Mutu al fu n ds

Mutual Funds: Introduction

Mutual funds have become extremely popular over the last 20 years. What was once just another
obscure financial instrument is now a part of our daily lives. In fact, to many people, investing means buying mutual funds. After all, its common knowledge that investing in mutual funds is (or at least should be) better than simply letting your cash waste away in a savings account, but, for most people, that's where the understanding of funds ends. It doesn't help that mutual fund salespeople speak a strange language that is interspersed with jargon that many investors don't understand. Originally, mutual funds were heralded as a way for the little guy to get a piece of the market. Instead of spending all your free time buried in the financial pages of the Wall Street Journal, all you had to do was buy a mutual fund and you'd be set on your way to financial freedom. As you might have guessed, it's not that easy. Mutual funds are an excellent idea in theory, but, in reality, they haven't always delivered. Not all mutual funds are created equal, and investing in mutuals isn't as easy as throwing your money at the firt salesperson who solicits your business A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund. You can make money from a mutual fund in three ways: 1) Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution. 2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution. 3) If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit. Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.

Mutual Fund Definition:

A mutual fund is made up of money that is pooled together by a large number of investors who give their money to a fund manager to invest in a large portfolio of stocks and / or bonds Mutual fund is a kind of trust that manages the pool of money collected from various investors and it is managed by a team of professional fund managers (usually called an Asset Management Company) for a small fee. The investments by the Mutual Funds are made in equities, bonds, debentures, call money etc., depending on the terms of each scheme floated by the Fund. The current value of such investments is now a days, calculated almost on daily basis and the same is reflected in the Net Asset Value (NAV) declared by the funds from time to time. This NAV keeps on changing with the changes in the equity and bond market. Therefore, the investments in Mutual Funds is not risk free, but a good managed Fund can give you regular and higher returns than when you can get from fixed deposits of a bank etc. like all other investments in equities and debts, the investments in Mutual funds also carry risk. However, investments through Mutual Funds are considered better due to the following reasons:

Your investments will be managed by professional finance managers who are in a better position to assess the risk profile of the investments; Your small investment cannot be spread into equity shares of various good companies due to high price of such shares. Mutual Funds are in a much better position to effectively spread your

investments across various sectors and among several products available in the market. This is called risk diversification and can effectively shield the steep slide in the value of your investments. Thus, we can say that Mutual funds are better options for investments as they offer regular investors a chance to diversify their portfolios, which is something they may not be able to do if they decide to make direct investments in stock market or bond market. For example, if you want to build a diversified portfolio of 20 scrips, you would probably need Rs 2,00,000 to get started (assuming that you make minimum investment of Rs 10000 per scrip). However, you can invest in some of the diversified Mutual Fund schemes for as low as Rs.10, 000/-. WHAT ARE VARIOUS TYPES OF MUTUAL FUNDS A common man is so much confused about the various kinds of Mutual Funds that he is afraid of investing in these funds as he cannot differentiate between various types of Mutual Funds with fancy names. Mutual Funds can be classified into various categories under the following heads:(A) ACCORDING TO TYPE OF INVESTMENTS: - While launching a new scheme, every Mutual Fund is supposed to declare in the prospectus the kind of instruments in which it will make investments of the funds collected under that scheme. Thus, the various kinds of Mutual Fund schemes as categorised according to the type of investments are as follows:(a) EQUITY FUNDS / SCHEMES (b) DEBT FUNDS / SCHEMES (also called Income Funds) (c ) DIVERSIFIED FUNDS / SCHEMES (Also called Balanced Funds) (d) GILT FUNDS / SCHEMES (e) MONEY MARKET FUNDS / SCHEMES (f) SECTOR SPECIFIC FUNDS (g) INDEX FUNDS B) ACCORDING TO THE TIME OF CLOSURE OF THE SCHEME :- While launching a new schemes, Mutual Funds also declare whether this will be an open ended scheme (i.e. there is no specific date when the scheme will be closed) or there is a closing date when finally the scheme will be wind up. Thus, according to the time of closure schemes are classified as follows:(a) OPEN ENDED SCHEMES (b) CLOSE ENDED SCHEMES

