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MUTUAL FUND – A GLOBALLY PROVEN
INVESTMENTAVENUE
Worldwide, Mutual Fund or
Unit Trust as it is referred to
in some parts of the world, has a long and successful
history.The popularity of Mutual Funds has increased
manifold in developed financial markets, like the
United States. As at the end of
March 2008, in the US
alone there were 8,064 mutual funds with total assets
of about US$ 11.734 trillion (Rs.470 lakh
crores)*. In India, the mutual fund industry started with the
setting up of the erstwhile Unit Trust of India in 1963.
Public sector banks and financial institutions were
allowed to
establish mutual funds in 1987. Since 1993,
private sector and foreign
institutions were permitted
to set up mutual funds.
In February 2003, following the repeal of the Unit Trust
of India Act 1963 the erstwhile UTI was bifurcated into
two separate entities viz.The Specified Undertaking of
the Unit Trust of India, representing broadly, the assets
of US 64 scheme,
schemes with assured returns and
certain other schemes and UTI Mutual Fund
conforming to SEBI Mutual Fund
Regulations.
As at the end of March 2008, there were 33 mutual
funds, which managed assets of Rs. 5,05,152 crores
(US $ 126 Billion)* under 956 schemes.
This fast growing industry is regulated by the
Securities and Exchange Board of India (SEBI).
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WHAT IS A
MUTUAL FUND?
A Mutual Fund is a trust that pools the savings of a
number of investors who share a common financial
goal. Anybody with
an investible surplus of as little as a
few hundred rupees can invest in Mutual Funds.These
investors buy units of a particular
Mutual Fund scheme that has a defined investment objective and
strategy.
The money thus collected is then invested by the
fund manager in different types of securities. These
could range from
shares to debentures to money
market instruments, depending upon the scheme’s
stated objectives. The income earned
through these investments and the capital appreciation realised by
the scheme are shared by its unitholders in proportion
to the number of units owned by them. Thus a Mutual
Fund is the most suitable investment for the common
man as it offers an
opportunity to invest in a diversified,
professionally managed basket of securities at a
relatively low
cost.
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ORGANISATION OF
A MUTUAL FUND
There are many
entities
involved and the
diagram below
illustrates the
organisational
set up of a
mutual fund:
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Organisation of
a Mutual Fund |
TYPES OF MUTUAL
FUND SCHEMES
There are a wide variety of Mutual Fund
schemes that cater to your needs, whatever your
age, financial position, risk
tolerance and return
expectations. Whether as the foundation of your
investment programme or as a supplement,
Mutual Fund schemes can help you meet your
financial goals?
(A) By Structure
Open-Ended Schemes
These do not have a fixed maturity.You deal with
the Mutual Fund for your investments and
redemptions. The key feature is
liquidity.You can
conveniently buy and sell your units at Net Asset
Value(NAV) related prices, at any point of time.
Close-Ended Schemes
Schemes that have a stipulated maturity period
(ranging from 2 to 15 years) are called
close ended
schemes.You can invest
in the scheme at
the time of the initial issue and thereafter you can
buy or sell the units of the scheme on the stock
exchanges where they are listed. The market
price at the stock exchange could vary from the
scheme’s NAV on account of demand
and supply situation, unitholders’ expectations and other
market factors. One of the characteristics of the
close-ended schemes is that they are generally
traded at a discount to NAV; but closer to
maturity, the discount narrows.
Some close-ended schemes give you an
additional option of selling your units to the
Mutual Fund through periodic
repurchase at NAV related prices. SEBI Regulations ensure
that at least one of the two exit routes are
provided to the investor under the close ended
schemes.
Interval Schemes
These combine the features of open-ended and close-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during predetermined intervals at NAV related prices.
(B) By Investment Objective
Growth Schemes
Aim to provide capital appreciation over the medium to long term. These schemes normally invest a majority of their funds in equities and are willing to bear short term decline in value for possible future appreciation.
These schemes are not for investors seeking regular income or needing their money back in the short term.
Ideal for:
Income Schemes
Aim to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures.
Capital appreciation in such schemes may be limited.
Ideal for:
Balanced Schemes
Aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. They invest in both shares and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace or fall equally when the market falls.
