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Mutual fund


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Mutual fund

  1. 1. You might have heard about companies like, Reliance Mutual Fund, TataMutual Fund, and SBI Mutual Fund etc. These are the companies collectmoney from you (the investor) and invest in stocks, bonds or any othersecurities. Return received from these funds is share with the investor asper agreement. The Company and Investor mutual agree to invest somefund and share return as per agreement. So the amount you invested inthis method is called Mutual Fund.Say you bought Mutual Fund of Rs 100,000.00 from Reliance mutualfund with a return assurance of Rs 200,000.00 after 3years. That meansyou gave Reliance Mutual Fund Rs 100,000.00 with an agreement thatthey will invest it some security and manage the money on an ongoingbasis for you , and will give you a return of Rs 100,0000.00 and principalamount of Rs 100,000.00 after 3years. This return is not guaranteedsince it will be invested in public market which is subjected tofluctuation.
  2. 2. The executive managing funds is called Fund Manager. Some moreexample of these companies are Sharekhan, HDFC securities, ICICIdirect, LIC (Life Insurance Corporation, India) etc.A Mutual Fund is the most suitable investment for the commonman as it offers an opportunity to invest in a diversified,professionally managed basket of securities at a relatively lowcost. In stocks the investors have to analyze and manage his fund,where as in Mutual Fund a professional fund manager manages itof behalf of the investor. The company managing Mutual Fundstakes some charge for this (Details on charges will be explained insubsequent articles).
  3. 3. The Mutual Fund Company collectsfrom Individual investors as MutualFund and invests it in varioussecurities ranging from shares todebentures & money market etc,depending upon the schemesobjectives. The income earnedthrough these investments and thecapital appreciation (rise in value ofthe stock) realized by the scheme areshared with the investors inproportion to their investmentamount in line with the terms andconditions of the agreement Mutual Fund Cyclebetween Investor & Mutual Fundcompany.
  4. 4. It is clear that Mutual Fund gives relatively lower return thanStock, then why someone should go for Mutual Fund? The answeris very simple. If you invest in stock, you have to analyze thevolatility, risk involvement, worthiness of the stock and decideyour investment. You have to manage your fund. For becoming agood fund analyzer or fund manager you need considerableknowledge and experience. Risk is higher if you are not competentenough in taking investment decision.On the other side by buying a mutual fund, you are assigning aprofessional fund manager to manage your fund, who is betterthan you in terms of fund management and investment decisionmaking skill. Thus your risk for losing money is reduced and youneednt to run with Sensex or Nifty and various financial indexesand ratios. You are paying some charge to the fund manager forthis.
  5. 5. Mutual funds are supported by following advantages,Management by ProfessionalsYou avail of the services of experienced and skilled professionalswho are backed by a dedicated investment research team whoanalyzes the performance and prospects of companies. Withanalyzed data given from research professionals they selectsuitable fund to meet investment objectives.For doing all these research you may need full dedication on thissubject, financial knowledge and enormous time with experience.This is the biggest advantage with Mutual Fund w.r.t otherinvestment ideas.
  6. 6. Diversification of InvestmentMutual Fund managers invest in a number of companies across abroad cross section of industries and sectors. This diversificationreduces the risk because very rarely do all stocks decline at thesame time and in the same proportion. For you doing all theseneeds experience, knowledge & dedication. You achieve thisdiversification through a Mutual Fund company with far lessmoney than you can do on your own.Easier AdministrationInvesting in a Mutual Fund reduces paperwork and helps youavoid many problems such as bad deliveries, delayed paymentsand unnecessary follow up with brokers and companies. MutualFunds save your time and make investing easy, convenient &enjoyable. The amount they charge for this is far less than theresult you get.
  7. 7. Liquidity flexibilityAt any time you can buy or sell the mutual fund through your bankor Mutual Fund Company.Well RegulatedMutual Funds in India are registered with SEBI (Security andExchange Board of India) and they function within the provisionsof strict regulations designed to protect the interests of investors.The operations of Mutual Funds are regularly monitored by SEBI.In other countries also they are registered with respectiveregulatory actHigher return potentialOver a medium to long-term, Mutual Funds have the potential toprovide a higher return as they invest in a diversified basket ofselected securities.
