Mutual Fund

Mutual Fund

A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities such as stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is usually tracked as the change in the total market cap of the fund—derived by the aggregating performance of the underlying investments.

Types

Mutual funds are divided into several kinds of categories, representing the kinds of securities they have targeted for their portfolios and the type of returns they seek.

  1. Equity Funds
  2. The largest category is that of equity or stock funds. As the name implies, this sort of fund invests principally in stocks. Within this group is various sub-categories. Some equity funds are named for the size of the companies they invest in small-, mid- or large-cap. Others are named by their investment approach: aggressive growth, income-oriented, value, and others. Equity funds are also categorized by whether they invest in domestic (U.S.) stocks or foreign equities.
  3. Fixed-Income Funds
  4. Another big group is the fixed income category. A fixed income mutual fund focuses on investments that pay a set rate of return, such as government bonds, corporate bonds, or other debt instruments. The idea is that the fund portfolio generates interest income, which then passes on to shareholders.
  5. Index Funds
  6. Another group, which has become extremely popular in the last few years, falls under the moniker "index funds." Their investment strategy is based on the belief that it is very hard, and often expensive, to try to beat the market consistently. So, the index fund manager buys stocks that correspond with a major market index such as the S&P 500 or the Dow Jones Industrial Average (DJIA). This strategy requires less research from analysts and advisers, so there are fewer expenses to eat up returns before they are passed on to shareholders. These funds are often designed with cost-sensitive investors in mind.
  7. Balanced Funds
  8. Balanced funds invest in both stocks and bonds to reduce the risk of exposure to one asset class or another. Another name for this type of mutual fund is "asset allocation fund." An investor may expect to find the allocation of these funds among asset classes relatively unchanging, though it will differ among funds. This fund's goal is asset appreciation with lower risk. However, these funds carry the same risk and can be as subject to fluctuation as other classifications of funds.
  9. Others
  10. There is a fund for nearly every type of investor or investment approach. Other common types of mutual funds include money market funds, sector funds, alternative funds, smart-beta funds, target-date funds, and even funds-of-funds, or mutual funds that buy shares of other mutual funds.

Procedure

  1. Who should Invest?
  2. Mutual funds make investing easier for you. Each fund is designed to fulfil different goals. This is particularly useful for people who do not have the time or patience to research and choose wisely.
  3. When to Invest
  4. Factors to consider before investing:
    1. Availability of Funds
    2. Market conditions
    3. Desired duration of investing
    4. Expected returns
    However, for a normal individual, it could be quite difficult factor in all of these, hence, one should go for a SIP starting today, or at the earliest.
    The best time to make mutual fund investment is when you have money. This is not to imply that these funds are expensive. Rather, last-minute investments (e.g. – at the end of financial year) often stems from hasty decisions. Rise and fall of the stock market as reported, can influence one’s decisions. Truth is, not every mutual fund invests in stocks.
    If you notice consistently poor performance, don’t hesitate to sell it. The basic rule of any investment is to start early. The more you delay, the more you will lose out on potential returns. So, the right time to invest is always NOW.
  5. How to Invest
  6. Thanks to the digital wave, you can easily access mutual funds nowadays. You may invest in mutual funds using any of the below options.
    1. Direct Investment
    2. Investors can directly contact fund houses to apply for a scheme and save on brokerage. Get the form from the nearest branch of the fund house or download it online. Do take care to go through the fine print and clear all your queries before deciding.
    3. Agents
    4. These are sales professionals who reach out to potential customers and inform them on the different fund options. You can choose based on your income, investment goal and risk profile. The agent can help you with applications, redemption, transactions and cancellation among others. They charge commissions for their services.
    5. Online (Distributors/Fund Houses)
    6. Buying/selling a mutual fund unit online is almost the norm today. This not only saves time and effort but also makes it easy to compare funds and make informed decisions.

Advantages

There are a variety of reasons that mutual funds have been the retail investor's vehicle of choice for decades. The overwhelming majority of money in employer-sponsored retirement plans goes into mutual funds.

