A lot of mutual fund advice/research out there is focussed on how investors must evaluate mutual funds. Unfortunately, that is often not enough, which explains why wrong mutual funds are still sold/bought and mis-selling continues to be the bane of the industry. As a result, a lot of investors who end up investing in the wrong investment are left very disillusioned with how their investments have performed. All this can be prevented if investors are armed with two rules – guidelines on how to evaluate a mutual fund and just as importantly – guidelines on how not to evaluate a mutual fund. This note deals with the latter.
1. Don’t read too much into past performanceRead any mutual fund advertisement and there is likely to be a mention of the fund’s incredible performance over the years. At times the focus on past performance is so overwhelming that it leaves investors with the impression that, it is all that matters while investing in a mutual fund. In our view, past performance is important, but it is just one of half a dozen factors that must be considered while investing in a mutual fund. Among other factors that rarely find a mention in advertisements are the fund house’s investment philosophy and processes, level of ethics, performance across market phases especially the downturns.
2. Don’t read too much into mutual fund ratingsIn our view, mutual fund ratings get more than their share of attention from investors, which is unfortunate. This is especially true since in the Indian context mutual fund ratings are often biased towards returns with little or no room for evaluating among other factors, the fund house’s investment philosophy, processes, track record on transparency, compliance and ethics. Since the ratings are so heavily dependent on returns they are unviable, as investors cannot be expected to invest or redeem their investments every time there is a change in the ratings.
Investors may want to consider what Morningstar, a leading stock and mutual fund research firm based in the US which in a way pioneered the concept of mutual fund ratings, has to say about its own ratings:
"As always the Morningstar Rating is intended for use as a first step in the fund evaluation process. A high rating alone is not sufficient basis for investment decisions."
3. Don’t read too much into CAGR performance One of the many selling points for mutual funds is their performance in terms of compounded annualised growth rate (CAGR). Any student of mathematics can confirm this – CAGR is just an indicator of growth between two points (or between two dates as in the case of a mutual fund investment). It tells you nothing about what transpired in the interval and more importantly it tells you nothing about the risk the mutual fund has exposed investors to and the investment process that generated that CAGR. At the end, the CAGR hides more than it reveals which is why investors should not read more in it than necessary.
4. Don’t count on the star fund managerYou will notice this point is a little different from the previous points. Unlike other factors like past performance that merit some (positive) consideration, the presence of a star fund manager merits no such consideration. On the contrary a fund house must be given negative marks for attributing its success to a star fund manager. While over the short-term a star fund manager may bring about a dramatic change in the mutual fund’s performance, over the long-term he can do more harm than good.
As a mutual fund’s performance gets inextricably linked with the presence of the star fund manager, his existence in the fund house becomes a prerequisite for the fund’s success. If the star fund manager quits the fund house, it could leave the fund and its investors in the lurch because the existing team is unlikely to be capacitated to deliver on the same lines as the star fund manager.
So what must investors do? Go for fund houses that institutionalise the fund management process by building teams that are guided by well-defined processes where individuals have a limited role to play.
5. Don’t question every investment decision made by your fund managerWhile it’s good to be aware of what your fund manager is up to, it is only in the fitness of things that you let him do what he is good at doing, which is identifying the best investment opportunities ahead of the competition. As an investor you must do what you are supposed to do which is getting your financial planner involved in the process of keeping a tab on your investments. The financial planner (provided he is honest and competent) should be the one to tell you whether the fund manager is investing in line with his pre-determined investment mandate and philosophy. Once you understand the roles defined for all three parties over here – fund manager, financial planner and you (i.e. the investor) you will not waste your time agonising over views like whether your fund manager is doing the right thing by investing in software stocks in the backdrop of a rising rupee.
Wednesday, November 28, 2007
Reading a Mutual Fund Fact Sheet
This article was written by Personalfn for Business India, and was carried in its June 18, 2006 issue with the title, "Get the facts right". The original draft, in its entirety, has been retained here.
For some investors, a mutual fund factsheet serves the purpose of looking back and reminding themselves about their investments and finding out where they are headed. For others it is only a publication that adds little value. This is mainly because the second group of investors is unable to anlayse information from the factsheet and primarily depends on their investment advisor to unravel it for them. We believe investors should be self-reliant as far as evaluating their investment is concerned and that the fact sheet can help them on this front.
A factsheet presents an ocean of information about the AMC (Asset Management Company) and its various schemes. It provides valuable information, which is not only important for an existing investor but also for a prospective one. What an investor really needs to do is to extract the most relevant information from the factsheet, which can help him in tracking his existing investment or decide upon his future course of action. Also while analysing a factsheet, investors usually place more importance on net asset value (NAV). They tend to ignore other equally important information points simply because they are not competent enough to interpret it. We have highlighted some of the important points in a diversified equity fund’s factsheet that should draw the investor’s attention.
1. Investment objective
The mutual fund’s investment objective states what it aims to achieve e.g. capital appreciation, income generation among others. It could also inform the investor about the investment style of the fund and the kind of risk it is prepared to take for achieving its investment objective. For instance, a broad investment objective like ‘aiming for capital appreciation’ means the equity fund has a flexible investment approach and is likely to do whatever it takes to clock capital appreciation. A lot of equity funds in the past were launched with a rather minimal investment objective like ‘capital appreciation’. It gave investors little idea about how the mutual fund planned to conduct its investment activity. Nowadays of course, mutual funds have pointed investment objectives that give the investor a fairly good idea about how the mutual fund will go about its investments.
Ideally, an investment objective should be pointed enough for the investor to understand whether his own investment objective fits well with that of the mutual fund. For instance, an investment objective that states that the fund will ‘attempt to generate capital appreciation by investing significantly in the mid cap segment’, it tells the investor that it is likely to be a high risk – high return investment. If the investor has the risk appetite for such an investment he can consider investing in the fund.
2. Portfolio diversification
Portfolio diversification can be broadly explained under two categories:
a. Top 10 stock holdingsConcentration levels in the top 10 stocks reveals a lot about the investment approach of the fund. In our view, if the top 10 stocks of a diversified equity fund account for over 40% of the net assets then the fund should be regarded as concentrated as opposed to being diversified. A concentrated portfolio is usually a candidate for market volatility. While it may generate above-average growth during a market upturn, it will be a sitting duck during the downturn.
b. Sectoral allocationThis is another area that deserves a close look. A diversified equity fund is expected to be diversified across several sectors. If a fund has invested heavily across a few sectors, it qualifies as a sectorally concentrated equity fund. This could expose the mutual fund to higher levels of volatility during market turbulence. Sectoral concentration works against the fund if a particular sector/ sectors in which it has invested significantly is not performing as per expectations.
Looking at the sectoral allocation becomes particularly relevant because we have observed that equity funds are often well diversified across the top 10 stocks, but are heavily concentrated across a few sectors. During a market downturn, these funds tend to do as poorly as other concentrated funds.
While on the surface, some funds might seem like they are sectorally well diversified, a closer look might reveal otherwise. For example, it is not uncommon to find that similar-natured sectors such as ‘industrial capital goods’ and ‘industrial products’ being shown separately in the factsheet. This makes the fund look more diversified than it actually is. That is why, while analysing sectoral allocation, similar sectors should be clubbed together.