Ideal for:
Money Market/Liquid Schemes
Aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short
term instruments such as treasury bills, certificates of deposit, commercial paper and
interbank call money.
Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the market.
Ideal for:
Other Schemes
Tax Saving Schemes (Equity Linked Saving Scheme -
ELSS)
These schemes offer tax incentives to the investors under tax laws as prescribed from time to time and promote long
term investments in equities through Mutual Funds.
Ideal for:
Special Schemes
This category includes index schemes that attempt to replicate the performance of a particular index such as the BSE Sensex, the NSE 50 (NIFTY) or sector specific schemes which invest in specific sectors such as Technology, Infrastructure, Banking, Pharma etc.
Besides, there are also schemes which invest exclusively in certain segments of the capital market, such as Large Caps, Mid Caps, Small Caps, Micro Caps, 'A' group shares, shares issued through Initial Public Offerings (IPOs), etc.
Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index.
Sectoral fund schemes are ideal for investors who have already decided to invest in a particular sector or segment.
Fixed Maturity Plans
Fixed Maturity Plans (FMPs) are investment schemes floated by mutual funds and are close-ended with a fixed tenure, the maturity period ranging from one month to three/five years. These plans are predominantly debt-oriented, while some of them may have a small equity component.
The objective of such a scheme is to generate steady returns over a fixed-maturity period and protect the investor against market fluctuations. FMPs are typically passively managed fixed-income schemes with the fund manager locking into investments with maturities corresponding with the maturity of the plan. FMPs are not guaranteed products.
ExchangeTraded Funds
(ETFs)
Exchange Traded Funds are essentially index funds that are listed and traded on exchanges like
stocks. Globally, ETFs have opened a whole new panorama of investment opportunities to retail as well as institutional investors. ETFs enable investors to gain broad exposure to entire stock markets as well as in specific sectors with relative ease, on a real-time basis and at a lower cost than many other forms of investing.
An ETF is a basket of stocks that reflects the composition of an index, like S&P CNX Nifty, BSE Sensex, CNX Bank Index, CNX PSU Bank Index, etc. The ETF's trading value is based on the net asset value of the underlying stocks that it represents. It can be compared to a stock that can be bought or sold on real time basis during the market hours. The first ETF in India, Benchmark Nifty Bees, opened for subscription on December 12, 2001 and listed on the NSE on January 8, 2002.
Capital Protection Oriented Schemes
Capital Protection Oriented Schemes are schemes that endeavour to protect the capital as the primary objective by investing in high quality fixed income securities and generate capital appreciation by investing in equity/equity related instruments as a secondary objective. The first Capital Protection Oriented Fund in India, Franklin Templeton Capital Protection Oriented Fund opened for subscription on October 31, 2006.
Gold ExchangeTraded Funds
(GETFs)
Gold ExchangeTraded Funds offer investors an innovative, cost-efficient and secure way to access the gold market. Gold ETFs are intended to offer investors a means of participating in the gold bullion market by buying and selling units on the Stock Exchanges, without taking physical delivery of gold. The first Gold ETF in India, Benchmark GETF, opened for subscription on February 15, 2007 and listed on the NSE on April 17,2007.
Quantitative Funds
A quantitative fund is an investment fund that selects securities based on quantitative analysis. The managers of such funds build computer-based models to determine whether or not an investment is attractive. In a pure "quant shop" the final decision to buy or sell is made by the model. However, there is a middle ground where the fund manager will use human judgment in addition to a quantitative model. The first Quant based Mutual Fund Scheme in India, Lotus Agile Fund opened for subscription on October 25, 2007.
Funds Investing Abroad
With the opening up of the Indian economy, Mutual Funds have been permitted to invest in foreign securities/ American Depository Receipts (ADRs) / Global Depository Receipts (GDRs). Some of such schemes are dedicated funds for investment abroad while others invest partly in foreign securities and partly in domestic securities. While most such schemes invest in securities across the world there are also schemes which are country specific in their investment approach.
Fund of Funds
(FOFs)
Fund of Funds are schemes that invest in other mutual fund schemes. The portfolio of these schemes comprise only of units of other mutual fund schemes and cash / money market securities/ short term deposits pending deployment. The first FOF was launched by Franklin Templeton Mutual Fund on October 17, 2003.
