Business Club, IITK

Tutorial: MUTUAL FUNDS

Mutual Funds Basics

So now you know that you have two basically two options to invest in - Stocks and
the bonds. Considering the labyrinth of your busy professional and personal life, you
don't have energy and know how to maintain a portfolio of your investments where
you keep track of companies and bonds you invest in. You would certainly like to
have some professionals to manage your money, keep a track of how companies are
performing and change your portfolio as and when required based on economic
circumstances . Enters Mutual Funds. It is basically a team of highly professional
managers who take decisions with regard to your investments even without
intimating you. You receive return on your investment on regular basis. Obviously
they charge you for offering their professional know how, in return your money is
managed by professional brains.

Advantages of Mutual Funds:

Diversification of your portfolio is the key to safe and successful investments.

Suppose you invest in health, technology and tourism sector. If health sector goes
bankrupt, the intensity of losses would be compensated by the good performance of
other two sectors you have invested in. Imagine if you had made entire investments
in health sector! Now with diversification comes complexity and it becomes difficult
to keep a track of performance of so many companies. Mutual Funds offer you an
advantage of diversification. Your investments are made in hundreds of companies
from varied sectors and various bonds, with managers to keep a track and alter your
portfolio as and when necessary. Just imagine yourself investing your money in
hundred companies? An impossible feat to achieve.

All automotives run on fuel, and so do the mutual find managers. For managing your
investments, you are charged a fee but considering the advantages, it is acceptable.
Also you pay for the administrative expenses (such as maintaining a staff, office
expenses, postage expenses etc) which these fund managers incur. Indirectly you
also pay for the advertising and promotion of the mutual funds as resources for
these are drawn form the fee you pay.

TYPES OF MUTUAL FUNDS:

1. Equity Funds: Most of your investments are made in equities. As such more
risky, but high gains.
2. Bond Funds: Most of your investments made in bonds and securities. Safe
but lesser gains.
3. Mixed Funds: generally a balanced is maintained between the above two.
Say 40 % spent in equities and 60 % in bonds. If interest rates go high, the
percentage investments in bonds goes down and vice versa.( WHY ?). We
have already discussed this effect earlier while studying bonds.
4. Global Funds: Investments are made in bonds and equities all over the
world. A very good option to make investments abroad which otherwise is
 difficult and expensive to manage. Another advantage is if an economy of a
country sink, your loss would be compensated with benefits from investments
in other prospering economies ( This is obviously based on the premise that
we do not have a global economic depression)
5. Regional Funds: Investments made in particular region or country.
6. Specialty Funds: When your investments are made in a particular sector or
industry, say technology or health. High gains but relatively high risk.

Fee is charged in the form of loads.

1. Front end load: These are the most simple type of load: you pay the fee
when you purchase the fund. If you invest $1,000 in a mutual fund with a 5%
front-end load, $50 will pay for the sales charge, and $950 will be invested in
the fund.
2. Back-end loads (also known as deferred sales charges) - These are a bit
more complicated. In such a fund you pay the a back-end load if you sell a
fund within a certain time frame. A typical example is a 6% back-end load
that decreases to 0% in the seventh year. The load is 6% if you sell in the
first year, 5% in the second year, etc. If you don't sell the mutual fund until
the seventh year, you don't have to pay the back-end load at all.
3. No Laod Funds : You are not charged any fee or load.

It is a common conception that higher loads means better professional advice.

However studies have proves that wrong. In fact when you subtract your load from
the gains, the output you effectively receive turn out to be poor than a no load fund.

SOME TERMS :

1. Expense Ratio : Percentage of assets used to run the administrative and

other expenses of the mutual funds. If your are investing Rs1,000 in mutual
funds with expense ratio 1%, you will be actually investing Rs99/- and paying
the remaining Re1 to the fund management.
2. NAV - Nest asset Value :In the context of mutual funds, the total value of the
fund's portfolio less liabilities. The NAV is usually calculated on a daily basis.

That is all as per the bsics of mutual funds are concerned. You can continue your
pursuit on mutual funds on the following link.

Group Activity : At this stage we recommend you to pick up mutual funds of certain
company and study its terms and conditions. This will help you to gain an insight into
the practical issues associated with Mutual Funds.

A detailed documentation on basics of Mutual Funds is available on

http://www.investopedia.com/university/mutualfunds/

A list of Mutual Funds available in India : Mutual Funds in India

Brief history of Mutual Funds in India available here

A detailed documentation of operation and regulation of mutual funds in India is

available on http://www.amfiindia.com/