C) ACCORDING TO TAX INCENTIVE SCHEMES: - Mutual Funds are also allowed to float some tax saving schemes. Therefore, sometimes the schemes are classified according to this also:(a) TAX SAVING FUNDS (b) NOT TAX SAVING FUNDS / OTHER FUNDS (D) ACCORDING TO THE TIME OF PAYOUT: - Sometimes Mutual Fund schemes are classified according to the periodicity of the pay outs (i.e. dividend etc.). The categories are as follows:(a) Dividend Paying Schemes (b) Reinvestment Schemes The mutual fund schemes come with various combinations of the above categories. Therefore, we can have an Equity Fund which is open ended and is dividend paying plan. Before you invest, you must find out what kind of the scheme you are being asked to invest. You should choose a scheme as per your risk capacity and the regularity at which you wish to have the dividends from such schemes. Various Types of Mutual Funds based on allocation of funds : These days asset managers give very attractive names to some of their schemes, which may just another type of the above referred schemes. Some of the most popular type of Mutual Funds these days are "Aggressive Growth Fund"; "Balanced

Fund"; "Blend Fund"; "Capital Appreciation Fund"; "Crossover fund"; "Global Fund"; "Growth and Income Fund"; Money Market Fund"; "Liquid Fund"; "Prime Rate Fund"; "Hedge Fund"; "Index Fund"; "International Fund".

All Mutual Funds Are Not Alike

Mutual funds are considered a good means of investment in comparison to investing in the stock market which could be risky as it involves careful planning and a good understanding of how the market works, with most people unable to grasp the nuances well. Mutual funds are very cost-efficient and easy to invest in. A fund manager pools the money of a group of investors to purchase a diverse portfolio of securities. By doing so, investors can purchase securities at much lower trading costs compared to individual investments. A key advantage of mutual funds is diversification; they allow investors to spread their money across different investment vehicles. Furthermore, when one investment turns sour, another can offset the loss incurred, thereby reducing any risk significantly. Types of mutual funds: Mutual funds can be classified according to their structure and objective. One can get an idea by looking at some of them. Closed-end and open-end funds: The former have a set number of shares issued to the public through an IPO, while open end funds are operated by a mutual fund house by raising money from shareholders and investing in various asset classes. Large cap mid-cap funds: Large cap funds seek to grow capital by investing mainly in large blue chip companies, whereas the latter invest in small and medium sized firms. Equity funds: These mutual fund types are also called stock mutual funds because the pooled amounts are invested in stocks of public companies. Balanced funds: Also called hybrid funds, balanced mutual funds buy an assortment of common stock, preferred stock, bonds, and short-term bonds. Exchange traded funds: ETFs are traded on an exchange just as a stock is and comprise a basket of securities. They are unlike conventional mutual funds. Value funds: Value funds focus more on safety than on growth and often choose investments that provide both dividends and capital appreciation. Money market funds: These mutual fund types invest exclusively in money market instruments which are forms of debt that are very liquid and mature under a year's time. Fund of funds: A FoF is an investment fund that holds a portfolio of other investment funds instead of investing directly in securities. Besides these types, there are international mutual funds, regional mutual funds and sector funds which invest in securities on a global scale, in a specific geographic area and in a particular sector, respectively.

Mutual funds in India:

The first mutual fund to be introduced in India was way back in 1963 when the Government of India launched Unit Trust of India (UTI). UTI enjoyed a monopoly in the Indian mutual fund market till 1987 when a host of other government controlled Indian financial companies came up with their own funds. These included State Bank of India, Canara Bank, Punjab National Bank etc. This market was made open to private players in 1993 after the historic constitutional amendments brought forward by the then Congress led government under the existing regime of Liberalization, Privatization and Globalization (LPG). The first private sector fund to operate in India was Kothari Pioneer which was later merged with Franklin Templeton.

The major fund houses to operate in India are:

Fortis Birla Sunlife

Bank of Baroda HDFC ING Vysya ICICI Prudential SBI Mutual Fund Tata Kotak Mahindra Unit Trust of India Reliance IDFC Franklin Templeton Sundaram Mutual Fund Religare Mutual Fund Principal Mutual Fund

Mutual funds are an under tapped market in India

Despite being available in the market for over two decades now with assets under management equalling Rs 7,81,71,152 Lakhs (as of 28 February 2010) (Source: Association of Mutual Funds, India) , less than 10% of Indian households have invested in mutual funds. A recent report on Mutual Funds Investments in India published by research and analytics firm, Boston Analytics, suggests investors are holding back from putting their money in mutual funds due to their perceived high risk and a lack of information on how mutual funds work. This report is based on a survey of approximately 10,000 respondents in 15 Indian cities and towns as of March 2010.There are 43 Mutual Funds at present. The primary reason for not investing appears to be correlated with city size. For example, as depicted in the exhibit below, among respondents with a high savings rate, close to 40% of those who live in metros and Tier I cities cited such investments were very risky, whereas 33% of those in Tier II cities said they did not how and where to invest in such assets.

