Basics of mutual funds

The article mentioned below, is for the investors who have not yet started investing in mutual funds, but willing to explore the opportunity and also for those who want to clear their basics for what is mutual fund and how best it can serve as an investment tool.

Getting Started
Before we move to explain what is mutual fund, its very important to know the area in which mutual funds works, the basic understanding of stocks and bonds.

Stocks
Stocks represent shares of ownership in a public company. Examples of public companies include Reliance, ONGC and Infosys. Stocks are considered to be the most common owned investment traded on the market.

Bonds
Bonds are basically the money which you lend to the government or a company, and in return you can receive interest on your invested amount, which is back over predetermined amounts of time. Bonds are considered to be the most common lending investment traded on the market. There are many other types of investments other than stocks and bonds (including annuities, real estate, and precious metals), but the majority of mutual funds invest in stocks and/or bonds. TOP

Working of Mutual Fund

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Regulatory Authorities
To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds. It notified regulations in 1993 (fully revised in 1996) and issues guidelines from time to time. MF either promoted by public or by private sector entities including one promoted by foreign entities is governed by these Regulations. SEBI approved Asset Management Company (AMC) manages the funds by making investments in various types of securities. Custodian, registered with SEBI, holds the securities of various schemes of the fund in its custody.

According to SEBI Regulations, two thirds of the directors of Trustee Company or board of trustees must be independent. The Association of Mutual Funds in India (AMFI) reassures the investors in units of mutual funds that the mutual funds function within the strict regulatory framework. Its objective is to increase public awareness of the mutual fund industry. AMFI also is engaged in upgrading professional standards and in promoting best industry practices in diverse areas such as valuation, disclosure, transparency etc. TOP

What is a Mutual Fund?

A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund. Mutual funds are considered as one of the best available investments as compare to others they are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns. TOP

Diversification
Diversification is nothing but spreading out your money across available or different types of investments. By choosing to diversify respective investment holdings reduces risk tremendously up to certain extent. The most basic level of diversification is to buy multiple stocks rather than just one stock. Mutual funds are set up to buy many stocks. Beyond that, you can diversify even more by purchasing different kinds of stocks, then adding bonds, then international, and so on. It could take you weeks to buy all these investments, but if you purchased a few mutual funds you could be done in a few hours because mutual funds automatically diversify in a predetermined category of investments (i.e. - growth companies, emerging or mid size companies, low-grade corporate bonds, etc). TOP

Types of Mutual Funds Schemes in India

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned below.

Overview of existing schemes existed in mutual fund category: BY STRUCTURE

1. Open - Ended Schemes: An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity. 2. Close - Ended Schemes: These schemes have a pre-specified maturity period. One can invest directly in the scheme at the time of the initial issue. Depending on the structure of the scheme there are two exit options available to an investor after the initial offer period closes. Investors can transact (buy or sell) the units of the scheme on the stock exchanges where they are listed. The market price at the stock exchanges could vary from the net asset value (NAV) of the scheme on account of demand and supply situation, expectations of unitholder and other market factors. Alternatively some close-ended schemes provide an additional option of selling the units directly to the Mutual Fund through periodic repurchase at the schemes NAV; however one cannot buy units and can only sell units during the liquidity window. SEBI Regulations ensure that at least one of the two exit routes is provided to the investor. 3. Interval Schemes: Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.

The risk return trade-off indicates that if investor is willing to take higher risk then correspondingly he can expect higher returns and vise versa if he pertains to lower risk instruments, which would be satisfied by lower returns. For example, if an investors opt for bank FD, which provide moderate return with minimal risk. But as he moves ahead to invest in capital protected funds and the profitbonds that give out more return which is slightly higher as compared to the bank deposits but the risk involved also increases in the same proportion. Thus investors choose mutual funds as their primary means of investing, as Mutual funds provide professional management, diversification, convenience and liquidity. That doesnt mean mutual fund investments risk free. This is because the money that is pooled in are not invested only in debts funds which are less riskier but are also invested in the stock markets which involves a higher risk but can expect higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives market which is considered very volatile.

Overview of existing schemes existed in mutual fund category: BY NATURE

1. Equity fund: These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund managers outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows:

Diversified Equity Funds Mid-Cap Funds Sector Specific Funds Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix. 2. Debt funds: The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:

Gilt Funds: Invest their corpus in securities issued by Government, popularly known as Government of India debt papers.

These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government.

Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities. MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.

Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.

Liquid Funds: Also known as Money Market Schemes, These funds provides easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.