3. Fund Performance
This is the most popular criterion for most investors. All mutual funds publish NAV returns in their factsheet across various time frames. For an equity fund it is important to analyse returns for a longer duration of 3 years or even more. That is because as an asset class, equities tend to unlock their potential over a longer time horizon. An investor should ensure consistency of returns over various time frames. The best way to test the fund on this criterion is to check its returns over a calendar year as opposed to compounded annual growth returns (CAGR). The returns of the mutual fund scheme under review should be compared with other mutual funds from the same category across AMCs.
Another important parameter for judging the fund’s performance is by scrutinising how it has faired against its benchmark index. Every fund has a benchmark index. For instance, equity funds are often benchmarked against BSE Sensex S&P CNX Nifty, BSE 200, CNX Midcap among others. The index is a yardstick for evaluating the returns of the fund. A fund is expected to outperform its benchmark index across market cycles to qualify as a superior fund.
4. Loads and Expense Ratios
Fund houses normally disclose the load structure and expense ratios in the factsheets. The loads and expenses have a bearing on the fund’s performance. The fund’s NAV is declared after expenses have been factored in. Hence, higher expenses for a fund can impact its returns adversely over the long term. Similarly loads (entry/exit) are an initial cost that the investor has to bear at the time of investing in or exiting from the mutual fund. To get a fair idea, the investor should compare loads and expense ratios across various fund houses.
One important aspect that investors must bear in mind is that although loads and expense ratios have a direct impact on the returns, this cannot be the sole criterion for evaluating a mutual fund scheme. Other criteria like fund management style and performance should be given higher priority while investing rather than loads and expense ratios. In other words, a mutual fund with an average track record but lower expenses should not be given preference over an expensive mutual fund with an impressive track record. In such a case, consider the higher expenses as the ‘price’ you have to pay for investing in a well-managed fund.
5. Investment objective Vs Actual performance
It is important to understand whether the fund was able to adhere to and achieve its investment objective/mandate. For instance, a lot of large cap equity funds tend to make above-average allocation to mid cap stocks when this segment witnesses a rally. Or a balanced fund/MIP (monthly income plan) may up its equity allocation to benefit from a stock market rally while ignoring the ceiling on its equity investments. Always invest in a fund that treats its investment objective as sacrosanct and rigidly adheres to the same across time periods and market cycles. Investors must be wary of mutual funds that haven’t adhered to their investment objective/style.
inputs from personalfn.com
For some investors, a mutual fund factsheet serves the purpose of looking back and reminding themselves about their investments and finding out where they are headed. For others it is only a publication that adds little value. This is mainly because the second group of investors is unable to anlayse information from the factsheet and primarily depends on their investment advisor to unravel it for them. We believe investors should be self-reliant as far as evaluating their investment is concerned and that the fact sheet can help them on this front.
A factsheet presents an ocean of information about the AMC (Asset Management Company) and its various schemes. It provides valuable information, which is not only important for an existing investor but also for a prospective one. What an investor really needs to do is to extract the most relevant information from the factsheet, which can help him in tracking his existing investment or decide upon his future course of action. Also while analysing a factsheet, investors usually place more importance on net asset value (NAV). They tend to ignore other equally important information points simply because they are not competent enough to interpret it. We have highlighted some of the important points in a diversified equity fund’s factsheet that should draw the investor’s attention.
1. Investment objective
The mutual fund’s investment objective states what it aims to achieve e.g. capital appreciation, income generation among others. It could also inform the investor about the investment style of the fund and the kind of risk it is prepared to take for achieving its investment objective. For instance, a broad investment objective like ‘aiming for capital appreciation’ means the equity fund has a flexible investment approach and is likely to do whatever it takes to clock capital appreciation. A lot of equity funds in the past were launched with a rather minimal investment objective like ‘capital appreciation’. It gave investors little idea about how the mutual fund planned to conduct its investment activity. Nowadays of course, mutual funds have pointed investment objectives that give the investor a fairly good idea about how the mutual fund will go about its investments.
Ideally, an investment objective should be pointed enough for the investor to understand whether his own investment objective fits well with that of the mutual fund. For instance, an investment objective that states that the fund will ‘attempt to generate capital appreciation by investing significantly in the mid cap segment’, it tells the investor that it is likely to be a high risk – high return investment. If the investor has the risk appetite for such an investment he can consider investing in the fund.
2. Portfolio diversification
Portfolio diversification can be broadly explained under two categories:
a. Top 10 stock holdingsConcentration levels in the top 10 stocks reveals a lot about the investment approach of the fund. In our view, if the top 10 stocks of a diversified equity fund account for over 40% of the net assets then the fund should be regarded as concentrated as opposed to being diversified. A concentrated portfolio is usually a candidate for market volatility. While it may generate above-average growth during a market upturn, it will be a sitting duck during the downturn.
b. Sectoral allocationThis is another area that deserves a close look. A diversified equity fund is expected to be diversified across several sectors. If a fund has invested heavily across a few sectors, it qualifies as a sectorally concentrated equity fund. This could expose the mutual fund to higher levels of volatility during market turbulence. Sectoral concentration works against the fund if a particular sector/ sectors in which it has invested significantly is not performing as per expectations.
Looking at the sectoral allocation becomes particularly relevant because we have observed that equity funds are often well diversified across the top 10 stocks, but are heavily concentrated across a few sectors. During a market downturn, these funds tend to do as poorly as other concentrated funds.
While on the surface, some funds might seem like they are sectorally well diversified, a closer look might reveal otherwise. For example, it is not uncommon to find that similar-natured sectors such as ‘industrial capital goods’ and ‘industrial products’ being shown separately in the factsheet. This makes the fund look more diversified than it actually is. That is why, while analysing sectoral allocation, similar sectors should be clubbed together.
3. Fund Performance
This is the most popular criterion for most investors. All mutual funds publish NAV returns in their factsheet across various time frames. For an equity fund it is important to analyse returns for a longer duration of 3 years or even more. That is because as an asset class, equities tend to unlock their potential over a longer time horizon. An investor should ensure consistency of returns over various time frames. The best way to test the fund on this criterion is to check its returns over a calendar year as opposed to compounded annual growth returns (CAGR). The returns of the mutual fund scheme under review should be compared with other mutual funds from the same category across AMCs.
Another important parameter for judging the fund’s performance is by scrutinising how it has faired against its benchmark index. Every fund has a benchmark index. For instance, equity funds are often benchmarked against BSE Sensex S&P CNX Nifty, BSE 200, CNX Midcap among others. The index is a yardstick for evaluating the returns of the fund. A fund is expected to outperform its benchmark index across market cycles to qualify as a superior fund.
4. Loads and Expense Ratios
Fund houses normally disclose the load structure and expense ratios in the factsheets. The loads and expenses have a bearing on the fund’s performance. The fund’s NAV is declared after expenses have been factored in. Hence, higher expenses for a fund can impact its returns adversely over the long term. Similarly loads (entry/exit) are an initial cost that the investor has to bear at the time of investing in or exiting from the mutual fund. To get a fair idea, the investor should compare loads and expense ratios across various fund houses.
One important aspect that investors must bear in mind is that although loads and expense ratios have a direct impact on the returns, this cannot be the sole criterion for evaluating a mutual fund scheme. Other criteria like fund management style and performance should be given higher priority while investing rather than loads and expense ratios. In other words, a mutual fund with an average track record but lower expenses should not be given preference over an expensive mutual fund with an impressive track record. In such a case, consider the higher expenses as the ‘price’ you have to pay for investing in a well-managed fund.