Fund of Funds can be Sector specific e.g. Real Estate FOFs, Theme specific e.g. Equity FOFs, Objective specific e.g. Life Stages FOFs or Style specific e.g. Aggressive/Cautious FOFs etc.
Please bear in mind that any one scheme may not meet all your requirements for all time. You
need to place your money judiciously in different schemes to be able to get the combination of growth, income and stability that is right for you.
Remember, as always,
higher the return you seek
higher the risk you should be prepared to take.
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WHY
SHOULD YOU INVEST IN
MUTUAL FUNDS?
The advantages of investing in a Mutual Fund are:
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1. |
Professional Management:
You avail of
the services of experienced and skilled
professionals who are backed by a
dedicated investment research team which analyses the
performance and prospects of companies and
selects suitable
investments to achieve the
objectives of the scheme.
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2. |
Diversification:
Mutual Funds invest in a
number of companies across a broad cross-
section of industries and
sectors. This
diversification reduces the risk because seldom
do all stocks decline at the same time and in the
same proportion. You achieve this diversification
through a Mutual Fund with far less money than
you can do on your own.
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3. |
Convenient
Administration:
Investing in a
Mutual Fund reduces paperwork and helps you
avoid many problems
such as bad deliveries,
delayed payments and unnecessary follow up
with brokers and companies. Mutual Funds save
your time and make investing easy and
convenient.
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4. |
Return
Potential:
Over a medium to long-term, Mutual Funds have the potential to provide
a higher return as they
invest in a diversified
basket of selected securities.
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5. |
Low
Costs:
Mutual Funds are a relatively less
expensive way to invest compared to directly
investing in the capital
markets because the
benefits of scale in brokerage, custodial and
other fees translate into lower costs for investors.
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6. |
Liquidity:
In open-ended schemes, you can
get your money back promptly at Net Asset Value
(NAV) related prices
from the Mutual Fund itself.
With close-ended schemes, you can sell your
units on a stock exchange at the prevailing
market price or avail of the facility of repurchase through Mutual Funds at NAV related prices which some
close-ended and interval schemes offeryou periodically.
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7. |
Transparency:
You get regular information on
the value of your investment in addition to
disclosure on the specific
investments made by
your scheme, the proportion invested in each
class of assets and the fund manager's
investment strategy and outlook.
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8. |
Flexibility:
Through features such as
Systematic Investment Plans (SIP), Systematic
Withdrawal Plans (SWP) and
dividend reinvestment plans, you can systematically
invest or withdraw funds according to your needs
and convenience.
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9. |
Choice of
Schemes:
Mutual Funds offer a
variety of schemes to suit your varying needs
over a lifetime.
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10. |
Well
Regulated:
All Mutual Funds are
registered with SEBI and they function within the
provisions of strict
regulations designed to
protect the interests of investors. The operations
of Mutual Funds are regularly monitored
by SEBI.
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UNDERSTANDING
AND MANAGING
RISK
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All investments whether in shares, debentures or deposits involve risk: share value may go down depending upon the performance of the company, the industry, state of capital markets and the economy; generally, however, longer the term, lesser the risk; companies may default in payment of interest/principal on their debentures /bonds/ deposits; the rate of interest on an investment may fall short of the rate of inflation reducing the purchasing power.
While risk cannot be eliminated, skillful management can minimise risk. Mutual Funds
help to reduce risk through diversification and professional management. The experience and expertise of Mutual Fund managers in selecting fundamentally sound securities and timing their purchases and sales, help them to build a diversified portfolio that minimises risk and maximises returns. |
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HOW TO
INVEST IN
MUTUAL FUNDS
Step One
- Identify
your
investment
needs.
Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments, level of income and expenses among many other factors. Therefore, the first step is to assess your needs. Begin by asking yourself these questions:
1. What are my investment objectives and
needs?
Probable Answers: I need regular income or need to buy a home or finance a wedding or educate my children or a combination of all these needs.
2. How much risk am I willing to take ?
Probable Answers: I can only take a minimum amount of risk or I am willing to accept the fact that my investment value may fluctuate or that there may be a short term loss in order to achieve a long term potential gain.
3. What are my cash flow requirements?
Probable Answers: I need a regular cash flow or I need a lump sum amount to meet a specific need after a certain period or I don't require a current cash flow but I want to build my assets for the future.