3. Balanced funds: As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns. Further the mutual funds can be broadly classified on the basis of investment parameter viz, Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and invest accordingly.

By investment objective:

Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.

Income Schemes:Income Schemes are also known as debt schemes. The aim of these schemes is 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.

Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).

Money Market Schemes: Money Market 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 inter-bank call money.

Other schemes

Tax Saving Schemes: Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.

Index Schemes: Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index.

Sector Specific Schemes: These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. TOP

Types of returns

There are three ways, where the total returns provided by mutual funds can be enjoyed by investors:

Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it receives over the year to fund owners in the form of a distribution. 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. 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. TOP

Pros & cons of investing in mutual funds:

For investments in mutual fund, one must keep in mind about the Pros and cons of investments in mutual fund. Advantages of Investing Mutual Funds: 1. Professional Management - The basic advantage of funds is that, they are professional managed, by well qualified professional. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investments. 2. Diversification - Purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors risk is spread out and minimized up to certain extent. 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. 3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors. 4. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when they want.

5. Simplicity - Investments in mutual fund is considered to be easy, compare to other available instruments in the market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basis. Disadvantages of Investing Mutual Funds: 1. Professional Management- Some funds doesnt perform in neither the market, as their management is not dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or not the so-called professionals are any better than mutual fund or investor him self, for picking up stocks. 2. Costs The biggest source of AMC income, is generally from the entry & exit load which they charge from an investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon. 3. Dilution - Because funds have small holdings across 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. 4. Taxes - when making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.

Investments in Mutual Fund

Mutual Funds are a popular investment tool for investors because it offers a convenient and cost-effective way to invest in the financial markets. Mutual fund industry in India came with the concept of Mutual Fund in the year 1963 at the initiative of the Government of India

and Reserve Bank of India. The growth was slow initially but it accelerated from the year 1987 when non-UTI players entered the industry. The industry witnessed a compounded annual growth rate of 31.25% from March 2003 to March 2011. The figure for March 2011 is the quarterly average for the first calendar quarter as the regulator stopped providing monthly average asset under management (AAUM) from September 2010 onwards.

Mutual Funds are right way to invest into because it provides affordability, liquidity, tax benefits, and professional management and most importantly it helps in maximizing returns by effectively utilizing hard earned money. It also allows investor to systematically invest in equities and debt markets through Systematic Investment Plan. Through this mode investor can take exposure with as little as Rs. Five hundred and by investing regularly for a longer period can benefit from cost averaging and can built a large corpus to meet future commitments. Mutual fund is required to be registered with Securities and Exchange Board of India (SEBI), which regulates securities markets, before it can collect funds from the public. It acts like a company that pools money from investors and invests the same in stocks, bonds, short-term money-market instruments, other securities or assets and some combination of these investments. It offers an opportunity to invest in a diversified, professionally managed basket of securities. These securities are often referred to as holdings and all of the fund's holdings make up the portfolio. When one invest in a mutual fund, the investor is actually buying shares in the fund, which means investors own a percentage of the fund's entire portfolio in ratio of its holding. The assets in a mutual fund's portfolio are managed by a professional Fund Manager(s) who decides which securities to buy and sell based on the fund's investment objective, mentioned in the fund's prospectus. Wide varieties of Mutual Fund Schemes exist to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry.

If any new investor is looking to invest for the future in equities will usually face two options - mutual funds or individual stocks. However understanding the differences between them is essential as both carry inherent advantages and risks. Any individual investing in common stock of a company has to bear the responsibility of managing his portfolio on his own and also bear the price risk. In this active form of investment an individual must have sound knowledge, experience and adequate time, lack of which may increase his risk exposure. However Mutual Funds help to reduce risk through diversification and professional management. The experience and expertise of Fund managers in selecting securities and timing their purchases and sales help them to build a diversified portfolio that minimizes risk and maximizes returns. Lastly, after understanding the basics of mutual fund and its various schemes, an individual as per his investment objective needs to know the various criteria to choose the fund, which can be

Performance analysis of the scheme for a considerable long period taking into account historical returns and portfolio. Analysis of the Fund House and the experience of the Fund Manger. Analysis of the fund corpus and how it has changed across the time period. Comparison of charges deducted by Asset Management Companies across the category where an investor wishes to make investment. The price at which one can exit (i.e. exit load) the scheme and its impact on overall return. Comparison of scheme with its benchmark and how has the scheme performed especially in a volatile environment. Last but not the least an investor can refer to certain investment ratios such as Sharpe, Sortino, Treynor, Alpha etc. to judge the risk-return analysis of the scheme. The information regarding the ratio and their interpretation can be taken fromwww.mutualfundsindia.com.

