MUTUAL FUNDS

Mutual Funds Definition refers to the meaning of Mutual Fund, which is a fund, managed by an investment company with the financial objective of generating high Rate of Returns. These asset management or investment management companies collects money from the investors and invests those money in different Stocks, Bonds and other financial securities in a diversified manner. Before investing they carry out thorough research and detailed analysis on the market conditions and market trends of stock and bond prices. These things help the fund mangers to speculate properly in the right direction. The investors, who invest their money in the Mutual fund of any Investment Management Company, receive an Equity Position in that particular mutual fund. When after certain period of time, whether long term or short term, the investors sell the Shares of the Mutual Fund, they receive the return according to the mark conditions. The investment companies receive profit by allocating people's money in different stocks and bonds according to their Speculation about the Market Trend. Other than some specific mutual funds which carry certain Maturity Term, Investors can generally sell the shares of their mutual funds at any time they want. But, the return will vary according to market value of the stocks and bonds in which that particular mutual fund made investment. But, generally the share holders of mutual fund sell their share when the prices are up and Capital Gain is sure to happen.

Scope of Mutual Funds

Scope of Mutual Funds has grown enormously over the years. In the first age of mutual funds, when the investment management companies started to offer mutual funds, choices were few. Even though people invested their money in mutual funds as these funds offered them diversified investment option for the first time. By investing in these funds they were able to diversify their investment in common stocks, preferred stocks, bonds and other financial securities. At the same time they also enjoyed the advantage of liquidity. With Mutual Funds, they got the scope of easy access to their invested funds on requirement. But, in todays world, Scope of Mutual Funds has become so wide, that people sometimes take long time to decide the mutual fund type, they are going to invest in. Several Investment Management Companies have emerged over the years who offer various types of Mutual Funds, each type carrying unique characteristics and different beneficial features. To understand the broad scope of Mutual Funds we need to discuss the main types of Mutual Funds that are normally offered by the Mutual Companies. The wide choices in Mutual Funds go as the following:

Equity Funds or Stock Funds These types of Mutual Funds generally invest in stocks
which are publicly traded. Amount of risk, involved with these funds vary according to different types of Equity Funds.

Types of Equity Funds are; 1. Growth Funds-These funds invest in the stocks, which are under valued compared to
their worth. As these stock prices tend to rise in future and carry good growth potential, Growth Funds go for these kinds of stocks.

1. Value Funds-These funds go for long term investment and aims at increase of value
over the years.

2. International Equity Funds-These funds invest in the stocks of foreign

companies.

3. Global Equity Funds-These funds invest in stocks of both the domestic market
and the foreign markets.

4. Sector Funds or Specialty Funds-These funds invest in specific sectors like

Health care and in specific commodities like Gold.

5. Index Funds-These funds reflect the performance of stock market indexes. Bond Funds These funds invest in government bonds and corporate bonds. These
Bond Funds offer a steady source of income and in many times these incomes get the advantage of Tax Exemption.

Money Market Funds These funds invest in the money market. These funds involve low
level of risk and promises comparatively low rate of return.

Growth of Mutual Funds

Growth of Mutual Funds has been gradual and it took really long years to evolve the modern day mutual funds. Mutual Funds emerged for the first time in Netherlands in the 18th century. Then it got introduced to Switzerland, then Scotland and then to United States in the 19th century. The very idea of mutual funds came from the urge to deliver a form of Diversified Investment Solution. Over the years the idea developed and people received more and more choices of Diversified Investment Portfolio through the mutual funds. When in 1924, Massachusetts Investors Trust first introduced mutual funds in U.S, they found it difficult to

gain the trust of the investors. It was very natural that the people took time to adapt to a new investment idea. There emerged some confusion regarding the Taxation of Investment Income from mutual funds as there was no Regulation or legislation. Laws started to came in existence from 1940s. The result was not immediate. The Mutual Fund Concept achieved warm reception only in the middle of 1950s. By the end of fifties and in first half of 1960s mutual fund investment triggered up tremendously. Monetary Funds benefited a lot from the mutual funds. Earlier investors was used to invest directly in the stock market and many times suffered from loss due to wrong Speculation. But, with the mutual funds which were handled by efficient Fund Managers, Investment Risks was lowered by a great extent. The diversified investment structure of mutual funds also diversified risk and this contributed tremendously in the Growth of Mutual Funds. Over the years not only the new types of mutual funds emerged, the way, in which mutual funds were sold also changed. But, the Growth of Mutual Funds has not stopped. It is continuing to evolve to a better future, where investors will get newer opportunities.

