Some basic facts about mutual funds

Some basic facts about mutual funds

To invest in mutual funds, you need to first understand what they are, and how they work.

Even more basic is your grasp of stocks and bonds. Very quickly, stocks stand for shares of ownership in a public company, and bonds are money lent to the government or company, on which you receive interest. These are the two most common forms of investment, owned and loaned (real estate and precious metals being examples of others), but we are presently concerned with these instruments, since most mutual funds invest in stocks and/or bonds.

Simply, mutual funds act as intermediaries and facilitate investments in various securities (stocks and bonds). The logical question here would be: why do I need a mutual fund? Why can't I just invest directly?

The mutual fund advantage
Investing in a mutual fund allows you to minimise risk and maximise returns, because it acts as a middle man for a group of investors with a shared and predefined investment objective. If your main objective is security in investment but you don't know how to begin, a mutual fund is one way to go.

Typically, a fund manager will maintain the fund, and since you are one shareholder in the fund, you have the added advantage of easy investment, and lower trading costs.

Who are these fund managers?
Asset management companies (AMCs) approved by the Securities and Exchange Board of India (Sebi) manage the funds by making investments in various types of securities. This means that all recognised AMCs are monitored by higher authorities and stringent regulations, and funds are managed by professionals who have the necessary expertise.

How is your risk minimised?
Typically, investing in a mutual fund means investing in more than one stock. Some fund managers will diversify and spread your investment further by buying a mosaic of stocks and bonds. Investing in a large number of assets, or diversification, means that a loss incurred on one investment is minimised by gains in others.

How are trading costs reduced?
Since the AMC buys and sells large amounts of securities at a time, transaction costs are reduced, and the benefit is extended to the investor, because the average cost of the unit is lowered.

There are three ways in which you will see returns on your investment in a mutual fund:

• Through dividends on stocks and interest on bonds;
  
• Through capital gains, if the fund sells securities that have increased in price and the fund distributes these gains; and
  
• By selling your shares when the holdings increase in price.

Mutual funds can either be open-ended or close-ended in nature.
With open-ended funds, you can either enter or exit the fund any time during the scheme period, by buying/ selling fund units -- this means a high degree of liquidity. Close-ended funds, as the term implies, means that an exit is possible only when the scheme period is over.

Mutual fund schemes in India are varied and cater to a wide range of requirements and profiles, based on financial position, tolerance to risk, and expectations of returns. Each mutual fund has a specific stated objective.

The fund's objective is laid out in the fund's prospectus, which is the legal document that contains information about the fund, its history, its officers and its performance.

High on risk and high on return are Equity funds. Also known as Growth Schemes, the aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.

They may be further classified into Diversified Equity Funds, Mid-Cap Funds, Sector Specific Funds and Tax Savings Funds (ELSS).

Debt funds, or Income Schemes, invest in debt instruments, typically issued by the government, private companies, banks and other financial institutions, and promise low risk and a stable income.

These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. Further classification includes Gilt Funds, Income Funds, MIPs, Short Term Plans and Liquid Funds.

Balanced funds are a mix of both equity and debt funds. They invest in both equities and fixed income securities, providing both growth and stability.

Money Market Schemes promise high liquidity, preservation of capital and a 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.

Tax-saving schemes offer tax rebates to the investors under tax laws. For example, under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.

Index schemes track and emulate the performance of a particular index such as the BSE Sensex. The stocks in these portfolios will mirror those in the Index, as will the percentage of each stock retained. Returns will therefore mirror the movement of the Index.

Finally, a further benefit from investing mutual funds is the 100 per cent income tax exemption on all mutual fund dividends. For Equity Funds, short-term capital gains are taxed at 15 per cent. Long-term capital gains are not applicable.

For Debt Funds, short-term capital gains are taxed as per the slab rates applicable to you. Open-ended funds with equity exposure of more than 65 per cent are exempt from the payment of dividend tax for a period of three years from 1999-2000.

Source: Rediff

Good one

Thanks for the Info Jeee.

Good info mate.

Reliance mutual funds NFO will close tommorow i.e june 23rd

For people who follow SIP can invest in it

I will advice everyone to stay away from any NFO.

I purchase one SBI MF when sensex was 15,000. Today its more than 15350, but still nav is low which was there on that day. My money is still in negative. if sensex up, nav also up. Isn't it. Why? I purchased with 0 entry load

NAV of mutual fund does not depend upon the Sensex but usually when Sensex rises, NAV also rises and vice versa.

The Sensex is an average of the 30 prime stocks of BSE. The NAV is arrived at from the valuation of the stocks that the MF has invested in minus operating expenses, etc.

For example, when Sensex rises, it does not mean all stocks have risen. Some stocks fall even when majority rise. The same holds true for MF.

Actually I am not really that familiar with Mutual Funds and your article posted in here is very informative which makes me think of trying to Invest in this one..

