Mutual funds

Introduction:

Simply put, a mutual fund pools together money from many investors just like you to make up a large lump sum. The money collected is invested either in stocks, bonds and other securities, or in a combination of the three. As an investor, you are issued units in proportion to the money you have invested.

The Asset Management Company(AMC) will collect the funds from the investors through New Fund Offer (NFO). Each NFO pertains to a specific scheme of mutual funds. Each scheme will be having a predefined portfolio. The funds of each investors will be invested as per the portfolio.

Benefits of investing in Mutual funds:

1. An expert on your side:
When you invest in a mutual fund, the analysis and strategic thinking that goes into investing is not your worry. That's what a fund manager does for you.

2. Limited risk:
Mutual funds are diversification in action and hence do not rely on the performance of a single entity.

3. More for less:
Your money can probably afford just a handful of stocks, but by investing in just one fund, you could get yourself a number of units across a spread of companies and industries!

4. Easy investing:
You can invest in a mutual fund with as little as Rs. 5,000. Salaried individuals also have the option of investing a little every month in a SIP or Systematic Investment Plan.

5. Convenience:
You can invest directly with a fund house, or through your financial adviser, or even over the Internet.

6. Quick access to your money:
Should you need your money at short notice, you can usually get it in four working days.

7. Transparency:
As an investor, you get updates on the value of your units, information on specific investments made by the mutual fund and the fund manager's strategy and outlook.

8. Low transaction costs:
A mutual fund, by the sheer scale of its investments is able to carry out cost-effective brokerage transactions.

9. Tax benefits:
Over the years, tax policies on mutual funds have been favourable to investors and continue to be so.

10. Investor protection:
A mutual fund in India is registered with The Securities and Exchange Board of India or SEBI, which also monitors the operations of mutual funds to protect your interests.

Limitations of Mutual funds:

• Costs Despite Negative Returns — Investors must pay sales charges, annual fees, and other expenses regardless of how the fund performs. And, depending on the timing of their investment, investors may also have to pay taxes on any capital gains distribution they receive — even if the fund went on to perform poorly after they bought shares.
  
  
  
• Lack of Control — Investors typically cannot ascertain the exact make-up of a fund's portfolio at any given time, nor can they directly influence which securities the fund manager buys and sells or the timing of those trades.
  
  
  
• Price Uncertainty — With an individual stock, you can obtain real-time (or close to real-time) pricing information with relative ease by checking financial websites or by calling your broker. You can also monitor how a stock's price changes from hour to hour — or even second to second. By contrast, with a mutual fund, the price at which you purchase or redeem shares will typically depend on the fund's NAV, which the fund might not calculate until many hours after you've placed your order. In general, mutual funds must calculate their NAV at least once every business day, typically after the major U.S. exchanges close.

Types of Mutual Funds Scheme in India

Wide variety of Mutual Fund Schemes exist to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry.

• By Structure
  
  • Open - Ended Schemes
  • Close - Ended Schemes
  • Interval Schemes
    
    
    
• By Investment Objective
  
  • Growth Schemes
  • Income Schemes
  • Balanced Schemes
  • Money Market Schemes
    
    
    
• Other Schemes
  
  • Tax Saving Schemes
• Special Schemes
  
  • Index Schemes
  • Sector Specfic Schemes
  
  
  Criterias of Mutual funds:
  
  

  1. Liquidity:

  An advantage of mutual funds is the ability to get in and out with relative ease. In general, you are able to sell your mutual funds in a short period of time without there being much difference between the sale price and the most current market value. However, it is important to watch out for any fees associated with selling, including back-end load fees. Also, unlike stocks and exchange-traded funds (ETFs), which trade any time during market hours, mutual funds mutual funds transact only once per day after the fund's net asset value(NAV) is calculated.
  

  
  

  2. Safety:

  Unlike equity investment, the amount we invest in the mutual funds are are diversified. If one stock goes into red, the others may lift the value of the fund with its increase in market value. The safety of the invested money in mutual fund is on a higher side than the money invested in equity. More over, while investing in equity shares, we have to track the movement of stock and foresee the shares prices in order to gain through the sale of stocks. Failing which, our money in the equity shares are not safer. But in the case of mutual fund investments, the Asset Management Company will regularly track and forecast the share prices of the shares in the fund portfolio. The will make our money more safer. And also the AMC being professional trackers, our investment will be valued more.
  

  
  

  3. Returns:

  As explained earlier the funds can be classified as Growth, Income, Balanced and Money market schemes.
  

  The portfolio of the Growth funds will be concentrating more on the investing in equity market. The concept behind this is even though if the short term earnings will be uncertain, the longterm scenario may be positive and can also fetch an increased income. More risk is involved in the growth fund of the mutual funds.
  

  The portfolio of the dividend scheme of the funds will concentrate more on the debt over equity. As the debt market is lot more safer than the equity market. The returns from the dividend schemes, may be litter less when compared to the growth scheme because of the added risk carried by the growth scheme as more weightage is given to the equity than debt.
  

  Balanced funds have a fair share of equities and fixed income securities in their asset allocation. The proportion is indicated in their offer documents. These are appropriate for investors looking for moderate growth. NAVs of these funds are likely to be less volatile compared to pure equity funds.
  

  Primary objective of these schemes is to provide liquidity and moderate income. These invest exclusively in short-term instruments such as treasury bills, short term debt securities etc. These funds are appropriate for individuals and corporate as a means to park their surplus funds for short periods.
  

  
  

  4. Tax saving:

  A person who wants to save taxes as well as invest in stock market to take advantage of the high growth potential of investments in equities can go for ELSS offered by any of the mutual funds. ELSS is an instrument sold by mutual funds for the specific purpose of enabling taxpayers to save their taxes. The proceeds from ELSS are mostly invested in the stock market so that investors get the benefits of appreciation in stock prices, thereby marketing the stock market work for investors. The tax deduction for ELSS is available under section 82C of the Income Tax Act 1961 and the maximum amount invested in ELSS which will qualify for the tax deduction is Rs.1,00,000/-. Investing in NFO of any ELSS scheme may be risky because of the risk uncertainty of under performance of the fund. So it is wise to invest in the already issued NFO which are performing better in the market.

  The unit price of the performing fund may be high because naturally good performing funds will be high, but the fact that their performance has been good enough should give enough confidence that they would continue to perform better than the rest.
  

  
  

  5. Involvement:
  

  The involvement by the investor in selecting and tracking the fund should be effective in different senses. While selecting the Fund the investor has to study about the performance of the fund and while selecting the NFO the investor has to study the portfolio of the fund in which the AMC invests the funds of the investor.

  Whereas after investing in either the existing fund or NFO, the involvement towards the investment shifts from the investor to the AMC. The investor is now relieved from tracking and analysing the investment. Even though the investor should update his knowledge on the performance of the fund, his contribution towards the analysing will be less because the experts in the name of AMC will take care of the analysis and diversification part of it.
  

  
  

  6. Amount of Investment:

  There is no limitations on how much one should invest and for how many days of minimum investment he should have and all. The amount you invest in the fund the returns you get.Recent innovation to the mutual fund industry is, Systamatic Investment Plan. In SIP the investor is allowed to invest in the mutual funds not in the traditional fashion of paying the full amount and getting the units alloted to his name. Instead the investor can invest in the mutual fund like Recurring deposits. Like making a recurring deposit, the investor can invest in the SIP monthly in a particular fund, the investor then gets the allocation of units in his name based on the NAV of the particular fund at the particular date of payment of amount. Like this by paying the amount in monthly installments he will be benefited out of mutual fund in a simple way.