|
|
| |
| |
Content
What is a Mutual Fund?
A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI) that pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. In other words, a mutual fund allows an investor to indirectly take a position in a basket of assets.
Which was the First Mutual Fund to be set up in India?
Unit Trust of India is the first Mutual Fund set up under a separate act, UTI Act in 1963, and started its operations in 1964 with the issue of units under the scheme US-64
What is the Regulatory Body for Mutual Funds?
Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds mentioned above. All the mutual funds must get registered with SEBI. The only exception is the UTI, since it is a corporation formed under a separate Act of Parliament.
Why should I choose to invest in a mutual fund?
For a retail investor who does not have the time and expertise to analyze and invest in stocks and bonds, mutual funds offer a viable investment alternative. This is because:
 |
Mutual funds diversify the risk of the investor by investing in a basket of assets. When investing in a single fund, an investor is actually investing in numerous securities. Spreading your investment across a range of securities can help to reduce risk. |
|
Convenience: With most mutual funds, buying and selling shares, changing distribution options, and obtaining information can be accomplished conveniently by telephone, by mail, or online. |
|
Professional Management: A team of professional fund managers manages them with in-depth research inputs from investment analysts. Mutual funds are managed and supervised by investment professionals. This eliminates the investor of the difficult task of trying to time the market. |
|
Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information which individual investors cannot access. |
|
Liquidity: Mutual fund units are liquid and orders to buy or sell are placed during market hours. However, orders are not executed until the close of business when the NAV (Net Average Value) of the fund can be determined. |
Can mutual funds be viewed as risk-free investments?
No. Mutual fund investments are not totally risk free. In fact, investing in mutual funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds the controllable risks are substantially reduced.
What are the some of the risks involved in investing in mutual funds?
|
Market Risk. The possibility that stock fund or bond fund prices overall will decline over short or even extended periods. Stock and bond markets tend to move in cycles, with periods when prices rise and other periods when prices fall. |
|
Credit Risk. The possibility that a bond issuer will fail to repay interest and principal in a timely manner. Also called default risk. |
|
Income Risk. The possibility that a fixed-income fund's dividends will decline as a result of falling overall interest rates. |
|
Interest Rate Risk. The possibility that a bond fund will decline in value because of an increase in interest rates. |
|
Principal Risk. The possibility that an investment will go down in value, or "lose money," from the original or invested amount. |
What are open-ended and closed-ended mutual funds?
In an open-ended mutual fund there are no limits on the total size of the corpus. Investors are permitted to enter and exit the open-ended mutual fund at any point of time at a price that is linked to the net asset value (NAV). In case of closed-ended funds, the total size of the corpus is limited by the size of the initial offer.
Is the purchase and redemption in case of open-ended funds done at the NAV?
Generally a fund levies an exit load if the investment period is less than the specified period. The redemption price will be lower than the NAV to the extent of the exit load. There is no entry load on purchase of funds.
What are the different types of options that any mutual fund scheme offers?
That depends on the strategy of the concerned scheme. But generally there are 3 broad categories. A dividend plan entails a payment of dividend to the investors. A reinvestment plan is a plan where these dividends are reinvested in the scheme itself. A growth plan is one where no dividends are declared and the investor gains through capital appreciation in the NAV of the fund.
What is a Systematic Investment Plan and how does it operate?
A systematic investment plan is one where an investor contributes a fixed amount every month and at the prevailing NAV the units are credited to his account.
What are the benefits of a Systematic Investment Plan?
A systematic investment plan (SIP) offers 2 major benefits to an investor:
|
It avoids lump sum investment at one point of time |
|
In a scenario of falling prices, it reduces your overall cost of acquisition by a process of rupee-cost averaging. This means that at lower prices you end up getting more units for the same investment |
What is NAV and how it is calculated?
NAV is the net asset value of the fund. Simply take the current market value of the fund's net assets (securities held by the fund minus any liabilities) and divide by the number of shares outstanding. So if a fund had net assets of Rs.50 lakh and there are one lakh shares of the fund, then the price per share (or NAV) is Rs.50.00.
Mutual fund categories
Mutual funds fall into the following categories: money market funds, bonds funds, stocks funds, balanced funds, and asset allocation funds.
Stock Fund Types:
| 1. |
Large Cap: Primarily invests in "Blue-chip" companies - large, well-known industrials, utilities, technology, and financial services companies with large market capitalization. Large cap stocks are perceived to be less risky than smaller capitalized companies. |
| 2. |
Mid Cap: Primarily invests in companies whose market capitalization is smaller than large caps but larger than small caps. Mid caps are generally considered more risky than large cap stocks but have a higher return expectation. |
| 3. |
Small Cap: Primarily invests in emerging companies, thought to have potential for future growth and profit. Small caps are generally considered the riskiest stocks compared to larger capitalized firms but carry the expectation of higher returns. Small cap funds are subject to greater volatility than those in other asset categories. |
| 4. |
Sector: Primarily invests in specific industry sectors such as technology, financials, health, or energy. |
Bond Funds:
Invest in bonds, which are debt securities, issued by corporations or governments in exchange for money loaned to them. Generally, the issuer agrees to repay the loan by a specific date and to make regular interest payments to the lender until then.They are a basket of bonds with different durations, yields, credit quality, and values.
Bond Fund Types:
|
Government: Primarily invest in bonds issued by the Central or State Governments or RBI. |
|
Corporate: Primarily invest in bonds issued by corporations to help fund business activities. e.g. CPs, CDs ,Term Deposits, PSU/PFI Bonds, Private Corporate Securities and Pass Through Certificates. |
Money market funds:
Money market funds invest in short-term securities such as Treasury bills, PSU/PFI Bonds, CPs, CDs, Term Deposits, Private Corporate Securities and Pass Through Certificates of shorter durations. Money market funds are designed to provide steady dividend income on the investment amount, although the yield may fluctuate daily.
Balanced Funds:
|
Invest in stocks, bonds, and cash investments, in varying proportions. |
|
Produce dividend and capital gain distributions and share price appreciation in proportion to their allocation among the three major asset classes. |
Asset Allocation Funds:
In an asset allocation fund, the manager will diversify the assets among each category: cash, bonds, and stocks and weight them according to the portfolio strategy. The manager will redistribute the weightings according to market conditions. Portfolio strategies generally differ according to risk tolerance:
|
Aggressive Growth Strategy Portfolio |
|
Growth Strategy Portfolio |
|
Growth and Income Strategy Portfolio |
|
Income Strategy Portfolio |
|
|
|
|
|
 |
Application form for Mutual Funds (MF)
|
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