Originally Posted by matthew

Actually I am not really that familiar with Mutual Funds and your article posted in here is very informative which makes me think of trying to Invest in this one..

Mutual funds;
When a new scheme is offered, you get each unit at Rs 10/= ( like most shares)
Mostly you get allotment ( (unlike shares "Sharks" corner most, and small
investors get a refund of application money )
For the same NAV can go up or go down, depending on the way the fund managers have invested.
Usually MF investments should be considered Long term investments
and money invested for a particular purpose.
Say College fees/education abroad/medical expenses etc

Other than Fixed Deposits in Banks /Post office /Public Provident Fund ( U.T.I schemes now : Forget Master Gain!!)
(with a limit of 1 lakh I think) are assured refunds.
For any other investment consider the risk factors.
Your investment return is not assured/.

Originally Posted by essbebe

Your investment return is not assured/.

The ads cleary mention MF subject to market risk instead assured returns seem to be highly advantageous to opt for.

Originally Posted by essbebe

Mutual funds;
When a new scheme is offered, you get each unit at Rs 10/= ( like most shares)
Mostly you get allotment ( (unlike shares "Sharks" corner most, and small
investors get a refund of application money )
For the same NAV can go up or go down, depending on the way the fund managers have invested.
Usually MF investments should be considered Long term investments
and money invested for a particular purpose.
Say College fees/education abroad/medical expenses etc

Other than Fixed Deposits in Banks /Post office /Public Provident Fund ( U.T.I schemes now : Forget Master Gain!!)
(with a limit of 1 lakh I think) are assured refunds.
For any other investment consider the risk factors.
Your investment return is not assured/.

Originally Posted by Vasundra

The ads cleary mention MF subject to market risk instead assured returns seem to be highly advantageous to opt for.

Bank deposits and debt instruments like FDs, MIPs, etc. promise a return of 6% to 10% depending upon the institution. While it appears to be a reasonable ROI, the inflation factor is never taken into account. My father retired in 1996. At that time, he, like a typical conservative middle income group person, has invested in FDs, Post Office savings, NSC, PF/PPF, etc.

I can tell you that his income from these instruments would not have lasted more than 10 years. Today, he and my mother, would have been begging on the streets. This is the sad truth.

While it is true that one cannot predict how much one will need in the future, I have devised my own formula for this:

a) Sum up all your expenses - pure expenses and not something on savings. Include things like EMIs on loans, LIC premia, other premia, etc. also. Again do this for the entire year. The easiest way to the above is use your bank passbook or statements for a year.
b) Arrive at the average expenses per year per person. Consider all the dependents on your income.
c) Put this figure in a worksheet. Column A = Year, Colum B = standard expenses adjusted for 6% inflation every year. In the next column, put the number of dependents. You may get married in future or have children or your parents may retire and depend upon you, etc.
d) In the next column add any major expense that you may incur in future years such as self-marriage (if not married as yet), EMIs for purchase of a house/car, higher education for children, sudden expenses on hospitalization of old parents, marriage of children, etc. Do some rough but reasonable guesses for such expenses.
e) Continue to add rows for every year till the age of 75 at least.
f) Add expenses for every year, row-wise.

You have now a reasonable guide of your expenses.

Now you can start planning for the future.

As I stated before, you cannot hope on debt instruments and shares market trading may not be your cup of tea. MFs is a reasonable middle ground.

The following article is an excellent guide on why the small investor should opt for MFs rather than shares.

http://www.raagvamdatt.com/Direct-in...-Funds-MFs/56/

Has anyone Read Mutual Fund Guide by PersonalFN, it covers all the basics of Mutual Fund. I guess its really worth to read.

thanks a lot..

Can you give some insights for Options-call and put.
I am little bit confused about it.. like how these two products are traded on exchange. why the trade volume for these are lot more than futures and how to analysis which options amy give return in near futures ? Are there any technical or fundamental analysis strategies available just like as we do in case of stocks ?

Equity investment is the lesser evil than mutual funds. ~ Benjamin Graham

I have an account in mutual fund but I don't see the account is earning althought I have been created the account 2 years back. My account NAV drop drastically during the financial crisis and it has yet go back to earning NAV. I am kind of disappointed on unit trust.

Originally Posted by pinkypainter

I have an account in mutual fund but I don't see the account is earning althought I have been created the account 2 years back. My account NAV drop drastically during the financial crisis and it has yet go back to earning NAV. I am kind of disappointed on unit trust.

Returns in MFs can be balanced only by systematic investments. Most small investers and novices like us invest when the market is high. So when the market crashes we see a severe loss. Obviously we cannot predict the market. So the idea is to keep investing in proven funds via SIP - basically small investments every week/fortnight/month. This helps in keeping trhe discipline and invest in the market when it is high or low. At the end of two three years the most conservation gain should amount to 15%.