Share This
 

Mutual Funds

Mutual Fund Investments are safe , Money and FinanceA mutual fund is a portfolio, or collection, of individual securities (some combination of stocks, bonds, or money market instruments) managed according to a specific objective spelled out in the fund's prospectus. A mutual fund allows investors to pool their money, then the fund invests it on their behalf. Unlike individual stocks, whose value fluctuates minute by minute, mutual funds are priced at the end of each day based on what the securities in the portfolio are worth.

In simple terms mutual fund can be conceived as a company (Asset management Companies or AMC's) that bring together a group of people and invest their money in stocks, bonds, and other securities. Each investor owns share, which represent a portion of the holdings of the fund.

One can make money from a mutual fund in three ways:

1) Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution.
2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.
3) If fund holdings increase in price but are not 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 its owner a choice either to receive a check for distributions or to reinvest the earnings and get more shares.

What is NAV?

Mutuals Funds are valued on their respective Net Assets Value or NAV’s. Basically, this is the investment company's best assessment of the value of a portfolio holdings in their fund. They use the daily closing price of all securities held by the fund, subtract some amount for liabilities, divide the result by the number of outstanding units in the fund and Poof! you have the NAV. The fund company will sell you units at that price (don't forget about any sales charge) or will buy back your units at that price (possibly less some fee). Net Asset Value (NAV) = (Value Of All Securities Held By The Fund - Expenses And Liabilites Of The Fund) % Value Of Outstanding Units In The Fund More

Different types of Mutual Funds

Mutual funds can be classified based on the structure and investment objective.

By Structure

Closed-End Fund

Mutual FundA closed-end fund looks much like a stock of a publicly traded company: It is traded on some stock exchange, you buy or sell shares in the fund through a broker just like a stock (including paying a commission), the price fluctuates in response to the fund's performance and (very important) what people are willing to pay for it. Also like a publicly traded company, only a fixed number of shares are available. These funds have a stipulated maturity period generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. The market price of closed-end funds is determined by supply and demand and not by net-asset value (NAV), as is the case in open-end funds. Usually closed mutual funds trade at discounts to their underlying asset value.

Open-End Fund

An open-end fund is the most common variety of mutual fund. Both existing and new investors may add any amount of money they want to the fund. In other words, there is no limit to the number of shares in the fund. Investors buy and sell shares usually by dealing directly with the fund company, not with any exchange. The price fluctuates in response to the value of the investments made by the fund, but the fund company values the shares on its own; investor sentiment about the fund is not considered. Open-end funds keep some portion of their assets in short-term and money market securities to provide available funds for redemptions. A large portion of most open mutual funds is invested in highly liquid securities, which enables the fund to raise money by selling securities at prices very close to those used for valuations.

By Investment Objective

Growth Funds

The aim of growth funds is to provide capital appreciation over the medium to long term. Such schemes normally invest a majority of their corpus in equities. Growth schemes are ideal for investors who have a long-term outlook and are seeking growth over a period of time.

Income Funds

The aim of Income Funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income. Capital appreciation in such funds may be limited, though risks are typically lower than that in a growth fund.

Balanced Funds

Mutual funds, Money and FinanceThe aim of Balanced Funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. This proportion affects the risks and the returns associated with the balanced fund - in case equities are allocated a higher proportion, investors would be exposed to risks similar to that of the equity market. Balanced funds with equal allocation to equities and fixed income securities are ideal for investors looking for a combination of income and moderate growth.

Money Market Funds

The aim of Money Market Funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit, Commercial Paper and Inter-Bank Call Money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for corporate and individual investors as a means to park their surplus funds for short periods.

Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws, as the Government offers tax incentives for investment in specified avenues. Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction under Section 88 of the Indian Income Tax Act, 1961.

Index Schemes

Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE S&P CNX 50.

Sectoral Schemes

Sectoral Funds are those which invest exclusively in specified sector(s) such as FMCG, Information Technology, Pharmaceuticals, etc. These schemes carry higher risk as compared to general equity schemes as the portfolio is less diversified, i.e. restricted to specific sector(s) / industry (ies).

Different plans that mutual funds offer

To cater to different investment needs, Mutual Funds offer various investment options. Some of the important investment options include:

Growth Option

Dividend is not paid-out under a Growth Option and the investor realises only the capital appreciation on the investment (by an increase in NAV).

Dividend Payout Option

Dividends are paid-out to investors under the Dividend Payout Option. However, the NAV of the mutual fund scheme falls to the extent of the dividend payout.

Dividend Re-investment Option

Here the dividend accrued on mutual funds is automatically re-invested in purchasing additional units in open-ended funds. In most cases mutual funds offer the investor an option of collecting dividends or re-investing the same.

Retirement Pension Option

Some schemes are linked with retirement pension. Individuals participate in these options for themselves, and corporates participate for their employees.

Insurance Option

Certain Mutual Funds offer schemes that provide insurance cover to investors as an added benefit.

Systematic Investment Plan (SIP)

Here the investor is given the option of preparing a pre-determined number of post-dated cheques in favour of the fund. The investor is allotted units on a predetermined date specified in the offer document at the applicable NAV.

Systematic Withdrawal Plan (SWP)

Mutual Fund Returns, Money and FinanceAs opposed to the Systematic Investment Plan, the Systematic Withdrawal Plan allows the investor the facility to withdraw a pre-determined amount / units from his fund at a pre-determined interval. The investor's units will be redeemed at the applicable NAV as on that day.

Returns from mutual funds

Returns from Mutual Funds are generally in the form of dividends payouts and as such there is no guaranteed returns to the investors. Although, SEBI regulations allow Mutual Funds to offer guaranteed returns subject to the Fund meeting certain conditions, most Funds do not offer such guarantees. In case of a guaranteed return scheme, the sponsor or the AMC, guarantees a minimum level of return and makes good the difference if the actual returns are less than the guaranteed minimum. The name of the guarantor and the manner in which the guarantee shall be met must be disclosed in the offer document by the Mutual Fund. Investments in mutual funds are not guaranteed by the Government of India, the Reserve Bank of India or any other government body.

 

Back

© 2010 Education All Rights Reserved. Powered by i4 Technologies.in