Mutual fund investments
Introduction to mutual funds
Mutual funds have become extremely popular over the last 20 years. What
was once just another obscure financial instrument is now a part of our daily
lives. More than 80 million people, or one half of the households in America,
invest in mutual funds. That means that, in the United States alone, trillions
of dollars are invested in mutual funds.
In fact, to many people, investing means buying mutual funds. After all, it's
common knowledge that investing in mutual funds is (or at least should be)
better than simply letting your cash waste away in a savings account, but,
for most people, that's where the understanding of funds ends. It doesn't
help that mutual fund salespeople speak a strange language that is
interspersed with jargon that many investors don't understand.
Originally, mutual funds were heralded as a way for the little guy to get a
piece of the market. Instead of spending all your free time buried in the
financial pages of the Wall Street Journal, all you had to do was buy a
mutual fund and you'd be set on your way to financial freedom. As you
might have guessed, it's not that easy. Mutual funds are an excellent idea in
theory, but, in reality, they haven't always delivered. Not all mutual funds
are created equal, and investing in mutuals isn't as easy as throwing your
money at the first salesperson who solicits your business.
Mutual funds- what are
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 and invests their money in stocks, bonds, and other securities. Each
investor owns shares, which represent a portion of the holdings of the fund.
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
3) If fund holdings increase in price but are not sold by the fund manager,
the fund's shares increase in price. You can then sell your mutual fund
shares for a profit.
Funds will also usually give you a choice either to receive a check for
distributions or to reinvest the earnings and get more shares.
They have their respective advantages and disadvantages like professional
management, diversification , liquidity, costs dilution, taxes etc.
Various types of mutual
funds and schemes
Each fund has a predetermined investment objective that tailors the fund's
assets, regions of investments and investment strategies. At the
fundamental level, there are three varieties of mutual funds:
1) Equity funds (stocks)
2) Fixed-income funds (bonds)
3) Money market funds
All mutual funds are variations of these three asset classes.
Let's go over the many different flavors of funds. We'll start with the safest
and then work through to the more risky.
Money Market Funds
The money market consists of short-term debt instruments, mostly Treasury
bills. This is a safe place to park your money. You won't get great returns,
but you won't have to worry about losing your principal. A typical return is
twice the amount you would earn in a regular checking/savings account and
a little less than the average certificate of deposit (CD).
Income funds are named appropriately: their purpose is to provide current
income on a steady basis. These terms denote funds that invest primarily in
government and corporate debt. While fund holdings may appreciate in
value, the primary objective of these funds is to provide a steady cashflow to
investors. Bond funds are likely to pay higher returns than certificates of
deposit and money market investments, but bond funds aren't without risk.
The objective of these funds is to provide a balanced mixture of safety,
income and capital appreciation. The strategy of balanced funds is to invest
in a combination of fixed income and equities. A typical balanced fund might
have a weighting of 60% equity and 40% fixed income.
Funds that invest in stocks represent the largest category of mutual funds.
Generally, the investment objective of this class of funds is long-term capital
growth with some income. There are, however, many different types of
equity funds because there are many different types of equities. A great way
to understand the universe of equity funds is to use a style box, an example
of which is below.
The idea is to classify funds based on both the size of the companies
invested in and the investment style of the manager. The term value refers
to a style of investing that looks for high quality companies that are out of
favor with the market.
An international fund (or foreign fund) invests only outside your home
country. Global funds invest anywhere around the world, including your
It's tough to classify these funds as either riskier or safer than domestic
investments. They do tend to be more volatile and have
unique country and/or political risks. But, on the flip side, they can, as part
of a well-balanced portfolio, actually reduce risk by increasing diversification.
Although the world's economies are becoming more inter-related, it is likely
that another economy somewhere is outperforming the economy of your
The last but certainly not the least important are index funds. This type of
mutual fund replicates the performance of a broad market index such as
the S&P 500 or Dow Jones Industrial Average (DJIA). An investor in an index
fund figures that most managers can't beat the market. An index fund
merely replicates the market return and benefits investors in the form of low
What is a systematic
A Systematic Investment Plan or SIP is a smart and hassle free mode for
investing money in mutual funds. SIP allows you to invest a certain pre-
determined amount at a regular interval (weekly, monthly, quarterly, etc.).
A SIP is a planned approach towards investments and helps you inculcate
the habit of saving and building wealth for the future.