5. Investment objective Vs Actual performance
It is important to understand whether the fund was able to adhere to and achieve its investment objective/mandate. For instance, a lot of large cap equity funds tend to make above-average allocation to mid cap stocks when this segment witnesses a rally. Or a balanced fund/MIP (monthly income plan) may up its equity allocation to benefit from a stock market rally while ignoring the ceiling on its equity investments. Always invest in a fund that treats its investment objective as sacrosanct and rigidly adheres to the same across time periods and market cycles. Investors must be wary of mutual funds that haven’t adhered to their investment objective/style.
inputs from personalfn.com
CAGR - Not the best choice always
For most investors, a fund’s performance on the net asset value (NAV) appreciation front is sacred i.e. returns is the only parameter to be considered while making an investment decision. Its showing on other parameters like volatility control and risk-adjusted return is almost never taken into account; also, the fund’s portfolio management style and the fund house’s pedigree are ignored. Making an investment decision based solely on the NAV performance is a flawed approach, since a fund’s showing on the returns front can be misleading.
Yes, you read that right! A fund’s NAV appreciation figures can be misleading. How can simple numbers mislead, you might ask. The answer – compounded annual growth rate or CAGR as it is better known. The performances of mutual fund schemes over longer time frames (i.e. over 1-Yr) are expressed in CAGR terms.
You have probably come across this term in mutual fund fact sheets and performance-related advertisements. As per guidelines issued by SEBI (Securities and Exchange Board of India), performances of funds for time frames more than a year are required to be compounded annualised i.e. expressed in CAGR terms.
What is CAGR? Simply put, CAGR computes the growth clocked by an investment, assuming that it occurs at a steady rate. In other words, the CAGR smoothens the highs and lows between the investment tenure. An example should help us better understand the same. Assume that you invest Rs 10,000 in a mutual fund on September 28, 2004, and stay invested for a period of 3 years. As on September 28, 2007, the investment is worth Rs 30,000. This gives you a return of 44.2% CAGR over the 3-Yr investment tenure. In other words, your investment grew at 44.2% every year, during the 3-Yr period.
This is how you calculate CAGR:
CAGR = {(Present Value of Investment/Purchase Price) ^ [1/(Number of Years)] - 1}
Why CAGR can be misleading
As mentioned earlier, CAGR smoothens the highs and lows and puts forth a steady growth rate. In the example above, the 44.2% CAGR doesn’t reveal the instances when the growth rate dipped below or rose above 44.2%. Hence, the volatility in the fund’s performance is concealed, thereby not providing a complete picture.
In the table above, we have an equity fund that was launched in September 2002 at an NAV of Rs 10. As can be seen, the fund has fared modestly in the first 3 years, clocking growths of 10.0%, 18.2% and 15.4% in the first, second and third year respectively. However, fund has performed extremely well in the fourth (60.0%) and fifth (70.8%) years. Over a 5-Yr period, the fund has clocked a growth of 32.6% CAGR, which can be termed as a competitive growth rate.
However, what the 32.6% CAGR fails to reveal was that the fund was a mediocre performer in the initial years of its existence. It’s only over the last two years, that the fund has made a turnaround and delivered impressive returns. This recent performance has cloaked the modest performance over the initial years and made the fund look like a competent long-term performer.
Generally, thematic/sector funds show a similar trend. These funds tend to perform well in shorter time periods when the underlying theme/sector hits a purple patch. However, the performance in the aforementioned periods is good enough to mask the lackluster showing in the past.
Then, there are funds that have capitalised on a bull run by taking on higher risk. For example, a fund that is a dud in the normal course could take on aggressive stock and sectoral bets and make the most of a bull run. The result – an impressive showing based on CAGR for longer time periods. Fund houses are happy to showcase the ‘impressive’ CAGR numbers of these duds in a bid to draw in investors.
Let’s not forget that the converse is true as well. A fund which has a track record of being a consistent performer, could hit a rough patch for some time. The result – a poor showing on the CAGR front.
As a research house, at Personalfn we have come across numerous instances of very mediocre funds featuring higher up in the rankings on the back of just one good rally. In fact, the 4-Yr-long runup in stock markets has served to ‘improve’ the performances of most equity funds regardless of their investment processes, philosophy and approach (Remember a rising tide lifts all boats).
Unsuspecting investors are likely to believe that the fund (with impressive CAGR numbers) has performed well consistently over the years based on intelligent stock picking, while it’s just that the latest rally has improved its CAGR numbers. In fact, most NFOs (new fund offers) that were launched over the last 4 years have very impressive CAGR numbers thanks in no small measure to the stock market rally. These funds have yet to witness a bearish phase and it’s anyone’s guess how they will fare over a sustained market downturn (It’s only when the tide is out, do you see who has been swimming naked).
The solutionSo, how can you ensure that the CAGR doesn’t mislead you into making an incorrect investment decision? Quite simple. Don’t accord the past performance numbers more importance than they deserve. Sure, it’s an important parameter, but certainly not the only one or the one to be considered in isolation.
Find out how the fund fares when compared to its peers and benchmark index. Evaluate the fund on parameters like volatility control and risk-adjusted return. Study the fund’s portfolio over longer time frames. Find out if the fund has adhered to its investment mandate and if it has a steady investment style that has worked for it over the long-term and across market cycles (particularly the downturns).
Evaluating a mutual fund is easier said than done. Ensure that factors like past performance and CAGR don’t mislead you.
inputs from personalfn.com
Yes, you read that right! A fund’s NAV appreciation figures can be misleading. How can simple numbers mislead, you might ask. The answer – compounded annual growth rate or CAGR as it is better known. The performances of mutual fund schemes over longer time frames (i.e. over 1-Yr) are expressed in CAGR terms.
You have probably come across this term in mutual fund fact sheets and performance-related advertisements. As per guidelines issued by SEBI (Securities and Exchange Board of India), performances of funds for time frames more than a year are required to be compounded annualised i.e. expressed in CAGR terms.
What is CAGR? Simply put, CAGR computes the growth clocked by an investment, assuming that it occurs at a steady rate. In other words, the CAGR smoothens the highs and lows between the investment tenure. An example should help us better understand the same. Assume that you invest Rs 10,000 in a mutual fund on September 28, 2004, and stay invested for a period of 3 years. As on September 28, 2007, the investment is worth Rs 30,000. This gives you a return of 44.2% CAGR over the 3-Yr investment tenure. In other words, your investment grew at 44.2% every year, during the 3-Yr period.
This is how you calculate CAGR:
CAGR = {(Present Value of Investment/Purchase Price) ^ [1/(Number of Years)] - 1}
Why CAGR can be misleading
As mentioned earlier, CAGR smoothens the highs and lows and puts forth a steady growth rate. In the example above, the 44.2% CAGR doesn’t reveal the instances when the growth rate dipped below or rose above 44.2%. Hence, the volatility in the fund’s performance is concealed, thereby not providing a complete picture.
In the table above, we have an equity fund that was launched in September 2002 at an NAV of Rs 10. As can be seen, the fund has fared modestly in the first 3 years, clocking growths of 10.0%, 18.2% and 15.4% in the first, second and third year respectively. However, fund has performed extremely well in the fourth (60.0%) and fifth (70.8%) years. Over a 5-Yr period, the fund has clocked a growth of 32.6% CAGR, which can be termed as a competitive growth rate.
