A mutual fund is a
professionally-managed investment scheme, usually run by an asset management
company that brings together a group of people and invests their money in
stocks, bonds and other securities. The owner who is responsible for buying mutual fund is liable of gains
or losses along with the expenses, losses and income. Every mutual fund has a
specific objective. The objective of the funds is predefined in the prospectus
which is also a tie of a legal document that contains all the information about
its history, officers etc.
Some popular objectives of a mutual fund are:
What the fund will invest in
Only in stocks
Only in fixed-income securities
In short-term money market
instruments (including government securities)
Partly in stocks and partly in
fixed-income securities, in order to maintain a ‘balance’ in returns and risk
by an Asset Management Company (AMC)
can be defined as the company which puts together a mutual fund. It may also
have several mutual fund schemes with equal or varied investments objectives.
The AMC hires professional managers who are responsible for buying and selling
Regulated by SEBI, Funds governed by Board of Directors
every mutual fund have a board of directors which is responsible to represents
shareholders interest except than of the AMC
II. Basics Terminologies
Value or NAV
NAV is the total
asset value (net of expenses) per unit of the fund and is calculated by the AMC
at the end of every business day.
calculated by: The value of all the securities in the portfolio in
calculated on a daily basis. All expenses are deducted and the resultant value
divided by the number of units in the fund is the fund’s NAV.
Ratio: AMCs charge an annual fee, or expense ratio that covers
administrative expenses, salaries, advertising expenses, brokerage fee, etc. A
fund’s expense ratio is typically to the size of the funds under management and
not to the returns earned. Normally, the costs of running a fund grow slower
than the growth in the fund size – so, the more assets in the fund, the lower
should be its expense ratio.
Some AMCs have sales charges, or loads, on their funds (entry load and/or exit
load) to compensate for distribution costs. Funds that can be purchased without
a sales charge are called no-load funds.
III. Types of Funds
At any time
during the scheme period, investors can either enter and exit the scheme (by
buying/ selling the fund units) at its net asset value. Also, AMCs are responsible
for issuing the mostly open-ended funds.
take place only after the period of the scheme is over. However, close-ended
funds are listed on the stock exchanges and investors can buy/ sell units also in
the secondary market.
documents that highlight the fund’s strategy and performance are as follows:
The prospectus (legal document) and
The shareholder reports (normally quarterly).
IV. Investment through Mutual Funds
Money Management: Fund managers are responsible for the implementation
of a consistent investment strategy that
reflects the aim of the fund. Fund managers monitor market and economic trends
and analyze securities to make a very informed investment decision.
It is one of the ideal way to reduce a risk. Mutual
funds offer investors an opportunity to diversify across assets depending on
their needs of investment.
Investors can sell their mutual fund units on any business day and receive the
current market value on their investments within a short time period, which is
generally 3-6 days.
They are very much affordable. Some of the mutual funds costs as low as Rs.
Most funds provides the convenience of periodic purchase plans, automatic
withdrawal plans and the automatic reinvestment of interest and dividends.
Which is proved to be very much convenient for the investors/customers.
and variety: An investor can select form blue-chip stock funds,
sectoral funds, funds that aim to provide income with modest growth or those
that take big risks in the search for returns. In some of the conditions
balanced funds can also be opted for.
benefits on Investment in Mutual Funds: The Govt. Of India have relaxation for
those who invest in funds and the rules are as follows:
1) 100% Income
Tax exemption on all Mutual Fund dividends
2) Equity Funds
– Short term capital gains are taxed at
Long term capital
gains are not applicable.
Debt Funds –
Short term capital gains are taxed as per the slab rates applicable to you.
3) The Open-end
funds which have an equity exposure of more than 65% are exempt from the
payment of dividend tax for a period of 3 years from 1999-2000.
Selecting a mutual fund
What all things we need to have in mind before
selecting a mutual fund? Should the best performing fund be selected? The
answer is no. mutual fund investing requires a strategic input just like any
other investment option. But the
advantage is that the strategy here is a natural extension of your asset
allocation plan. It is recommended to follow the following process:
Identify funds whose investment objectives match your asset allocation
we buy a computer, we look for the option which suits our demands. Similarly,
in case of mutual funds we should choose a mutual fund which meets our risk
tolerance and our risk capacity.
what we should see as per our investment objectives of mutual funds fixed
income or equity, general equity or sector-focused, high risk or low risk,
blue-chips or turnarounds, long-term or short-term liquidity focus.
Evaluate past performance, look for consistency
performance does not guarantee the performance of a mutual fund but if we have
to predict the performance of a mutual fund we have to analyse its past
performance for doing this we have to find the past 3 to 5 years of data and
then identify the best performing mutual fund on the basis of data. Then
shortlist the funds and select best out of them.
just select same type of funds or funds of a similar companies rather select
funds of different categories. So that the diversity should be maintained and
risk will be minimized as the accounting principle says don’t put all the eggs
in same basket.
Consider Fund Costs
cost which we are going to invest in a mutual fund is taken under consideration
and all the aspects related to cost should be deeply scrutinized. So that the
best possible return should be obtained from the mutual fund.
How to monitor your investments?
making an investment in mutual fund we should regularly keep a check over its
performance that whether it is meeting our demands or not and whether it is
performing up to the expectations or not. We should also make a review of this
performance so that we can optimize our profit and minimize our loss. And the effectiveness
of fund utilized is fully met.
You change your investment plan.
example, as you grow older you might adopt a more conservative investment
approach, pruning some of your riskier (equity-oriented) funds.
A fund changes its strategy.
that alters its investment objective or approach might no longer fit your
The fund’s poor results persist.
fund regularly trails other funds that invest in similar securities, consider
replacing it. The poor performance is more often than not a reflection on the
relative expertise of the asset management company.