A SIP is a flexible and easy investment plan. Your money is auto-debited
from your bank account and invested into a specific mutual fund scheme.You
are allocated certain number of units based on the ongoing market rate
(called NAV or net asset value) for the day.
Every time you invest money, additional units of the scheme are purchased
at the market rate and added to your account. Hence, units are bought at
different rates and investors benefit from Rupee-Cost Averaging and the
Power of Compounding.
If you started investing Rs. 10000 a month on your 40th birthday, in
20 years time you would have put aside Rs. 24 lakhs. If that
investment grew by an average of 7% a year, it would be worth Rs.
52.4 lakhs when you reach 60.
However, if you started investing 10 years earlier, your Rs. 10000
each month would add up to Rs. 36 lakh over 30 years. Assuming the
same average annual growth of 7%, you would have Rs. 1.22 Cr on
your 60th birthday - more than double the amount you would have
received if you had started ten years later!
What is systematic transfer
STP is a variant of SIP. STP is essentially transferring investment from one
asset or asset type into another asset or asset type. The transfer happens
gradually over a period. STP and its importance Systematic Transfer Plan is
of two types; fixed STP, and capital appreciation STP. A fixed STP is where
investors take out a fixed sum from one investment to another.
A capital appreciation STP is where investors take the profit part out of one
investment and invest in the other. Example of STP Suppose you have
invested 5 lakhs in debt funds because you thought market is trading at
close to peak. The PE ratio of the market is 25 and hence you think that fall
is imminent. Hence you invested your money in debt fund. Now assume that
your prophecy was right and the market indeed fell to a level where you can
make entry to equities.
Important points to keep in mind STP is a possibly the second best
investment strategy after SIP. It is one of the best risk mitigation strategies
of the market. Investors though should keep the following points in mind.
First, STP is a risk mitigation strategy. It will protect you from any
adverse loss to a large extent. Investors should be clear about this. All
risk mitigation strategies cap the loss but also reduce returns when
market is bullish.
Second, investors need to follow it with discipline. STP, just like SIP,
benefits only when followed properly. Breaking STP because of short
term market movement or interest rate movement will only harm your
investment in long term.
Finally, you need to understand the assets and the stages they are in.
For example, it would be unwise to transfer money from debt to equity
when the market is closer to peak value. Similarly, it would be
counter-productive to transfer money from equity to debt when the
market is close to bottom.
What is systematic
A Systematic Withdrawal Plan (SWP) is a facility that allows an investor to
withdraw money from an existing mutual fund at predetermined intervals.
The money withdrawn from a systematic withdrawal plan can be reinvested
in another portfolio or it can be used as a source of regular income.
Systematic withdrawal plans are used by investors to create a regular flow of
income from their investments. Investors looking for income at periodical
intervals usually invest in these funds.
Systematic withdrawal plans is of advantage to investors who require
liquidity as it allows account holders to access their money exactly when
they need it.
say you have 5,000 units in a Mutual Fund scheme. You have given
instructions to the fund house that you want to withdraw Rs. 8,000
every month through SWP. Now let's assume that on 1 December, the
Net Asset Value (NAV) of the scheme is Rs. 20.
Equivalent number of MF units = Rs. 8,000 / Rs. 20 = 400
400 units would be redeemed from your MF holdings, and Rs. 8,000
would be given to you.
Your remaining units = 5,000 - 400 = 4600
Now say, on 1 January, the NAV is Rs. 16.
Equivalent number of units = Rs. 8,000 / Rs. 16 = 500
500 units would be redeemed from your MF holdings, and Rs. 8,000
would be given to you.
Your remaining units = 4600 - 500 = 4100
Franklin India blue-chip
Long term capital appreciation.
A fund that invests in large cap stocks.
Is an open end growth scheme with an objective to primarily provide
medium to long term capital appreciation.
An open ended diversified equity fund with primary objective to provide
medium to long term capital appreciation
The fund focuses investing in large-cap companies with strong financials,
quality management and market leadership
The fund is suitable for Investors that prefer large cap oriented equity fund
with an investment horizon of 3-5 years
The fund may be considered more suitable for investors who prefer funds
with a long term track record as Franklin India Bluechip Fund has tackled
the bull and bear phases by focusing on long term opportunities rather
than short term trends.
Nov 30, 1993
S&P BSE SENSEX
Asset Size (Rs cr)
Exit Load 1% if units are redeemed / switched-out within 1 year from
the date of allotment
Top Ten Holdings
% of Total