during that time, the fund's NAV drops by only 6%, then the fund is said to have outperformed the benchmark. Report submitted to SEBI every 6 months
AMFI: Under the heading Investors Zone, you will find another one called ARN Search . This refers to the AMFI Registration Number. Click on it and you will arrive at a search page. You can locate an agent in your vicinity by just putting in your PIN code or name of your city
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