5 things u should kno bout mutual funds Whether you are an experienced investor or a beginner, you are probably aware that there are thousands of mutual funds to choose from and dozens of details to

know. However, there are five basic things that every investor should know to be successful with investing in mutual funds. 1. Getting Started: Investing With Mutual Funds

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Why use mutual funds in the first place? The short answer is to save money and to earn returns that are hopefully higher than those associated with guaranteed investments, such as Certificates of Deposit. Before investing with mutual funds, be sure to know your investment objective, which is the goal and time frame you have to invest. This will guide you in choosing the best funds for your purpose. In general, mutual funds are best used for time horizons of more than three years and preferably more than 10 years. 2. Know Thy Risk The reason why most mutual funds usually provide greater returns over time than guaranteed investments is because of the risk premium rewarded to investors. This premium comes in the form of higher returns associated with accepting market risk, which is the risk of losing some portion or the entire original amount invested. The greatest risk for you as an investor, however, is likely to be you. Be careful of "chasing performance," which is the human tendency to continuously seek and buy the highest performing funds while selling the under-performing ones. Remember that investing should not be thrilling, it should be boring. Slow and steady wins the race! 3. Buying Baskets: Diversify, Diversify, Diversify! Mutual funds are like baskets of investments because one single mutual fund can invest in dozens or hundreds of stocks and/or bonds, referred to as "holdings." There are many mutual funds that are diverse enough alone to invest a large portion of your hard-earned savings; however it is a good idea to spread your risk (diversify) across the different mutual fund types, such as stock funds, bond funds and money market funds. 4. Know Loads and Expenses The costs associated with buying and selling mutual funds can be broken into four basic types: Front Load: These are charged up front (at the time of purchase) and can be up to 5% or more of the amount invested. For example, if you invest $1,000 with a 5% front load, the load amount will be $50.00 and therefore your initial investment will actually be $950.

Back Load: These are charged only when you sell a fund. Also called deferred sales charges, back loads are usually in the 5% range and may decline or even be reduced to zero over time, usually after five or more years. No Load or Load Waived: As the name implies, this category of fund expense has no front load or back load. Expense Ratio: Not all funds charge loads; however there are underlying expenses in all mutual funds. Expense ratios average around 1.50% ($1.50 for every $100) for stock mutual funds and are for the ongoing management of the fund. Also, sometimes included in the expense ratio is an operational charge, called a 12b-1 fee. 5. Past Performance Is No Guarantee of Future Results (But Important to Know) We've all seen the disclaimers about past performance. However, a mutual fund investor will still consider past performance in their initial evaluation before buying. Review longer periods, such as 5 and 10 years, and compare the performance with that of other funds in the same category. It is also important to see how long the manager has been at the helm of the fund. If, for example, you find a mutual fund with an impressive five-year return but the manager's time at the fund, called "manager tenure," is only one year, this new manager can not be given credit for that 5-year performance.

Investing in Mutual Funds For Beginners

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by CRAI G FO RD on JUNE 19, 2009 5 CO MM EN TS

Not everyone needs to know everything. I have an uncle who was recently honored as a university fellow at Lakehead University (Congratulations, Uncle John). He specializes in the study of Banach spaces and abstract convexity. Now I have no idea what any of that means and furthermore have no idea how someone can specialize in it. So I am glad that I dont need to know that. But, in the field of math I do need to know how to add, subtract, multiply, and divide. No everyone needs to know everything, but life is a lot easier if you at least know some minimal facts about important things. Today I want to help you learn how to start investing. So here are the five things I think everyone should know about investing.
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Important Mutual Fund Investing Facts For New Investors 1. What is a mutual fund?

Mutual funds are places where a group of investors (everyday folk like you and me) pool their money. Due to minimums or fees an individual investor might be limited to buying only a few stocks. When your investments are so concentrated, any poorly performing stock can have a dramatically negative impact on your losses. Some mutual funds can be purchased with as little as $500 and give you ownership of hundreds of stocks. Mutual funds have different goals and focuses depending on how they choose to invest. The greatest advantage of mutual funds is that your money is spread out between many different stocks.