By going through such an exercise, you will know what you want out of your investment and can set the foundation for a sound Mutual Fund Investment strategy.
Step Two
- Choose the
right Mutual
Fund.
Once you have a clear strategy in mind, you now have to choose which Mutual Fund and scheme you want to invest in. The offer document of the scheme tells you its objectives and provides supplementary details like the track record of other schemes managed by the same Fund Manager. Some factors to evaluate before choosing a particular Mutual Fund are:
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the track record of performance over the last
few years in relation to the appropriate
yardstick and similar funds in
the same
category. |
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how well the Mutual Fund is organised to
provide efficient, prompt and personalised
service. |
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degree of transparency as reflected in
frequency and quality of their communications. |
Step Three -
Select the ideal
mix of Schemes.
Investing in just one Mutual Fund scheme may not meet all your investment needs. You may consider investing in a combination of schemes to achieve your specific goals.
The following charts could prove useful in selecting a combination of schemes that satisfy your needs.
Step Four-
Invest regularly
For most of us, the approach that works best is to invest a fixed amount at specific intervals, say every month. By investing a fixed sum each month, you get fewer units when the price is high and more units when the price is low, thus bringing down your average cost per unit. This is called rupee cost averaging and is a disciplined investment strategy followed by investors all over the world. With many open-ended schemes offering systematic investment plans, this regular investing habit is made easy for you.
Step Five - Keep
your taxes in
mind
As per the current tax laws, Dividend/Income Distribution made by mutual funds is exempt from Income Tax in the hands of investor. However, in case of debt schemes Dividend/ Income Distribution is subject to Dividend Distribution Tax. Further, there are other benefits
available for investment in Mutual Funds under the provisions of the prevailing tax laws. You may therefore consult your tax advisor or Chartered Accountant for specific advice to achieve maximum tax efficiency by investing in mutual funds.
Step Six- Start
early
It is desirable to start investing early and stick to a regular investment plan. If you start now, you will make more than if you wait and invest later. The power of compounding lets you earn income on income and your money multiplies at a compounded rate of return.
Step Seven -The
final step
All you need to do now is to get in touch with a Mutual Fund or your advisor and start investing. Reap the rewards in the years to come. Mutual Funds are suitable for every kind of investor-whether starting a career or retiring, conservative or risk taking, growth oriented or income seeking.
YOUR RIGHTS AS A
MUTUAL FUND
UNITHOLDER
As a unitholder in a Mutual Fund scheme coming under the SEBI (Mutual Funds) Regulations, you are entitled to:
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1. |
Receive unit certificates or statements of
accounts confirming your title within 30 days from
the date of closure of the
subscription under
open-ended schemes or within 6 weeks from the
date your request for a unit certificate is received
by the Mutual Fund.
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2. |
Receive information about the investment
policies, investment objectives, financial position
and general affairs of the
scheme.
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3. |
Receive dividend within 30 days of their
declaration and receive the redemption or
repurchase proceeds within 10
working days
from the date of redemption or repurchase.
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4. |
Vote in accordance with the Regulations to:
a. change the Asset Management Company;
b. wind up the schemes.
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5. |
Receive communication from the Trustees
about change in the fundamental attributes of
any scheme or any other
changes which would
modify the scheme and affect the interest of the
unitholders and to have option to exit at
prevailing Net Asset Value without any exit load
in such cases.
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6. |
Inspect the documents of the Mutual Funds
specified in the scheme's offer document.
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In addition to your rights, you can expect the following from Mutual Funds: |
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To publish their NAV, in accordance with
the regulations: daily, in case of open-ended
schemes and once a week, in
case of close-
ended schemes.
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To disclose your schemes' entire portfolio
twice a year, unaudited financial results half
yearly and audited annual
accounts once a year.
In addition many mutual funds send out
newsletters periodically. |
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To adhere to a Code of Ethics which require
that investment decisions are taken in the best
interest of the unitholders. |
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TEN ADVANTAGES OF INVESTING IN MUTUAL FUNDS
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Professional Management |
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Diversification |
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Convenient Administration |
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Return Potential
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Low Costs |
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Liquidity
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Transparency |
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Flexibility
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Choice of Schemes |
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Well Regulated |
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