Mutual Funds Investment: Mutual Funds Investment has become a subject of great
importance in the present context, especially when all the investors are keen to diversify their investment to maintain a balance between Investment Return and Investment Risk. Mutual Funds Investment not only provides the customers with their much desired diversified investment portfolio, but also offers the benefit of high liquidity. Investors are free to sell their mutual fund shares any time to get the back the amount that was invested in the mutual funds. It is another issue that any time sell of mutual fund shares may result in poor rate of return. For gaining the Diversified Investment Solution and the liquidity advantage, any person needs to invest in Mutual Funds. But, before investing their hard earned money one needs to carry out sincere research on the performance of those mutual funds, he is considering to invest in. The things that one needs to consider before deciding on any particular mutual fund are the

following: Performance of the Fund and the Rate of Returns: It is perhaps needless to say that
one requires to be well informed about the Fund Performance before investing. Excellent Performance not only means high Rate of Return, it also needs the consistency. The funds which have been proved of being able to generate satisfactory rate of return consistently over a period can be considered for investing.

Investment Psychology of the Mutual Fund: Before taking final investment decision
one needs to to know about the Investment Psychology of the mutual fund. The investment psychology of the fund has to match with the Financial Objective of the customer. A track record of excellent performance and high rate of returns cannot be the only yard stick to judge whether that fund is suitable for the particular investor or not.

Risk Adjustment: It is also very important to check that how the funds adjusted with risk
over the years.

Fund Management: Management of funds is the ultimate thing and it in many ways
depends on the efficiency of the Fund Mangers who actually allocates asset by making Speculation based on the market research and market analysis.

Mutual Fund Fees: Investors should be well prepared about the fees and charges associated
with mutual Funds. There are loaded funds and no load funds. Loaded Funds are those mutual funds which involve sales charges and other fees and no load funds are those which carry no charges.

Opportunities of Mutual Funds: Opportunities of Mutual Funds are tremendous

especially when investment is concerned. For any individual who intends to allocate his assets into proper forms of investment and want to diversify his Investment Portfolio as well as the risks, Mutual Funds can be proved as the biggest opportunity. Investors get a lot of advantages with the Mutual Fund Investment. Firstly, they are not required to carry on intensive research and detailed analysis on Stock Market and Bond Market. This work is done by the Fund Mangers of the Investment Management Company on behalf of the investors. In fact, the professional Fund Managers who handle the mutual funds of any particular company, are able to speculate the market trend more correctly than any common individual. Good Speculation about the trends of stock prices and bond prices leads to right allocation of funds in the right stocks and bonds resulting in good Rate of Returns. Investors also get the advantage of high Liquidity of the mutual funds. This means the investors can enjoy easy access to the funds invested in the mutual funds whenever they require the money. When the investors invest in any mutual fund, they are given some equity position in that fund. The investors can any time sell their mutual fund shares to get back the money invested in mutual funds. The only thing is that the Rate of Return that they will get may not be favorable as the return depends on the present market

condition. The greatest opportunity that the mutual funds offer is the opportunity of diversifying their investments. Investment Diversification actually diversifies the Risk associated with investment. This is because, if at a time, if prices of some stocks are declining, deceasing the Value of Investment, prices of some other stocks and bonds may tend to rise and in this way the loss of the mutual fund is offset by the strength of the stocks whose prices are rising. As all the mutual funds diversify their investments in various common stocks, preferred stocks and different bonds, the risk to be borne by the investors are well diversified and in other terms lowered.

Challenges Facing Mutual Funds: There are many Challenges Facing Mutual
Funds which is of prime concern to the people who have an investment spree. People find mutual fund investment so much interesting because they think they can gain high rate of return by diversifying their investment and risk. But, in reality this scope of high rate of returns is just one side of the coin. On the other side, there is the harsh reality of highly Fluctuating Rate of Returns. Though there are other disadvantages also, this concern of fluctuating returns is most possibly the greatest challenge faced by the mutual fund.

The Issue of Fluctuating Returns

In spite of being a diversified investment solution, mutual funds investment in no way guarantees any return. If the market prices of major shares and bonds fall, then the value of mutual fund shares are sure to go down, no matter how diversified the mutual fund portfolio be. It can be said that mutual fund investment is somewhat lower risky than Direct Investment in stocks. But, every time a person invests in mutual fund, he unavoidably carries the risk of losing money.

Mutual Funds Vs Individual Stocks: Mutual Funds Vs Individual Stocks has

always been a debatable issue. While some like to play safe with mutual fund investment, some others prefer investment in individual stocks.When any investor invests in any mutual fund all that he is required to do is pay the Shareholder Fees and Fund Operating Fees. The whole work of managing funds, starting from Market Research and analysis of stock and bond price and recent market trends up to final Allocation of Funds or assets in various stocks and bonds is completely done by the Professional Fund Managers employed by the Investment Management Company. In this case, the fund management remains in the hands of the fund managers of the mutual fund company. But, in case of Direct Investment in individual stocks, the total control

remains in the hands of the individual investors. But, most of the people agree about the fact, that mutual funds hold some important benefits over and above Individual Stocks. So, to get the actual depiction of Mutual Funds Vs Individual Stocks, we will discuss the advantages put forwarded by Mutual Funds.