However, what the 32.6% CAGR fails to reveal was that the fund was a mediocre performer in the initial years of its existence. It’s only over the last two years, that the fund has made a turnaround and delivered impressive returns. This recent performance has cloaked the modest performance over the initial years and made the fund look like a competent long-term performer.
Generally, thematic/sector funds show a similar trend. These funds tend to perform well in shorter time periods when the underlying theme/sector hits a purple patch. However, the performance in the aforementioned periods is good enough to mask the lackluster showing in the past.
Then, there are funds that have capitalised on a bull run by taking on higher risk. For example, a fund that is a dud in the normal course could take on aggressive stock and sectoral bets and make the most of a bull run. The result – an impressive showing based on CAGR for longer time periods. Fund houses are happy to showcase the ‘impressive’ CAGR numbers of these duds in a bid to draw in investors.
Let’s not forget that the converse is true as well. A fund which has a track record of being a consistent performer, could hit a rough patch for some time. The result – a poor showing on the CAGR front.
As a research house, at Personalfn we have come across numerous instances of very mediocre funds featuring higher up in the rankings on the back of just one good rally. In fact, the 4-Yr-long runup in stock markets has served to ‘improve’ the performances of most equity funds regardless of their investment processes, philosophy and approach (Remember a rising tide lifts all boats).
Unsuspecting investors are likely to believe that the fund (with impressive CAGR numbers) has performed well consistently over the years based on intelligent stock picking, while it’s just that the latest rally has improved its CAGR numbers. In fact, most NFOs (new fund offers) that were launched over the last 4 years have very impressive CAGR numbers thanks in no small measure to the stock market rally. These funds have yet to witness a bearish phase and it’s anyone’s guess how they will fare over a sustained market downturn (It’s only when the tide is out, do you see who has been swimming naked).
The solutionSo, how can you ensure that the CAGR doesn’t mislead you into making an incorrect investment decision? Quite simple. Don’t accord the past performance numbers more importance than they deserve. Sure, it’s an important parameter, but certainly not the only one or the one to be considered in isolation.
Find out how the fund fares when compared to its peers and benchmark index. Evaluate the fund on parameters like volatility control and risk-adjusted return. Study the fund’s portfolio over longer time frames. Find out if the fund has adhered to its investment mandate and if it has a steady investment style that has worked for it over the long-term and across market cycles (particularly the downturns).
Evaluating a mutual fund is easier said than done. Ensure that factors like past performance and CAGR don’t mislead you.
inputs from personalfn.com
Caution - No Back Seat Driving
If you ask us, investing in a mutual fund can be a huge burden off the investor’s back. Why? Because if it weren’t for the mutual fund, the investor would have been investing directly in the equity/debt markets on his own. That is why at Personalfn, we find it surprising when mutual fund investors begin questioning their fund manager’s investment decisions as if they know a thing or two about investing that their fund manager doesn’t.
The merits of mutual fund investing have found mention in several books of finance and investment, as also on Personalfn; it’s time to revisit them, to remind the investor why he invested in a mutual fund in the first place. As an investor you have probably invested in a mutual fund for one (or all) of these reasons:
1) You want to grow your money through investments in equity/debt markets but do not have the time and expertise to do it on your own.
2) You want to invest in equity/debt markets; you have the time and expertise to make the investments but aren’t sure if you will be able to do so over the long-term.
3) Regardless of whether you have the time or expertise, you prefer mutual funds for the sheer breadth of investment options like equity funds, debt funds, tax-saving funds (equity-linked saving schemes – ELSS) and hybrid funds (balanced funds, monthly income plans – MIPs) among others. The convenience of investing offered by mutual funds through options like systematic investment plans (SIPs) only enhances the investment experience.
Notice that most investors prefer mutual funds because they face serious constraints on their time. They have either little or no inclination to research their investments and even when they have the inclination, they aren’t sure how long they can keep up with the demands of investing.
Investors who invest directly in equity/debt markets will vouch for the demands of investing that we are referring to over here. To be a successful investor:
a) You have to research and then form a view on among other areas – the economy, markets and interest rates at a global and domestic level.
b) Having understood this, you have to identify sectors and companies that are best placed to generate above-average growth over the long-term.
c) Having identified these sectors and companies you have to keep on researching/tracking them on a regular basis to test your original premise of investing in these sectors and companies.
It is apparent that researching/investing is ‘exclusive’ in the sense that not everyone can claim to be good at it or even have the time for it. This is because of the sheer volume of research and analysis that must be done before arriving at a ‘simple’ investment decision. Fund houses recognise the gravity of the situation, which is why they have a team of analysts that assist the fund manager. Put together, there are a lot of people working to ensure that the investor’s money is invested in the right avenues.
A lot of investors must be wondering why we are saying this because they probably know it already. We are wondering the same thing – if investors already know this, why do they question the fund manager’s investment decisions despite knowing that he knows more about investing and finance than them; and that is the reason why he is managing their money and not the other way round.
For some time now, at Personalfn, we have seen investors question their fund manager’s decision to invest in software/technology companies despite the rising rupee. We think we should give some credit to fund managers; if the lay investor can see the impact of the rising rupee on the profitability of software companies, then the fund manager probably saw this even earlier. If despite this the fund manager chooses to invest/remain invested in software companies it’s probably because unlike the lay investor he can foresee some events (based on his research) that are not foreseen by the investor (due to lack of research). In such a situation, the investor must trust his fund manager with his investment decisions instead of second-guessing him. If the investor doesn’t trust his fund manager with his investment calls, then he either needs to learn to trust him or exit the mutual fund completely.
We are not saying that investors must trust their fund managers blindly. However, once they have identified a mutual fund for investment, they need to have a certain level of confidence in their fund manager’s investment decisions. Of course, the decision to invest in a mutual fund must never be taken frivolously. It’s a decision that must be taken after consulting an honest and competent financial planner, who will shortlist the mutual funds that are best suited for the investor. Once that is done, it’s the fund manager’s job to take care of the investments and the financial planner’s job to track the performance and investment decisions of the mutual fund. The investor on his part should refrain from ‘backseat’ fund management.
The merits of mutual fund investing have found mention in several books of finance and investment, as also on Personalfn; it’s time to revisit them, to remind the investor why he invested in a mutual fund in the first place. As an investor you have probably invested in a mutual fund for one (or all) of these reasons:
1) You want to grow your money through investments in equity/debt markets but do not have the time and expertise to do it on your own.
2) You want to invest in equity/debt markets; you have the time and expertise to make the investments but aren’t sure if you will be able to do so over the long-term.
3) Regardless of whether you have the time or expertise, you prefer mutual funds for the sheer breadth of investment options like equity funds, debt funds, tax-saving funds (equity-linked saving schemes – ELSS) and hybrid funds (balanced funds, monthly income plans – MIPs) among others. The convenience of investing offered by mutual funds through options like systematic investment plans (SIPs) only enhances the investment experience.
Notice that most investors prefer mutual funds because they face serious constraints on their time. They have either little or no inclination to research their investments and even when they have the inclination, they aren’t sure how long they can keep up with the demands of investing.
Investors who invest directly in equity/debt markets will vouch for the demands of investing that we are referring to over here. To be a successful investor:
a) You have to research and then form a view on among other areas – the economy, markets and interest rates at a global and domestic level.
b) Having understood this, you have to identify sectors and companies that are best placed to generate above-average growth over the long-term.
c) Having identified these sectors and companies you have to keep on researching/tracking them on a regular basis to test your original premise of investing in these sectors and companies.
