| |
Worldwide, the
Mutual Fund, or Unit Trust as it is called in some parts of the world, has a
long and successful history. The popularity of the Mutual Fund has increased
manifold. In developed financial markets, like the United States, Mutual Funds
have almost overtaken bank deposits and total assets of insurance funds. As of
date, in the US alone there are over 5,000 Mutual Funds with total assets of
over US $ 3 trillion (Rs. 100 lakh crores). In India,the Mutual Fund industry
started with the setting up of Unit Trust of India in 1964. Public sector banks
and financial institutions began to establish Mutual Funds in 1987. The private
sector and foreign institutions were allowed to set up Mutual Funds in 1993.
Today, there are 36 Mutual Funds and over 200 schemes with total assets of
approximately Rs. 81,000 crores. This fast growing industry is regulated by the
Securities and Exchange Board of India (SEBI).
|
What
is a mutual fund?
What are the types of mutual fund schemes?
What is NAV?
Why should you invest in mutual funds?
How do you understand and manage risk?
How to invest in mutual funds?
What is an Unit ?
What are your rights as a mutual fund unitholder?
What is Load & what are the types of Loads ?
What is ETF? |
|
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.
|
| |
| 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, 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 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 pre-determined 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:
* Investors in their prime earning years.
*Investors seeking growth over the long-term
|
| 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:
*Retired people and others with a need for capital stability and regular
income.
* Investors who need some income to supplement their earnings.
|
| 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:
*Investors looking for a combination of income and moderate growth.
|
| 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. Returns on these schemes may
fluctuate, depending upon the interest rates prevailing in the market. Ideal
for:
* Corporates and individual investors as a means to park their surplus funds
for short periods or awaiting a more favourable investment alternative.
|
| 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. Recent amendments to the Income Tax Act provide further
opportunities to investors to save capital gains by investing in Mutual Funds.
The details of such taxsavings are provided in the relevant offer documents.
Ideal for:
* Investors seeking tax rebates.
|
| Special Schemes
|
| Industry Specific Schemes |
| Industry Specific Schemes invest
only in the industries specified in the offer document. The investment of these
funds is limited to specific industries like InfoTech, FMCG and Pharmaceuticals
etc. |
| Index Schemes |
| Index Funds attempt to replicate
the performance of a particular index such as the BSE Sensex or the S&P NSE
50 index (Nifty), etc. These schemes invest in the securities in the same
weightage comprising index. NAV of such schemes would rise or fall in
accordance with the rise or fall in the index. |
| Sectoral Schemes/Sector specific
funds |
| These 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.
The returns on these funds are dependent on the performance of the respective
sectors / industries. Sectoral Funds are those, which invest exclusively in a
specified industry or a group of industries or various segments such as 'A'
Group shares or initial public offerings. |
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. A few frequently
used terms are explained here below:
Net Asset Value ("NAV")
Net Asset Value is the market value of the assets
of the scheme minus its liabilities. The per unit
NAV is the net asset value of the scheme divided
by the number of units outstanding on the Valuation
Date.
Sale Price Is the price you pay
when you invest in a scheme. Also called Offer Price.
It may include a sales load.
Repurchase Price Is the price at
which a close-ended scheme repurchases its units
and it may include a back-end load. This is also
called Bid Price.
Redemption Price Is the price at
which open-ended schemes repurchase their units
and close-ended schemes redeem their units on maturity.
Such prices are NAV related.
Sales Load Is a charge collected
by a scheme when it sells the units. Also called,
'Front-end' load. Schemes that do not charge a load
are called 'No Load' schemes.
Repurchase or 'Back-end' Load Is
a charge collected by a scheme when it buys back
the units from the unitholders.
|
| |
| What Is NAV?
|
| NAV means Net Asset Value. This is
the main performance indicator of a fund, especially when viewed in terms of
its appreciation over time. The NAV breaks down the performance of a scheme in
terms of the market value of every outstanding unit of the scheme. A fund's NAV
is calculated as total assets minus all expenses and divided by the number of
its total outstanding units. |
| |
| Why should you
invest in Mutual Fund ?
|
The advantages of investing in a
Mutual Fund are:
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.
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 declare 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.
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.
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.
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.
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 ofdirect repurchase at NAV
related prices which some close-ended and interval schemes offer you
periodically.
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.
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.
9. Choice of Schemes - Mutual Funds offer a family of schemes
to suit your varying needs over a lifetime.
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. |
| |
| Understanding &
Managing Risk |
| 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.
|
| |
| 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: * the track record of performance over the last few years in relation
to the appropriate yardstick and similar funds in the same category.
* how well the Mutual Fund is organised to provide efficient, prompt and
personalised service.
* 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 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 buy fewer units when the price is
higher and more unitswhen 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 |
| If you are in a high tax bracket
and have utilised fully the exemptions under Section 80L of the Income Tax Act,
investing in growth funds that do not pay dividends might be more tax efficient
and improve your post-tax return. If you are in a low tax bracket and have not
utilised fully the exemption available under Section 80L, selecting funds
paying regular income could be more tax efficient. 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.
|
| 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 agent/broker 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.
|
| |
| What is UNIT?
|
| A unit in a mutual fund scheme
means one share in the assets of a particular scheme. So, a person holding
units in a scheme is referred to as a unit holder. |
| |
| Your Right As a
Mutual Fund Unitholder |
As a unitholder in a Mutual Fund
scheme coming under the SEBI (Mutual Funds) Regulations, ("Regulations") you
are entitled to:
1. Receive unit certificates or statements of accounts confirming your title
within 6 weeks from the date of closure of the subscription or within 6 weeks
from the date your request for a unit certificate is received by the Mutual
Fund;
2. Receive information about the investment policies,investment objectives,
financial position and general affairs of the scheme;
3. Receive dividend within 42 days of their declaration and receive the
redemption or repurchase proceeds within 10 days from the date of redemption or
repurchase;
4. Vote in accordance with the Regulations to:
a. either approve or disapprove any change in the fundamental investment
policies of the scheme which are likely to modify the scheme or affect your
interest in the Mutual Fund; (as a dissenting unitholder, you would have a
right to redeem your investments);
b. change the asset management company;
c. wind up the schemes.
5. Inspect the documents of the Mutual Funds specified in the scheme's offer
document. In addition to your rights, you can expect the following from Mutual
Funds:
*To publish their NAV, in accordance with the regulations: daily, in case of
most open ended schemes and periodically, in case of close-ended schemes;
* To disclose your schemes' portfolio holdings, expenses, policy on asset
allocation, the Report of the Trustees on the operations of your schemes and
their future outlook through periodic newsletters, half- yearly and annual
accounts;
* To adhere to a Code of Ethics which require that investment decisions are
taken in the best interests of the unitholders.
|
| |
| What is Load &
what are the types of Loads ? |
| Load is a charge collected by a
mutual fund on units. It can be either entry load i.e., the charge is collected
when an investor buys the units or exit load i.e., the charge collected when
the investor sells back the units. |
| |
| Exchange-traded
funds (or ETFs) |
| Exchange-traded funds (or ETFs) are
open-ended collective investment schemes, traded as shares on most global stock
exchanges.Each ETF unit is set at a fractional value of the index it tracks.
Typically, ETFs try to replicate a stock market index such as the S&P 500
or BSE Sensex, a market sector such as energy or technology, or a commodity
such as gold or petroleum. |
| |
|
|