Average Annual Return: Average Annual Return refers to the return of a mutual fund
which is measured as an average after deducting the mutual fund's operating Expense Ratio. These expenses do not contain the Sales Charges of the mutual fund. In many cases of Mutual Fund Investment, the investors are required to pay Transaction Brokerage Commissions for their Investment Portfolio. But, these commissions are not counted for at the time calculating the Average Annual Return. This Average Annual Return is actually a figure which is represented in percentage and is used to reveal a particular mutual fund's historical return. Generally, Average Annual Return of a mutual fund shows the average returns of the fund over last three years or five years or ten years. A fund can also calculate the Average Annual Return on the basis of its returns for the whole life of the fund. It is a clear fact that Average Annual Return is not a compounded rate of return. Annual Returns of a fixed number of years is added and divided by the number of years, to get the figure of Average Annual Return and when the returns are considered, the Expense Ratios are subtracted to get the net value of returns. This Average Annual Return calculation is necessary to get a clear idea about the Reinvested Dividend. Capital Gain Distribution is also related with Average Annual Return.

Automatic Investment Plan

Automatic investment plan is an investment mechanism through which investors will be able to invest a small amount of money at regular intervals. It can alternatively called as systematic investment plan. Normally funds are automatically invested in a retirement or mutual fund account. This is done by way of deduction from the savings or checking account. Automatic investment plan also enables the investors to transfer a set of their amount electronically to another account at an assigned number of occurrences. Automatic investment plan can be regarded as an effective systematic mechanism as because these investments are of manageable size and investors will be able to save their money as well. Some examples of automatic investment plan: Examples of automatic investment plan can be mutual fund contribution, stock, automatic withdrawal plan etc.

Some effective guidelines as recommended by economists: It is recommended that the investors should invest at a regular interval and this will protect their accounts from any sort of market fluctuations. Investors should purchase maximum shares when they observe that the prices are going low and they should purchase the minimum shares if it goes high. But the best way is to purchase shares when investors think them most capable. Investors should analyze a lot before going for any investment and should opt for those, which have a uniform track record and benchmarks. This way investors will be able to instill a method of practice to save their investments.

The truth: It has been observed that inflation increases the prices of commodities and reduce
the value of money. That is why investors should choose the best investment type to avoid the effect of inflation. In the long run the average price per unit can be lesser than the average market price of the fund and this will enable the investors to buy a higher amount of units at an average market price. This will improve the volatility.

Automatic Reinvestment Plan: Automatic reinvestment plan is a mechanism

normally used by mutual funds that enable investors to buy additional shares using their dividends or distribution out of their capital gains. Automatic reinvestment plan also enable the one to electronically transfer his amount from one account to another. It can alternatively be defined as an agreement through which dividends from mutual fund or capital gains are utilized to buy additional fund shares.

Working principle: Individual can mechanically deposit his amount into his checking
account through this automatic reinvestment plan mechanism. In this systematic plan, the fund manager reinvests the amount earned by the investor into his mutual fund account. Investors can get the added advantage by adopting this mechanism, as this will enable him to acquire more shares and at the same time they can avoid excess taxes. In automatic reinvestment plan mechanism, the capital gains produced by the fund can be utilized to mechanically buy more fund shares rather than dispensing these to the investors in form of cash.

Advantage from investors point of view:

This automatic reinvestment plan enables the investors to acquire more investment gains, as after some period of time; the extra value produced by this automatic reinvestment can produce a significant amount. Advantage from company's point of view

This automatic reinvestment plan can make a smaller company to a larger one, as through this mechanism, any capital and dividends made from the initial investments can enable the company to buy more shares in the fund and it is a continuing process. Advice by experts: Investors should at first look at the prospectus and go through that section where there are matters about automatic reinvestment plan. Secondly, they should confirm the matter that their mutual fund is utilizing this automatic reinvestment facility. They can consult with the fund manager for further clarification. Investors should also discuss with the fund manager about tax liabilities etc.

Asset Management Fund

The Asset Management Fund or AMF Fund is actually a mutual fund, in which shares are sold without any commission. Asset management fund primarily deals with client's investment. This fund is specifically made for clients to provide some special privileges like access to an array of products. These special facilities are not for average investors. Normally the financial establishments invest on behalf of its clients. Alternative definition of Asset management fund. The asset management fund can alternatively defined as an account at any financial establishment which comprise of some facilities like credit cards, debit cards, loans, checking etc. The asset management fund also enables the clients to automatically transfer their amounts that go beyond a certain level into a higher interest earning account. Asset management fund is alternative called as central asset account or an asset management account.

Striking features:
Some of the prominent features of Asset management fund are: Asset management fund expenses are normally confined to high deserving individuals, business firms, governments, or financial negotiator. The expenses are based on products like fixed income, equity, real estate, agriculture etc. Somebody, when deposits his money into his account is normally put into a money market fund. This money market fund usually offers more return in comparison to other regular money market account like checking and savings accounts.