It is apparent that researching/investing is ‘exclusive’ in the sense that not everyone can claim to be good at it or even have the time for it. This is because of the sheer volume of research and analysis that must be done before arriving at a ‘simple’ investment decision. Fund houses recognise the gravity of the situation, which is why they have a team of analysts that assist the fund manager. Put together, there are a lot of people working to ensure that the investor’s money is invested in the right avenues.
A lot of investors must be wondering why we are saying this because they probably know it already. We are wondering the same thing – if investors already know this, why do they question the fund manager’s investment decisions despite knowing that he knows more about investing and finance than them; and that is the reason why he is managing their money and not the other way round.
For some time now, at Personalfn, we have seen investors question their fund manager’s decision to invest in software/technology companies despite the rising rupee. We think we should give some credit to fund managers; if the lay investor can see the impact of the rising rupee on the profitability of software companies, then the fund manager probably saw this even earlier. If despite this the fund manager chooses to invest/remain invested in software companies it’s probably because unlike the lay investor he can foresee some events (based on his research) that are not foreseen by the investor (due to lack of research). In such a situation, the investor must trust his fund manager with his investment decisions instead of second-guessing him. If the investor doesn’t trust his fund manager with his investment calls, then he either needs to learn to trust him or exit the mutual fund completely.
We are not saying that investors must trust their fund managers blindly. However, once they have identified a mutual fund for investment, they need to have a certain level of confidence in their fund manager’s investment decisions. Of course, the decision to invest in a mutual fund must never be taken frivolously. It’s a decision that must be taken after consulting an honest and competent financial planner, who will shortlist the mutual funds that are best suited for the investor. Once that is done, it’s the fund manager’s job to take care of the investments and the financial planner’s job to track the performance and investment decisions of the mutual fund. The investor on his part should refrain from ‘backseat’ fund management.
MF Past Performance - not a sure shot
If you are a type of investor who goes through the fact sheet or offer document, in order to study a particular scheme before investing in it, you would have come across a disclaimer (below the scheme’s historical returns) stating, “past performance may or may not be sustained in future and should not be used as a basis for comparison with other investments”. According to SEBI (Securities and Exchange Board of India) guidelines, fund houses must state this disclaimer explicitly whenever they mention the past performance of a scheme. As usual, this guideline came into force because fund houses were mis-selling their schemes based solely on the past performance.
However, disclaimers apart, as a practice investors continue to make investments based on a scheme’s past performance. To make matters worse, fund houses are only too pleased to toe the line by actively advertising the past performance of their schemes leading investors to conclude that it is the single-most important parameter (if not the most important one) to be considered while investing in a mutual fund scheme.
The marketing tactic of playing the ‘past performance card’ at frequent intervals inevitably raises the question - is past performance the only parameter to be considered while investing in mutual fund scheme? In our view – No. Let’s see why at Personalfn we are so adamant about this point.
Relevance of past performancePast performance of a particular scheme simply informs you, the investor, how much return the mutual fund scheme has generated over a time frame. However, there are certain critical points that the past performance numbers in isolation do not tell. We discuss these points below:
a) The risk the investor has been exposed to in the mutual fund’s quest for growth. In a rising market, it is not altogether difficult to clock higher growth if the fund manager is willing to take on higher risk (we have seen this on several occasions like the tech rally in 1999-early 2000, the mid cap rally in 2003-05). In that case, the past performance numbers in isolation will be inaccurate because they do not give investors any inkling of the higher risk they have been exposed to. At Personalfn, we believe that before investing in any investment, it must be evaluated based on the risk-return criterion; evaluating it across any one of them (risk or return) will not serve the purpose as the investor will ultimately end up investing in avenue that is not completely suited to him.
b) Even while showcasing past performance, funds are careful to show the compounded annualised growth rate (CAGR) numbers over longer time frames (3-5 years). Over this extended time frame, a CAGR figure is not entirely representative of the ups and downs (which could be considerable given the extended time frame) witnessed by the mutual fund over that period. This is because the CAGR number tends to even out the fund’s performance over the long-term and the bad times (based on wrong investment calls) are not that easily discernible.
A statistic that underlines, how much a mutual fund has fallen during a particular market slump (as compared to the benchmark index and peers) or how it has performed during a particular calendar year, is far more illustrative in our view as opposed to just a CAGR figure; after a market rally, a CAGR figure looks much better than it did before.
c) Another reason why past performance is not entirely representative of a mutual fund’s ‘good showing’ is because; it does not take into consideration the performance of its peers. It is possible that a fund has performed reasonably well (across relevant parameters) by itself, but hasn’t quite made the mark when compared to its peers. In other words, some of its peers that have outperformed it deserve to be considered by investors before the mutual fund under question. At Personalfn, we compare an investment (be it a mutual fund, fixed deposit, unit-linked insurance plan – ULIP, among others) with its comparable peer group before giving a view on whether or not you should invest in it.
d) Past performance fails to highlight the investment processes and approach pursued by the fund house. It does not give the investor an idea whether the past performance is the result of 1) good fortune/luck 2) a star fund manager 3) a team-based investment approach that takes decisions based on well-defined processes that are not over-dependent on a particular individual (like a star fund manager). At Personalfn, our preference is for Point 3); unfortunately the marketing campaign doesn’t help us with that information, this we learn after constant interaction with fund houses and their investment teams.
e) Past performance often ignores the change in guard or mandate. Fund houses first talk of a star fund manager who was instrumental in sprucing up their performance. They get a lot of money based on this star fund manager. The performance numbers that are advertised are attributed to the ‘brilliance’ of the star fund manager. When the star fund manager quits (which in many cases is often a matter of time), the fund house continues to use the performance attributable to the ex-fund manager to draw fresh monies under the new (star) fund manager! Investors however, are clueless as to whether the performance being advertised is the result of the existing team or an older team.
On the same lines, a mutual fund that revises its mandate/investment objective continues to use the performance figures under the older mandate/investment objective. Again, investors have absolutely no idea whether the performance numbers correspond to the revised mandate or an older mandate.
In an article we wrote earlier, we had addressed this particular issue in detail and had recommended that fund houses either stop using older, irrelevant performance numbers or mention that the performance came under the previous fund management team or an older investment mandate.
f) Of course, last but not the least, past performance is no guarantee of future performance. While this is adequately mentioned in the advertisements, we wonder why it needs to be advertised in the first place. It’s a bit like advertising tobacco products freely with a small disclaimer at the bottom!!
Nonetheless this disclaimer is important; we have mentioned it right at the end because we believe that the 5 points discussed earlier are a lot more important.
What should investors do?Our advice to investors is that they should adhere to the basics of mutual fund investing. They should evaluate mutual funds across parameters, including of course past performance, before considering any investments.
In our view, SEBI, as a regulator of Indian stock markets, should take note of such campaigns and discourage fund houses from misguiding investors through such misrepresentative and inaccurate advertisements.
Till then we can only hope that, unlike on previous occasions when such one-off cases started trends in the mutual fund industry, this particular problem is nipped in the bud by the regulator at the earliest.