On the other hand, among those who invested, close to nine out of ten respondents did so because they felt these assets to be more professionally managed than other asset classes. Exhibit 2 lists some of the influencing factors for investing in mutual funds.Interestingly, while non-investors cite risk as one of the primary reasons they do not invest in mutual funds, those who do invest cite the fact that they are professionally managed and more diverse most often as the reasons they invest in mutual funds versus other investments.

Association of Mutual Funds in India: It is popularly known as AMFI

Importance of Mutual Funds

Mutual funds offer inexperienced and experienced investors---who may not have a lot of money to invest---the ability to invest in more than just one investment tool without having to monitor or manage that investment personally and at a reduced risk. 1. Benefit A mutual fund reduces an investor's risk two ways: through diversification in companies and diversification in business fields. By purchasing a combination of stocks, bonds and other securities-rather than just one single stock purchase--their risk is spread out over many fields and companies, instead of just one.
1.

Experienced Management Purchasing into a mutual fund automatically provides the investor with an experienced investment manager to oversee their investment. This is because the mutual fund is composed of different investment securities and requires a competent professional to oversee it from the onset.

Objectives of Mutual Funds

Most people have neither the time nor interest to research and select individual stocks and bonds for their investment portfolios, and that's where mutual funds come in. Mutual funds are composed of stocks, bonds and other assets, giving you diversification, which means a decline in value in any one stock or bond won't significantly hurt your overall return. A handful of well-chosen mutual funds or index funds can offer a diversified portfolio that allows the individual investor to spend his or her time on other pursuits. Thousands of mutual funds are available that can satisfy the objectives of different types of investors. 1. Diversification Investors are often advised that they shouldn't "put all their eggs in one basket." Investors who have too high of a percentage of their assets in one or two stocks can be severely affected if one of the companies goes belly-up. Most financial experts say investors should have at least 15 stocks in their portfolios. It takes a lot of time and effort to keep up with that many companies. Conversely, mutual funds hold a number of stocks, which gives investors instant diversification and protects them from a sharp decline in any one holding.

2. Growth Some mutual fund investors are looking for rapid growth in the value of their funds. Stocks have historically offered the best long-term returns of any asset class, though it can be an up-and-down ride. Stock funds that are labelled "growth" typically invest in companies with bright prospects, while "value" funds target stocks that seem inexpensive compared with the company's earnings. 3. Income Other fund investors care more about receiving income from their investments. Numerous stock funds invest in companies with high dividend payouts. Bond funds also can provide steady income, as can funds that invest in real estate investment trusts, or REITs. All these income-focused funds pass the yields along to their investors, usually on a monthly or quarterly basis. Yields of 3 percent to 7 percent are often available with income-oriented mutual funds.

Mutual Fund Functions

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Mutual funds are one of the most commonly held investments for the passive investor. They are great for the individual investor who wants the risk and return profile, which only professional investors can create. In addition to the myriad fees involved in purchasing and/or redeeming mutual funds like frontend load, redemption fees, management fees and account fees, you may even have fees for exchanging or transferring your fund between common fund families. And yet, with all these fees, people continue to invest in mutual funds. There must be a good reason. Professional Management

Experience and training count for a lot in the world of investments. It is a world where not knowing the right pricing convention can cost you a couple thousand dollars in a few seconds. The key to mutual fund performance and one of its main functions for passive investors is the fact it is a hands-off investment. The fund is professionally managed by money managers and a dedicated research team. Diversification

One perk to professional management is diversification, which serves a risk mitigation function for mutual funds. The more diversified your portfolio, the more you can mitigate the risk of losing your original investment value. Another way to say this is, "Don't put all your eggs in one basket." Affordability

Affordability is a key consideration for most mutual fund investors. The majority of those who invest in mutual funds do not have huge estates to invest and only small amounts to contribute on a monthly basis. Being able to pay into an investment on a monthly basis provides the mutual fund greater access to a larger investment community. Liquidity

In addition to affordability, mutual fund shares can be easily redeemed (provided redemption fees or back-end funds are not excessive). Increased liquidity contributes to lowering the overall level of risk of investing in anything that is not as liquid as cash.