2. What do the terms large cap, small cap, value, growth and international mean?
Not all mutual funds are equal. They have different purposes. Some will invest in bonds, others in specific sectors of the economy. Some mutual fund companies invest primarily in big companies. Others in small companies. Some might do a little of everything. It is crucial that you know the categorization of your mutual fund as that has the greatest impact of your expected risk and return. Small cap(italization) mutual funds basically invest in smaller companies. These stocks provide a lot more opportunity for quick growth as smaller can grow twice as big, twice as fast. On the other hand, because they are smaller there is a lot more opportunity for failure. Large caps focus on bigger companies. They would buy stocks from places you

have heard of like Wal-Mart, Exxon, and General Electric. These companies are established and might be expected to provide steady results, but likely will not provide a surge of gains or losses. Growth and Value refer to the style the fund manager prefers for buying stocks. Value managers look for great stocks that for some reason or another seem to be under priced. In the mall they would be the ones looking through the 50% off rack. Growth managers, however, buy stocks that are performing well. The stock has posted positive results so they buy these stocks with the expectation that the growth will continue. International funds will typically buy stocks that are owned by companies that are either owned or operated outside the United States or the home country.

3. What are mutual fund management fees?

Someone out there is managing your money. They are deciding which stocks to buy and which to sell. They take a salary. They have people who do research and analysis. They get paid. They send out information and furnish offices. Some pay for advertising. Who pays for it all? You do the mutual fund investor. It is easy to find out what you will pay when you get a prospectus. They will tell you the percentage they charge in fees. They will also show you how much that would be in actual dollars based on a preset dollar investment. Always remember: when it comes to fees they are always

included when you see their performance. In other words, at the end of a trading day when a mutual fund posts their returns, all mutual fund fees have already been accounted for. Mutual funds structure their fees in different ways. One way that funds earn money is by charging a load. For example, a fund might charge a 5% front end load. That means when you give them $1,000 they will take $50 as their fee and invest $950. A back end load is a fee that is assessed when you take the money out. If a company has a back end load of 1% and you withdraw $1000 you will pay $10 towards the load fee and they would give you $990. No load funds will invest the full amount. No load funds will typically have higher management fees.

4. What is a prospectus?
A prospectus is an introductory booklet. Much of the information will seem dry and useless. This is because prospectuses are written for lawyers as much as buyers. However, the prospectus will introduce you to the management style. From that style you can get a good idea at the level of risk you are assuming.

5. Where can I buy a mutual fund?

Mutual funds can be purchased directly form the organization (fund family) who oversees the fund. These days you can just get online and view all the important information. That organization will only sell their own brand of funds. You can also purchase funds through an online brokerage firm. A brokerage firm will allow you to

purchase mutual funds from any fund family they have access to. You are not limited to only one fund family. You can also purchase mutual funds through a financial advisor who works either independently or for a brokerage firm. Your advisor will suggest funds, and make purchases on your behalf (with an extra layer of fees).
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NEWS:

Prepaid cards are preferably used for applications mostly for purchases on the net
By STAFF REPORTER
TAGS: MUTUAL FUND, PREPAID CARD, QUANTUM MUTUAL FUND

Quantum Mutual Fund, Indias first completely paperless online mutual fund, has offered Prepaid cards as an online payment option for its investors. Prepaid Cards are neither a credit nor a debit card, and is preferably used for applications mostly for purchases on the net. After logging in to Quantum Mutual Funds Invest Online platform, investors can complete their usual online mutual fund transaction and then select Prepaid Card as payment option. Investors will then have to enter their prepaid card number in order to complete their transaction. Strengthening its first-mover stance, Quantum is currently the only mutual fund house in India to offer such a payment mechanism. The fund house is known as the countrys first direct-to-investor mutual fund, and early last year launched Indias first completely paperless invest online platform. The online medium is brilliant in terms of reach and convenience to investors. However, many investors today are wary of transacting online because of the perceived risk of online security lapses. When we launched our paperless Invest Online platform last year, we were aware that one of the challenges that we would face would be convincing investors about the security of their transactions. To address this concern, we ran an ISO 27001 Certification and increased our SSL Encryption. Prepaid cards is another step in this direction to cater to investors who are still wary of or uncomfortable with using their netbanking to transact online, said Jimmy A Patel, chief executive officer of Quantum Mutual Fund. This feature is only available for online investors who can choose Prepaid Cards as their payment option for transacting on the companys website. The transaction limit for investments via such Prepaid cards is Rs 50,000 and all entities that issue such cards are regulated by the Reserve Bank of India (RBI). Quantum is initially accepting such payments only through iCash Cards which aim to offer a safe and easy payment option to Indian investors, without compromising on their safety or privacy.