However, disclaimers apart, as a practice investors continue to make investments based on a scheme’s past performance. To make matters worse, fund houses are only too pleased to toe the line by actively advertising the past performance of their schemes leading investors to conclude that it is the single-most important parameter (if not the most important one) to be considered while investing in a mutual fund scheme.
The marketing tactic of playing the ‘past performance card’ at frequent intervals inevitably raises the question - is past performance the only parameter to be considered while investing in mutual fund scheme? In our view – No. Let’s see why at Personalfn we are so adamant about this point.
Relevance of past performancePast performance of a particular scheme simply informs you, the investor, how much return the mutual fund scheme has generated over a time frame. However, there are certain critical points that the past performance numbers in isolation do not tell. We discuss these points below:
a) The risk the investor has been exposed to in the mutual fund’s quest for growth. In a rising market, it is not altogether difficult to clock higher growth if the fund manager is willing to take on higher risk (we have seen this on several occasions like the tech rally in 1999-early 2000, the mid cap rally in 2003-05). In that case, the past performance numbers in isolation will be inaccurate because they do not give investors any inkling of the higher risk they have been exposed to. At Personalfn, we believe that before investing in any investment, it must be evaluated based on the risk-return criterion; evaluating it across any one of them (risk or return) will not serve the purpose as the investor will ultimately end up investing in avenue that is not completely suited to him.
b) Even while showcasing past performance, funds are careful to show the compounded annualised growth rate (CAGR) numbers over longer time frames (3-5 years). Over this extended time frame, a CAGR figure is not entirely representative of the ups and downs (which could be considerable given the extended time frame) witnessed by the mutual fund over that period. This is because the CAGR number tends to even out the fund’s performance over the long-term and the bad times (based on wrong investment calls) are not that easily discernible.
A statistic that underlines, how much a mutual fund has fallen during a particular market slump (as compared to the benchmark index and peers) or how it has performed during a particular calendar year, is far more illustrative in our view as opposed to just a CAGR figure; after a market rally, a CAGR figure looks much better than it did before.
c) Another reason why past performance is not entirely representative of a mutual fund’s ‘good showing’ is because; it does not take into consideration the performance of its peers. It is possible that a fund has performed reasonably well (across relevant parameters) by itself, but hasn’t quite made the mark when compared to its peers. In other words, some of its peers that have outperformed it deserve to be considered by investors before the mutual fund under question. At Personalfn, we compare an investment (be it a mutual fund, fixed deposit, unit-linked insurance plan – ULIP, among others) with its comparable peer group before giving a view on whether or not you should invest in it.
d) Past performance fails to highlight the investment processes and approach pursued by the fund house. It does not give the investor an idea whether the past performance is the result of 1) good fortune/luck 2) a star fund manager 3) a team-based investment approach that takes decisions based on well-defined processes that are not over-dependent on a particular individual (like a star fund manager). At Personalfn, our preference is for Point 3); unfortunately the marketing campaign doesn’t help us with that information, this we learn after constant interaction with fund houses and their investment teams.
e) Past performance often ignores the change in guard or mandate. Fund houses first talk of a star fund manager who was instrumental in sprucing up their performance. They get a lot of money based on this star fund manager. The performance numbers that are advertised are attributed to the ‘brilliance’ of the star fund manager. When the star fund manager quits (which in many cases is often a matter of time), the fund house continues to use the performance attributable to the ex-fund manager to draw fresh monies under the new (star) fund manager! Investors however, are clueless as to whether the performance being advertised is the result of the existing team or an older team.
On the same lines, a mutual fund that revises its mandate/investment objective continues to use the performance figures under the older mandate/investment objective. Again, investors have absolutely no idea whether the performance numbers correspond to the revised mandate or an older mandate.
In an article we wrote earlier, we had addressed this particular issue in detail and had recommended that fund houses either stop using older, irrelevant performance numbers or mention that the performance came under the previous fund management team or an older investment mandate.
f) Of course, last but not the least, past performance is no guarantee of future performance. While this is adequately mentioned in the advertisements, we wonder why it needs to be advertised in the first place. It’s a bit like advertising tobacco products freely with a small disclaimer at the bottom!!
Nonetheless this disclaimer is important; we have mentioned it right at the end because we believe that the 5 points discussed earlier are a lot more important.
What should investors do?Our advice to investors is that they should adhere to the basics of mutual fund investing. They should evaluate mutual funds across parameters, including of course past performance, before considering any investments.
In our view, SEBI, as a regulator of Indian stock markets, should take note of such campaigns and discourage fund houses from misguiding investors through such misrepresentative and inaccurate advertisements.
Till then we can only hope that, unlike on previous occasions when such one-off cases started trends in the mutual fund industry, this particular problem is nipped in the bud by the regulator at the earliest.
Don't go by the Mutual Fund Ratings
We have noticed that often, investors consider a lot of parameters in isolation while making investments in mutual funds. In the past, we have delved on some of these parameters viz. past performance, fund manager, performance on compounded annualised growth rate (CAGR). In this article, we discuss another parameter that leaves investors all starry-eyed – mutual fund ratings. We have given our view on ratings and also how Morningstar, a pioneer of sorts in mutual fund ratings, considers its own ratings.
For some time now, Indian mutual fund investors have taken a fancy for star ratings that are accorded by select mutual fund research firms/agencies. These firms, based on certain pre-determined parameters, give a rating (often by way of stars, more stars means a better rating) to various mutual funds. Often the rating process is quite complicated, so we find it ironical as to how investors have taken a fancy to them without first understanding how these ratings were arrived at.
Star ratings in the Indian context don’t really do justice to the funds that are rated. To begin with, the ratings are biased towards returns i.e. net asset value appreciation and even then it’s only past performance. Other factors like risk, portfolio diversification, ethics, processes and investment philosophy are either given lower weightage or no weightage at all.
In our view, star ratings in most cases (at least in the Indian context) must be considered with a pinch of salt for the following reasons:
1) Since past performance has such an important role to play in the rating process, the ratings are backward-looking, not forward-looking.
2) Given that returns are a key constituent in the ratings, other factors being the same, a change in the returns usually results in a revision in the rating. For investors, it can be a nightmare to realign their investments in a mutual fund in response to the latest revision in its rating.
3) The ratings do not accord adequate priority to investment processes pursued by a mutual fund. A mutual fund based on its processes may register a certain performance level which may not compare well to another mutual fund, with a superior performance on the back of a star fund manager. In our view, there is a higher risk associated with the mutual fund with a star fund manager that the ratings simply fail to capture. When the star fund manager quits, the mutual fund is left in the lurch and this is most likely to show in its performance. The ratings usually fail to highlight this to the investor.
4) The ratings also fail to highlight the importance of ethics. A fund house (or its star fund manager) that is embroiled in a scam/financial irregularity does not get a ‘negative rating’ on ethics. So a fund house that is performing well on the returns front, although it has been hauled up by regulators for misdemeanours while investing, will still manage to get a high rating based on high returns, albeit at lower ethics. So there is a need to accord an ‘ethics-adjusted return’ which ratings fail to do.
5) Most ratings also ignore transparency and compliance in terms of information flow to investors. A mutual fund that does not give adequate and relevant information to investors in a timely and consistent manner will nonetheless rank highly based on its superior performance. So there are no negative ratings for being investor-unfriendly and no plus points for being investor-friendly.
6) Ratings fail to tell an investor whether or not he should be investing in a fund. There could be a dozen equity funds in a particular peer group, all with 5 star ratings. How is the investor supposed to know, which is the best fund for him? The ratings fail to guide investors on exactly which fund is ideal for their portfolios.
