Professional Documents
Culture Documents
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, & even if
the fund loses money, the manager still gets
paid.
Costs - Creating, distributing & running mutual
fund is expensive. Everything from managers
salary to 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
rupee spent on fees is a rupee that has no
opportunity to grow over time.
Turnover
It is a measure of volume of a fund's
securities trading. It is expressed as
percentage of net asset value & is
normally annualized. Turnover equals
the lesser of a fund's purchases or
sales during a given period (of no
more than a year) divided by
average net assets. If the period is
less than a year, the turnover figure
is annualized.
Identifying Goals & Risk Tolerance Identifying a goal is important to find the
right fund for the task.
Before investing in fund, identify
why you are investing?
What is your goal?
Are long-term capital gains desired, or
current income is preferred?
Will the money be used to pay for current
expenses, or to supplement long term plan?
For short-term goals, money market funds
may be the right choice, For long term goals,
bond funds, stock funds may be appropriate.
Each mutual fund has different risks & rewards. In general, the
higher the potential return, the higher the risk of loss.
Although some funds are less risky than others, all funds have
some level of risk - it's never possible to diversify away all risk.
This is a fact for all investments.
Each fund has a predetermined investment objective that
tailors fund's assets, regions of investments & investment
strategies. At the fundamental level, there are three types of
mutual funds:
1) Equity funds (stocks)
2) Fixed-income funds (bonds)
3) Money market funds
All mutual funds are variations of these three types. For
example, while equity funds that invest in fast-growing
companies are known as growth funds, equity funds that
invest only in companies of the same sector or region are
known as specialty funds.
Bond/Income Funds
Their purpose is to provide current income
on a steady basis. Such mutual funds, the
terms "fixed-income," "bond," and
"income" are used. These MF invest
primarily in government & corporate debt.
While fund holdings may appreciate in
value, primary objective of these funds is
to provide a steady cash-flow to investors.
Generally conservative investors and
retirees. Invest in these funds.
Balanced Funds
The objective of these funds is to provide a
balanced mixture of safety, income & capital
appreciation. Strategy of balanced funds is to
invest in a combination of fixed income & equities.
A typical balanced fund might have a weighting of
60% equity & 40% fixed income. The weighting
might also be restricted to a specified maximum or
minimum for each asset class.
Similar type of fund is known as asset allocation
fund. Objectives are similar to those of a balanced
fund, but these kinds of funds typically do not have
to hold a specified percentage of any asset class.
The portfolio manager is therefore given freedom
to switch the ratio of asset classes as the economy
moves through the business cycle.
Equity Funds
These MF invest in stocks, represent
largest category of mutual funds.
Generally, investment objective of this
class of MF is long-term capital growth
with some income.
There are many different types of equity
funds as there are many different types
of equities. A way to understand the
universe of equity funds is to use a style
box. The idea is to classify funds based
on both size of companies invested in
and investment style of the manager.
Value
Blend
Growth
What are small cap, mid cap and large cap shares?
Market capitalization (or mkt cap) of any stock traded in
the stock market is the stocks current market price
multiplied with its total shares outstanding.
The classification of stocks into large cap, mid cap & small
cap is quite subjective & would depend on the views of
investors (both big and small) in this regard. For instance,
stocks with a market capitalization of 5,000 crores & above
may be classified as large caps; stocks with a market
capitalization between 1,000 crores & 4,999 crores may be
classified as mid caps; & stocks with market capitalization
of less than 1,000 crores may be classified as small caps.
The above is only an example; you may choose to abide by
the classification available with your investment advisor; or
you may decide to create your own classification at your
convenience, as you may consider the latter classification
more suitable for the efficiency of your investment decision
making process.
Global/International Funds
An international fund (or foreign fund) invests
only outside home country. Global funds
invest anywhere around the world, including
home country.
It's tough to classify these funds as either
riskier or safer than domestic investments.
They do tend to be more volatile & have
unique country and/or political risks. But, on
the flip side, they can, as part of a wellbalanced portfolio, actually reduce risk by
increasing diversification. Although the world's
economies are becoming more inter-related, it
is likely that another economy somewhere is
outperforming the economy of home country.
Specialty Funds
These MF are all-encompassing category
consisting of funds that have proved to be
popular but don't necessarily belong to
specific categories. This type of MF
forgoes broad diversification to
concentrate on a certain segment of the
economy.
Index Funds
This type of mutual fund replicates
the performance of a broad market
index such as the S&P 500 or Dow
Jones Industrial Average (DJIA). An
investor in an index fund figures that
most managers can't beat the
market. An index fund merely
replicates the market return &
benefits investors in the form of low
charges.