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MUTUAL FUND A
GLOBALLY PROVEN
INVESTMENT
AVENUE
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
2006, in the US
alone there were
8,002 mutual
funds with total
assets of over
US$ 9.36
trillion
(Rs.427 lakh crores).
In India, the
mutual fund
industry started
with the setting
up of the Unit
Trust of India
in 1964. 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, assured
returns and
certain other
schemes and UTI
Mutual Fund
conforming to
SEBI Mutual Fund
Regulations.
As at the end of
March 2006,
there were 29
mutual funds,
which managed
assets of Rs.
2,31,862 crores
( US $ 52
Billion) under
592 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
thousand 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
unit holders 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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Mutual Fund
Operation Flow
Chart
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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 directly
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.
Close-Ended
Schemes
Schemes that
have a
stipulated
maturity period
(ranging from 2
to 15 years) are
called
close-ended
schemes. You can
invest directly
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,
unit holders
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 directly
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.
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.
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Investors in
their prime
earning
years. |
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Investors
seeking
growth over
the
long-term. |
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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:
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Retired
people and
others with
a need for
capital
stability
and regular
income. |
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Investors
who need
some income
to
supplement
their
earnings. |
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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:
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Investors
looking for
a
combination
of income
and moderate
growth.
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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: |
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Corporates and
individual
investors as a
means to park
their surplus
funds for short
periods or
awaiting a more
favourable
investment
alternative.
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(C) Other Schemes
Tax Saving
Schemes
These schemes
offer tax
rebates to the
investors under
tax laws as
prescribed from
time to time.
This is made
possible because
the Government
offers tax
incentives for
investment in
specified
avenues. For
example, Equity
Linked Savings
Schemes (ELSS)
and Pension
Schemes.
The details of
such tax saving
schemes are
provided in the
relevant offer
documents.
Ideal for: |
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Investors
seeking tax
rebates.
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Special
Schemes
This category
includes index
schemes that
attempt to
replicate the
performance of a
particular index
such as the SSE
Sensex or the
NSE 50, or
industry
specific schemes
(which invest in
specific
industries) or
sectoral schemes
(which invest
exclusively in
segments such as
IX Group shares
or initial
public
offerings).
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.
Keep in mind
that anyone
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.
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. |
ConvenientAdministration:
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
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 direct
repurchase at
NAV related
prices which
some close-ended
and interval
schemes offer
you
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
regular
investment
plans,
regular
withdrawal
plans 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
family 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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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 organized to
provide
efficient,
prompt and
personalized
service. |
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degree of
transparency
as reflected
in frequency
and quality
of their
communications. |
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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:
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.
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.
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
organized
to
provide
efficient,
prompt
and
personalized
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.
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This
plan
may
suit: |
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Investors
in
their
prime
earning
years
and
willing
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