  8. 8. FeesThis is a major disadvantage that ruins your income. Running aMutual Fund organization is off course an expensive task. Allexpenses from Fund managers salary to Investors transactionstatements is charged from investor’s income indirectly. Feestructures vary from fund to fund. You should give vigilantattention to the fee structure to avoid negative consequences at alater stage.Professionalism in Fund ManagerThe fund manager may be less capable than you. No one is moreworried about your money than yourself. Capability of the Fundmanager/Mutual Fund Company can be accessed from their pastrecords. Carefully understand the Mutual Fund companies pastrecords and the consistency of the positive or negative returns.
  9. 9. TaxesEverywhere taxes are imposed. You have to pay taxes for yourincomes unless the investment is recognized as tax benefitinvestment under govt. rules. Selecting a proper plan taking careto tax benefit rules can minimize the taxes.Lower returnReturn is lower than stocks. Because of the fees charged by yourmutual fund company for doing all analysis on behalf of you.Irrespective all these disadvantages Mutual Funds always takeconsiderable part in good investors portfolio due to lower risk andgood return
  10. 10. There is variety of Mutual Funds to suit everyone’s investmentstyle. Always there is Mutual Fund to cater your needs irrespectiveof your age, financial position, risk tolerance, investment style,return expectations etc.We are going to discuss different types of mutual funds available.It is suggested that you discuss with your Mutual Fund Companyor bank regarding details about types of Mutual Fund withamount risk & return, before investing. Because always theoriesare different than practical. Ask as many questions as possible tothe bank executive so that you get a clear picture about whereyou are going to invest your money. Dont hesitate to ask doubts,because they are paid from your money to answer you.
  11. 11. Growth FundsThese investments aim to provide capital appreciation over themedium to long term. These schemes normally invest a majorityof their funds in equities and are willing to bear short term declinein value for possible future appreciation.Suitable for: Investors seeking for growth of their fund over longterms.Income FundsThese investments aim to provide regular and steady income toinvestors. These schemes generally invest in fixed incomesecurities such as bonds and corporate debentures.Suitable for: Investors seeking regular income. Like Retired people& someone seeking supplementary income.
  12. 12. Balance FundsThese investments aim to provide both growth and income byperiodically distributing a part of the income and capital gains theyearn. These funds are invested in both shares and fixed incomesecurities in the proportion indicated in their offer documents.Suitable for: Investors seeking for income with growth at the sametime.Money Market FundsThese investments provide moderate income but your capital isrelatively safe. Here funds are invested in short term instrumentssuch as treasury bills, certificates of deposit, commercial paper andinterbank call money.Returns on these schemes may be affected by fluctuation of interestrates prevailing in the market.Suitable for: Investors as a means to park their surplus funds forshort periods or awaiting a more favorable investment alternative.
  13. 13. Tax saving Schemes (Equity Linked Saving Scheme - ELSS)These schemes offer tax incentives to the investors under tax lawsas prescribed by government from time to time and promote longterm investments in equities through Mutual Funds.Suitable for: Investors seeking for tax savings.Fixed Maturity PlansThe objective of such investment is to emphasize on steady returnsover a fixed-maturity period with protection to the investors againstmarket fluctuations. Your fund is locked for certain perioddepending on scheme, during the lock period you are not allowed towithdraw. Even though a good return is expected in this investmentbut it is not guaranteed.Suitable for: Investors seeking for growth of their fund in course oftime.
  14. 14. You must be clear in what way you are going to earn in MutualFunds. Basically there are three ways to earn money from MutualFunds.Dividends and InterestBonds pay interest & some stocks pay dividends. These interest anddividends are passed on to the investors in proportion to theirinvestments. You will be taxed yearly on this income unless theinvestment is tax free as per Govt. rules.
  15. 15. Appreciation valueIncrease in stock price is called appreciation or opposite isdepreciation. When market price of stocks increases to expectedvalue fund managers sell it. Value earned due to increase in price iscalled Capital gain and the opposite is Capital loss. At the yearenddifference in capital gain and loss, if higher is paid to the investors inproportion to their investment. Here also you will be taxed yearly onthis income unless the investment is tax free as per Govt. rules.Net Asset Value (NAV) of the Mutual Fund.If the company does not sell but holds securities that have increasedin value, the value of the shares of the mutual fund (called as NAV)increase and there is a profit. This also is a capital gain. However,you will not be taxed on this capital gain until the year you sell thefund
  16. 16. Always there is risk in every investment. Risk is high or lowdepending on market condition & expected gain. Risk can never beeliminated; however it can be minimized with effective fundmanagement by diversification & application of experience &expertise in the fund management. Mutual Funds suffer less riskfactor than stock since these are managed by professionals. Butenough risk is involved depending on capability of the fundmanager.Following steps may help you to understanding risk factorsunderlying the investment,1. Find out the tract record in return of the Mutual Fund Companyyou are going to invest in. Comparative higher return tract recordcan give a positive signal to your investment.