While in India ratings are considered by investors and the rating agencies as fairly conclusive, we would like to draw the attention of our visitors towards how Morningstar, the father of mutual fund ratings, so to speak, considers its own ratings. Morningstar is an international firm that researches mutual funds and stocks. This is what Morningstar has to say about its own ratings:
“As always the Morningstar Rating is intended for use as a first step in the fund evaluation process. A high rating alone is not sufficient basis for investment decisions.”
In our view, this is exactly how these ratings must be treated. They are at best a starting point for investors. They are certainly not the be-all and end-all of mutual fund evaluation. This is a point for consideration for all parties involved – the rating agency that gives the rating, the mutual fund that showcases them and the investor who is impressed by them.
For some time now, Indian mutual fund investors have taken a fancy for star ratings that are accorded by select mutual fund research firms/agencies. These firms, based on certain pre-determined parameters, give a rating (often by way of stars, more stars means a better rating) to various mutual funds. Often the rating process is quite complicated, so we find it ironical as to how investors have taken a fancy to them without first understanding how these ratings were arrived at.
Star ratings in the Indian context don’t really do justice to the funds that are rated. To begin with, the ratings are biased towards returns i.e. net asset value appreciation and even then it’s only past performance. Other factors like risk, portfolio diversification, ethics, processes and investment philosophy are either given lower weightage or no weightage at all.
In our view, star ratings in most cases (at least in the Indian context) must be considered with a pinch of salt for the following reasons:
1) Since past performance has such an important role to play in the rating process, the ratings are backward-looking, not forward-looking.
2) Given that returns are a key constituent in the ratings, other factors being the same, a change in the returns usually results in a revision in the rating. For investors, it can be a nightmare to realign their investments in a mutual fund in response to the latest revision in its rating.
3) The ratings do not accord adequate priority to investment processes pursued by a mutual fund. A mutual fund based on its processes may register a certain performance level which may not compare well to another mutual fund, with a superior performance on the back of a star fund manager. In our view, there is a higher risk associated with the mutual fund with a star fund manager that the ratings simply fail to capture. When the star fund manager quits, the mutual fund is left in the lurch and this is most likely to show in its performance. The ratings usually fail to highlight this to the investor.
4) The ratings also fail to highlight the importance of ethics. A fund house (or its star fund manager) that is embroiled in a scam/financial irregularity does not get a ‘negative rating’ on ethics. So a fund house that is performing well on the returns front, although it has been hauled up by regulators for misdemeanours while investing, will still manage to get a high rating based on high returns, albeit at lower ethics. So there is a need to accord an ‘ethics-adjusted return’ which ratings fail to do.
5) Most ratings also ignore transparency and compliance in terms of information flow to investors. A mutual fund that does not give adequate and relevant information to investors in a timely and consistent manner will nonetheless rank highly based on its superior performance. So there are no negative ratings for being investor-unfriendly and no plus points for being investor-friendly.
6) Ratings fail to tell an investor whether or not he should be investing in a fund. There could be a dozen equity funds in a particular peer group, all with 5 star ratings. How is the investor supposed to know, which is the best fund for him? The ratings fail to guide investors on exactly which fund is ideal for their portfolios.
While in India ratings are considered by investors and the rating agencies as fairly conclusive, we would like to draw the attention of our visitors towards how Morningstar, the father of mutual fund ratings, so to speak, considers its own ratings. Morningstar is an international firm that researches mutual funds and stocks. This is what Morningstar has to say about its own ratings:
“As always the Morningstar Rating is intended for use as a first step in the fund evaluation process. A high rating alone is not sufficient basis for investment decisions.”
In our view, this is exactly how these ratings must be treated. They are at best a starting point for investors. They are certainly not the be-all and end-all of mutual fund evaluation. This is a point for consideration for all parties involved – the rating agency that gives the rating, the mutual fund that showcases them and the investor who is impressed by them.
Mutual Fund FAQs
1.What is a Mutual Fund?
A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI) that pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. In other words, a mutual fund allows an investor to indirectly take a position in a basket of assets.
2.Which was the First Mutual Fund to be set up in India?
Unit Trust of India is the first Mutual Fund set up under a separate act, UTI Act in 1963, and started its operations in 1964 with the issue of units under the scheme US-64.
3.Who is the Regulatory Body for Mutual Funds?
Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds mentioned above. All the mutual funds must get registered with SEBI. The only exception is the UTI, since it is a corporation formed under a separate Act of Parliament.
4.What are the broad guidelines issued for a MF?
SEBI is the regulatory authority of MFs. SEBI has the following broad guidelines pertaining to mutual funds : (1) MFs should be formed as a Trust under Indian Trust Act and should be operated by Asset Management Companies (AMCs). (2) MFs need to set up a Board of Trustees and Trustee Companies. They should also have their Board of Directors. (3) The net worth of the AMCs should be at least Rs.5 crore. (4) AMCs and Trustees of a MF should be two separate and distinct legal entities. (5) The AMC or any of its companies cannot act as managers for any other fund. (6) AMCs have to get the approval of SEBI for its Articles and Memorandum of Association. (7) All MF schemes should be registered with SEBI. (8) MFs should distribute minimum of 90% of their profits among the investors. (9) There are other guidelines also that govern investment strategy, disclosure norms and advertising code for mutual funds.
5.How do mutual funds diversify their risks?
According to basis financial theory, which states that an investor can reduce his total risk by holding a portfolio of assets instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially reduced.
6.Can mutual funds assumed to be risk-free investments?
No. Mutual fund investments are not totally risk free. In fact, investing in mutual funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds the controllable risks are substantially reduced.
7.What are the types risks involved in investing in mutual funds?
A very important risk involved in mutual fund investments is the market risk. When the market is in doldrums, most of the equity funds will also experience a downturn. However, the company specific risks are largely eliminated due to professional fund management.
8.What are the different types of funds offered by fund house?
Currently there exist balanced funds, Income fund, Growth funds, Sector funds etc. To get more details about the different funds and their features please visit our mutual fund glossary.
9.What are the different types of plans that mutual fund offers?
That depends on the strategy of the concerned scheme. But generally there are 3 broad categories. A dividend plan entails a regular payment of dividend to the investors. A reinvestment plan is a plan where these dividends are reinvested in the scheme itself. A growth plan is one where no dividends are declared and the investor only gains through capital appreciation in the NAV of the fund.
10.What are open-ended and closed-ended mutual funds?
In an open-ended mutual fund there are no limits on the total size of the corpus. Investors are permitted to enter and exit the open-ended mutual fund at any point of time at a price that is linked to the net asset value (NAV). In case of closed-ended funds, the total size of the corpus is limited by the size of the initial offer.
11.What is the investor’s exit route in case of a closed-ended fund?
According to Sebi regulations, all closed-ended funds have to be necessarily listed on a recognized stock exchange. Thus the secondary market provides an exit route in case of closed-ended funds.
12.Why should one choose to invest in a mutual fund?
For retail investor who does not have the time and expertise to analyze and invest in stocks and bonds, mutual funds offer a viable investment alternative. This is because:(1) Mutual Funds provide the benefit of cheap access to expensive stocks (2) Mutual funds diversify the risk of the investor by investing in a basket of assets (3) A team of professional fund managers manages them with in-depth research inputs from investment analysts. (4) Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information which individual investors cannot access.
