Mutual Fund

Worldwide Mutual Fund has a long and successful history. The popularity of the Mutual Fund has increased manifold. In developed financial markets, like United States, Mutual Funds have almost overtaken bank deposits. 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 33 Mutual Funds and over 200 schemes with total assets of approximately 7 lacs crores. This fast growing industry is regulated by the Securities and Exchange Board of India (SEBI).



1. What is Mutual Fund?

A Mutual Fund is a trust that pools together the savings of a number of investors who share a common financial goal. The fund manager invests this pool of money in securities -- ranging from shares and debentures to money market instruments or in a mixture of equity and debt, depending upon the objectives of the scheme.


Investment can be in:

  • Shares
  • Debt Securities
  • Money Market Securities
  • Combination of the above mentioned securities

Benefits:

  • Professional Management
  • Diversification
  • Low Cost
  • Convenience & Flexibility
  • Liquidity
  • Transparency

Types of Mutual Funds:


Mutual Funds schemes can be classified:



# On the basis of Investment Objective

 

  • Equity Schemes
        • Diversified schemes
        • Sector specific schemes
        • Tax Savings schemes

 

          • Income Schemes
  • Gilt Schemes
  • Debt Schemes

 

    • Money Market Schemes – Liquid Schemes
    • Balances Schemes – Equity & Debt ratio 60:40.

Objective

Time Horizon

Risk Profile

Typical Investment Pattern

 

 

Equity (%)

Debt (%)

Money Mkt / Others (%)

Money Market

Short Term

Low

Nil

0 – 20

80 – 100

Income

Medium – Long Term

Low to Medium

Nil

80 – 100

0 – 20

Equity

Long Term

High

80 – 100

0 – 20

0 – 20

Balanced

Long Term

Medium to High

0 – 60

0 – 40

0 – 20

Tax Savings

Long Term

High

80 – 100

80 – 100

0 – 20

# On the basis of Liquidity

  • Open Ended Funds: Such funds enable the investor to invest and redeem their money any time. Units are continuously offered for sale and continuously bought back. Moreover, the schemes under which they’re sold are perpetual and do not have a fixed duration.
  • Close Ended Funds: The exact opposite of open-ended funds. These schemes come with a fixed life. Unlike open-ended schemes, once the initial offer close, there is no fresh sale of units. Normally, they do not offer repurchase and sale of repurchased units (though there are a few exceptions). However, units of such funds are normally listed on one or more of the stock exchanges.

     

    Net Asset Value:

    The price of one unit of a mutual fund scheme.

    NAV = (Assets – Liabilities) / No. of units

     

    Loads:

    Two types:

      • Entry Load (Abolished from 1st August 2009)
      • Exit Load

     

    Returns:

    • Absolute return = (NAV2 – NAV )/NAV1*100
    • Simple Annualized = (NAV2 – NAV1)/ NAV1*100*365/ no. of days
    • Compounded Annualised = (NAV2/NAV1)^(1/no. of years) – 1 * 100

     

    NAV1 – Previous NAV

    NAV2 – Current NAV

     

    Rolling Return:

    The annualized return for a particular period say 1 year, 1 month or even 1 week.

     

    Income:

    Two types:


    1. Current yield or dividend income

    Dividend Yield = Dividend received / Cost of mutual fund units

    2. Capital Gain

    Gain due to appreciation in NAV. Can be calculated by any of the above-mentioned methods. Total Return = Current Yield + Capital Gain


    Note:

      • Dividend is tax free in the hand of the investor
      • In case of 
        Equity Schemes: No dividend distribution tax.
        Debt Schemes: Mutual fund pays dividend distribution tax @ 13.07% for individuals & HUFs

        Mutual fund pays dividend distribution tax @ 20.91% for Corporate & others

 

Risk Associated With A Mutual Fund Schemes


Following types of risks are associated with a mutual fund scheme:


Credit risk – The possibility that the company holding your money will not pay the interest or dividend due, or the principal amount when it matures.


Inflation risk – The risk that the rupee you get when you sell will buy less than the rupee you originally invested.


Interest rate risk – The possibility that a fixed debt instrument, such as a bond, will decline in value due to a rise in interest rates.


Market risk – The risk that the unit price or value of your investment will decrease.


Few Facts about MF’s:
Offer Document – An official document that each investment company must publish, describing the mutual fund and offering its shares for sale. It contains information that has been mandatorily required by SEBI. It clearly indicates the investment objective and philosophy of the scheme and gives all the necessary information to the investor required for investment.

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