  17. 17. 2. Understand the volatility of the Mutual Fund you are investing in,through various financial research reports. What are the financialreports are how to read them will be discussed later in this section.3. You can seek advice from your friends & relatives in choosingMutual Fund Company and stocks (Strictly from those who knowabout Mutual Fund and have some experience & expertise).Try to avoid free tips from various un-trusted websites over internet.Also free advices from friends & relatives who dont about thereality.
  18. 18. Various technical aspects are there to be considered while selectinga Mutual Fund. But we will emphasis on certain general criteria tobe considered while selecting a Mutual Fund. Please consider thefollowing points while stepping out for buying a Mutual Fund,Determine your goal. What for you are going to invest in MutualFund? Be clear on your goal. Determine what type of fund youshould choose for achieving your goal. Consider risk factors involvedin the fund and risk factor that you can manage. You may needfunds giving higher return to meet your goal, but higher returncomes with higher risk, ask yourself whether you can manage withthat much risk.
  19. 19. Most important step is choosing a good fund manager. That is, towhich company you are going to give your money. In India there areno of companies offering Mutual Fund. For example, HDFCSecurities, ICICI Direct, India Bull, Sharekhan ltd. etc. Please findtime and analyze about the following details of the Fund Managers,1. How old the company is? If the company is nearly 5years old youcan trust on. There is no defined rule; new company also can betrusted.2. Get performance details about these companies over last at least5 years. These details you can find from various websites, etc. A littlesearch on Goggle or Yahoo can give you enormous data. You canready various financial research reports available on the abovementioned sites, News papers etc
  20. 20. 3. Consider reliability of the Fund Manager. They should beapproved by local approving authority. In India SEBI (Security andExchange Board of India) is the approving authority. Normally theyare approved4. Consider their features for easy trading and accessibility. Whetherthey are available over phone, email etc. easily. Also there officeshould be nearer for better communicationNow you have selected a Fund Manager (Or Broker), your goal isclear.Discuss about your goals with the Mutual Fund Company. Whattypes of fund they have to meet your goal. They will suggest manyschemes, you can analyze and scrutinize. All of them or none ofthem may or may not meet your requirement, but you should find afund that meets most of your requirement. If you feel that thiscompany is not at all meeting your requirement, you can go to some
  21. 21. All of them or none of them may or may not meet yourrequirement, but you should find a fund that meets most of yourrequirement. If you feel that this company is not at all meeting yourrequirement, you can go to some other company. Roads are alwaysopen. It is your money and you have to decide the best way toinvest.Always be clear about risk involved in the fund you are investing in.Some technical aspect you may consider which will be discussed inAnalysis of Mutual Fund articles in the subsequent articles.
  22. 22. Understanding various fees attracted in Mutual Fund is veryimportant. Most of the people dont know what are the fees killingtheir income. Unless you know this it is difficult to be successfulMutual Fund investor.Your broker can give you clear picture in fees & taxes applicable,since it varies Fund manager to Fund manager. Read their terms &conditions carefully, ask them about fee structures, ask all thedoubts you have and be clear.
  23. 23. As a Mutual fund holder coming under the SEBI (Securities ExchangeBoard of India/Mutual Funds) Regulations, you have the followingrights,1. Receive unit certificates or statements of accounts confirming your title within 30 days from the date of closure of the subscription under open-ended schemes or within 6 weeks from the date your request for a unit certificate is received by the Mutual Fund2. Receive information about the investment policies, investment objectives, financial position and general affairs of the scheme.3. Receive dividend within 30 days of their declaration and receive the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase4. Inspect the documents of the Mutual Funds specified in the scheme’s offer document.
  24. 24. 5. Receive communication from the Trustees about change in thefundamental attributes of any scheme or any other changes whichwould modify the scheme and affect the interest of the unit holdersand to have option to exit at prevailing Net Asset Value without anyexit load in such cases and other rights as per SEBI guidelines.Above rights are typical only. You can get full details from your locallegal adviser or from your broker. In other countries rules are almostsame but get cleared from your broker or any legal adviser.Please read & understand the terms and conditions carefully duringpurchasing a Mutual Fund from your company. Most of the peopledont read this and many who read doesn’t understand. Take yourown time and understand the jargons involved in it. The abovestated rules may vary with respect to your agreement with MutualFund Company.