Advantages of Mutual Funds

Professional Management - The primary advantage of funds is the professional management of your money. Investors purchase funds because they do not have the time or the expertise to manage their own portfolios. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make investments and monitor Diversification - By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. In other words, the more stocks and bonds you own, the less any one of them can hurt you (think about Enron). Large mutual funds typically own hundreds of different stocks in many different industries. It wouldn't be possible for an investor to build this kind of a portfolio with a small amount of money. Economies of Scale - Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what an individual would pay for securities transactions. Liquidity - Just like an individual stock, a mutual fund allows you to request that your shares be converted into cash at any time. Simplicity - Buying a mutual fund is easy! Pretty well any bank has its own line of mutual funds, and the minimum investment is small. Most companies also have automatic purchase plans whereby as little as

$100 can be invested on a monthly basis.

Disadvantages of Mutual Funds

Professional Management - Many investors debate whether or not the professionals are any better than you or I at picking stocks. Management is by no means infallible, and, even if the fund loses money, the manager still gets paid. Costs - Creating, distributing, and running a mutual fund is an expensive proposition. Everything from the managers salary to the investors statements cost money. Those expenses are passed on to the investors. Since fees vary widely from fund to fund, failing to pay attention to the fees can have negative long-term consequences. Remember, every dollar spend on fees is a dollar that has no opportunity to grow over time. Dilution - It's possible to have too much diversification. Because funds have small holdings in so many different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money. Taxes - When a fund manager sells a security, a capital-gains tax is triggered. Investors who are concerned about the impact of taxes need to keep those concerns in mind when investing in mutual funds. Taxes can be mitigated by investing in tax-sensitive funds or by holding non-tax sensitive mutual fund in a tax-deferred account, such as a 401(k) or IRA

How to Read a Mutual Fund Table

Mutual fund data is easy to find and easy to read. The most common method of accessing the information used to be via a mutual fund table in the newspaper, but now this information is more commonly found online. Online Websites provide significantly more data about a given mutual fund than a fund table does. Yahoo Finance, MSN Money and all of the major mutual fund companies provide robust websites filled with fund information. The following basic details are usually provided: fund name, net asset value, trade time (provides date for last price), price change, previous close price, year-to-date return, net assets, and yield. With a just a few clicks of the mouse you can also view historical prices, headlines news, fund holdings, Morningstar ratings and more. Newspaper Fund Table By providing key data points, mutual fund tables give an overview of a mutual funds performance for the past 12 months in relation to its current price. They also provide insight into how the funds price per share has changed over the course of the most recent week. However, with the high prices of newsprint, declining readership, and increasing adoption of technology, many newspapers are cutting back on the space allocated to mutual fund tables. This is particularly true where smaller and less popular funds are concerned. Going online or calling the fund company directly may be the only way to get information about these products. What Do You Need? The wealth of information available can be daunting. What do you really need to know? Where can you go to find it? How much detail is too much? The answers to these questions largely depend on how you plan to invest. If you are looking to day trade, for example, information about daily pricing trends may be critical to your efforts. If you plan to buy and hold for decades, long-term performance information, fund expense ratios, and the management teams history are probably enough. Fund fact sheets and a copy of the funds prospectus are available on most fund company websites. These documents generally provide all the information long-term investors require to make decisions.

A mutual fund brings together a group of people and invests their money in stocks, bonds, and other securities. The advantages of mutuals are professional management, diversification, economies of scale, simplicity and liquidity. The disadvantages of mutuals are high costs, over-diversification, possible tax consequences, and the inability of management to guarantee a superior return.

There are many, many types of mutual funds. You can classify funds based on asset class, investing strategy, region, etc. Mutual funds have lots of costs. Costs can be broken down into ongoing fees (represented by the expense ratio) and transaction fees (loads). The biggest problems with mutual funds are their costs and fees. Mutual funds are easy to buy and sell. You can either buy them directly from the fund company or through a third party. Mutual fund ads can be very deceiving.

SOME OF THE TERMS USED IN MUTUAL FUNDS

Net Asset Value (NAV) Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. Sale Price : It is the price you pay when you invest in a scheme and is also called "Offer Price". include a sales load. It may

Repurchase Price: - It is the price at which a Mutual Funds repurchases its units and it may include a back-end load. This is also called Bid Price. Redemption Price: It is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related. Sales Load / Front End Load: It is a charge collected by a scheme when it sells the units. Also called, Front-end load. Schemes which do not charge a load at the time of entry are called No Load schemes. Repurchase / Back-end Load : It is a charge collected by a Mutual Funds when it buys back / Repurchases the units from the unit holders.