  1. Diversification
  2. Diversification, or the mixing of investments and assets within a portfolio to reduce risk, is one of the advantages of investing in mutual funds. Buying individual company stocks and offsetting them with industrial sector stocks, for example, offers some diversification. However, a truly diversified portfolio has securities with different capitalizations and industries and bonds with varying maturities and issuers. Buying a mutual fund can achieve diversification cheaper and faster than by buying individual securities.
  3. Easy Access
  4. Trading on the major stock exchanges, mutual funds can be bought and sold with relative ease, making them highly liquid investments. Also, when it comes to certain types of assets, like foreign equities or exotic commodities, mutual funds are often the most feasible way—in fact, sometimes the only way—for individual investors to participate.
  5. Economies of Scale
  6. Mutual funds also provide economies of scale. Buying one spares the investor of the numerous commission charges needed to create a diversified portfolio. Buying only one security at a time leads to large transaction fees, which will eat up a good chunk of the investment. Also, the $100 to $200 an individual investor might be able to afford is usually not enough to buy a round lot of the stock, but it will purchase many mutual fund shares. The smaller denominations of mutual funds allow investors to take advantage of dollar cost averaging.
  7. Professional Management
  8. Most private, non-institutional money managers deal only with high-net-worth individuals—people with at least six figures to invest. However, mutual funds, as noted above, require much lower investment minimums. So, these funds provide a low-cost way for individual investors to experience and hopefully benefit from professional money management.
  9. Freedom of Choice
  10. Investors have the freedom to research and select from managers with a variety of styles and management goals. For instance, a fund manager may focus on value investing, growth investing, developed markets, emerging markets, income or macroeconomic investing, among many other styles. One manager may also oversee funds that employ several different styles.
    Liquidity, diversification, and professional management, all these factors make mutual funds attractive options for a younger, novice, and other individual investors who don't want to actively manage their money. However, no asset is perfect, and mutual funds have drawbacks too.
  11. Fluctuating Returns
  12. Like many other investments without a guaranteed return, there is always the possibility that the value of your mutual fund will depreciate. Equity mutual funds experience price fluctuations, along with the stocks that make up the fund. The Federal Deposit Insurance Corporation (FDIC) does not back up mutual fund investments, and there is no guarantee of performance with any fund. Of course, almost every investment carries risk. It is especially important for investors in money market funds to know that, unlike their bank counterparts, these will not be insured by the FDIC.
  13. Heavy Cash Supplies
  14. Mutual funds pool money from thousands of investors, so every day people are putting money into the fund as well as withdrawing it. To maintain the capacity to accommodate withdrawals funds typically have to keep a large portion of their portfolios in cash. Having ample cash is excellent for liquidity, but money is sitting around as cash and not working for you and thus is not very advantageous.
  15. High Costs
  16. Mutual funds provide investors with professional management, but it comes at a cost—those expense ratios mentioned earlier. These fees reduce the fund's overall pay-out, and they're assessed to mutual fund investors regardless of the performance of the fund. As you can imagine, in years when the fund doesn't make money, these fees only magnify losses.
  17. Lack of Transparency
  18. One thing that can lead to diworsification is the fact that a fund's purpose or makeup isn't always clear. Fund advertisements can guide investors down the wrong path. The Securities and Exchange Commission (SEC) requires that funds have at least 80% of assets in the particular type of investment implied in their names. How the remaining assets are invested is up to the fund manager. However, the different categories that qualify for the required 80% of the assets may be vague and wide-ranging. A fund can, therefore, manipulate prospective investors via its title. A fund that focuses narrowly on Congolese stocks, for example, could be sold with a far-ranging title "International High-Tech Fund."
  19. Evaluating Funds
  20. Researching and comparing funds can be difficult. Unlike stocks, mutual funds do not offer investors the opportunity to juxtapose the price to earnings (P/E) ratio, sales growth, earnings per share (EPS), or other important data. A mutual fund's net asset value can offer some basis for comparison, but given the diversity of portfolios, comparing the proverbial apples to apples can be difficult, even among funds with similar names or stated objectives. Only index funds tracking the same markets tend to be genuinely comparable.

FAQ's

SIPs are Systematic Investment Plans where money is deducted from your bank account and invested automatically. With a SIP, you’re able to purchase fund units at different levels of the market and benefit from rupee cost averaging.

After rigorous modelling we choose the right mix of funds that is best suited for your needs. We look at fund’s past returns, fund manager’s performance, it’s consistency, performance against its peers among other things to shortlist the funds.

Income-tax is levied on the annual income of a person. The year under the Income-tax Law is the period starting from 1st April and ending on 31st March of next calendar year. The Income-tax Law classifies the year as (i) Previous year, and (ii) Assessment year.

An Asset Management Company (AMC) is a highly regulated organisation that pools money from investors and invests the same in a portfolio. They charge a small fee for fund management.

NAV or Net Asset Value of the fund is the cumulative market value of the assets of the fund net of its liabilities. NAV per unit is simply the net value of assets divided by the number of units outstanding. Buying and selling into funds is done on the basis of NAV-related prices. NAV is calculated as follows:
NAV= Market value of the fund's investments + Receivables + Accrued Income – Liabilities - Accrued Expenses
The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV) and it varies on daily basis. For example, if the market value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is Rs.20.

The non-refundable fee paid to the Asset Management Company at the time of purchase of mutual fund units is termed as Entry Load. Entry Load is added to the NAV (purchase price) when you are purchasing Mutual Fund units

The non-refundable fee paid to the Asset Management Company at the time of redemption/ transfer of units between schemes of mutual funds is termed as exit load. It is deducted from the NAV (selling price) at the time of such redemption/ transfer.

Repurchase price is the price at which a close-ended scheme repurchases its units. Repurchase can either be at NAV or can have an exit load.

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