13.How investors invest in Mutual Funds?
One can invest by approaching a registered broker of Mutual funds or the respective offices of the Mutual funds in that particular town/city. An application form has to be filled up giving all the particulars along with the cheque or Demand Draft for the amount to be invested.
14.What are the parameters on which a Mutual Fund scheme should be evaluated?
Performance indicators like total returns given by the fund on different schemes, the returns on competing funds, the objective of the fund and the promoter’s image are some of the key factors to be considered while taking an investment decision regarding mutual funds.
15.What is a Systematic Investment Plan and how does it operate?
A systematic investment plan is one where an investor contributes a fixed amount every month and at the prevailing NAV the units are credited to his account. Today many funds are offering this facility.
16.What are the benefits of s Systematic Investment Plan?
A systematic investment plan (SIP) offers 2 major benefits to an investor: (1) It avoids lump sum investment at one point of time (2) In a scenario of falling prices, it reduces your overall cost of acquisition by a process of rupee-cost averaging. This means that (3) at lower prices you end up getting more units for the same investment.
17.What is the difference between mutual funds and portfolio management schemes?
While the concept remains the same of collecting money from investors, pooling them and investing the funds, the target investors are different. In the case of portfolio management the target investors are high networth investors while in case of mutual funds the target investors are the retail investors.
18.Is investor eligible for rebate on income tax by investing in a MF?
Yes in case of certain specific Equity Linked Saving Schemes, tax benefits are available under Section 88 of the Income Tax Act. In such cases the fund prospectuses explicitly states that it is a tax saving fund. In such cases 20% of your contribution will qualify for rebate under Section 88 of the Income Tax Act.
19.Do investments in mutual funds offer tax benefit on capital gains?
Yes. If the capital gains earned by you during a financial year are invested in specified mutual funds then such capital gains are exempt from capital gains tax under Section 54EA and Section 54EB of the Income Tax Act.
20.Do mutual fund investments attract wealth tax?
No. Under the Wealth Tax Act, all financial assets, including mutual fund units are exempt totally from Wealth Tax.
21.If I gift mutual fund units, does it attract gift tax?
No. With effect from 1st October 1998, units of a mutual fund gifted by unitholders are no longer chargeable to Gift Tax.
22.Is dividend earned from mutual funds exempt from income tax?
Yes. Income from mutual funds in the form of dividends is entirely exempt from income tax provided the fund in question is a equity/growth fund where more than 50% of the portfolio is invested in equities.
23.What are my major rights as a unit holder in a mutual fund?
Some important rights are mentioned below: (1) Unit holders have a proportionate right in the beneficial ownership of the assets of the scheme and to the dividend declared. (2) They are entitled to receive dividend warrants within 42 days of the date of declaration of the dividend. (3) They are entitled to receive redemption cheques within 10 working days from the date of redemption. (4) 75% of the unit holders with the prior approval of SEBI can terminate AMC of the fund. (5) 75% of the unit holders can pass a resolution to wind-up the scheme.
24. What is a fund house/family?
A group of funds managed under one umbrella. The most basic fund family would include a stock, bond and money market-portfolio, although many funds have variants like sector funds, balanced funds.
For instance, Zurich India Mutual Fund is a fund house with several funds under it.
25. What are a fund’s net assets?
The total value of a fund's cash and securities less its liabilities or obligations.
26. What is a fund portfolio?
A group of securities held by the mutual fund. A portfolio could be a mixture of stocks, bonds and cash.
27. What is the portfolio turnover of a fund supposed to mean?
A measure of the amount of buying and selling activity in a fund.Turnover is defined as the lesser of securities sold or purchased during a year divided by the average of monthly net assets. A turnover of 100 percent, for example, implies positions are held on average for about a year.
28. How are mutual funds classified?
Mutual Funds can be classified into the following 3 broad categories:
1. Portfolio classification
2. Functional classification
3. Geographical classification
29. How are mutual funds classified based on their portfolios?
Portfolio classification of mutual funds is done on the following basis:
Growth Funds
Investment objective: Capital appreciation of equity shares
Investment avenue: Equity shares of companies with high growth potential
For eg. Morgan Stanley Growth Fund
Income Funds
Investment objective: Providing safety of investments and regular income
Investment avenue: Bonds, debentures and other debt related instruments as well as equity shares of companies with high dividend payouts.
There are 2 aspects of income funds viz. low investment risk with constant income and high investment risk generating high income.
For eg. Templeton Income Fund
Balanced Funds
Investment objective: Modest risk of investment and reasonable rate of return Investment avenue: Judicious mix of equity shares, preference shares as well as bonds, debentures and other debt related instruments.
For eg. GIC Balanced Fund
Money Market Mutual Funds (MMMFs)
Investment objective: To take advantage of the volatility in interest rates in the money market Investment Avenue: Certificate of deposits (CDs), call money market, commercial papers. Investors can participate indirectly in the money market through MMMFs.
For eg. IDBI-PRINCIPAL Money Market Fund 1997
Specialised Funds
Investment Objective: To take advantage of conditions in a particular sector or a specific income producing security
Investment Avenue: Specialised investments in securities of companies in certain sectors or specific income producing securities
For eg. Kothari Pioneer's Internet Opportunities
Fund
Leveraged Funds
Investment objective: To increase the value of the portfolio and benefit the shareholders by gains exceeding the cost of borrowed funds
Investment avenue: Speculative and risky investments, like short sales to take advantage of declining market.
Not common in India
Index Funds
Investment Objective: To increase the value of the portfolio in line with the benchmark index (for eg. BSE Sensex, SP CNX 50)
Investment Avenue: Investments only in those shares that form a part of the benchmark index, in exactly the same proportion, so that the value of the index fund varies in proportion with the benchmark index.
For e.g. UTI Nifty Index Fund
Hedge Funds
Investment Objective: To hedge risks in order to increase the value of the portfolio
Investment Avenue: Employ speculative trading principles - buy rising shares and sell shares whose prices are likely to fall.
Not common in India
30. How are mutual funds classified functionally?
Functional classification of mutual funds is done on the following basis:
Open ended scheme
Investors under this scheme are free to join the fund or withdraw from the fund at any time after an initial lock-in period. Such funds announce sale and repurchase prices from time to time. In an open-ended scheme, investors can resell units in the fund to the issuing mutual fund at the net asset value (NAV) of the units. This is because open-ended schemes are permitted to buy/sell their own units. For e.g. Alliance Capital 1995 Fund
Close-ended scheme
Unlike the open-ended schemes, close-ended schemes do not issue units for repurchase redemption on a periodic basis. Its units can be redeemed only on termination of the scheme, or through dealings in the secondary market. In such schemes, the period of the scheme is specified at the outset. They have a definite target amount for the funds and cannot sell more after initial offering. For eg. UTI Mastergain 1986
31. How are mutual funds classified geographically?
Mutual funds can be classified geographically on the following basis:
Domestic funds
Domestic fund houses launch funds, which mobilise savings of the nationals within the country. These schemes could fall under any of the categories mentioned under portfolio classification and functional classification. Schemes launched by Indian MFs like GIC MF, UTI LIC MF, SBI MF, Canbank MF, Bank of Baroda MF, Bank of India MF, Morgan Stanley, Templeton, Alliance.
Offshore Funds
Offshore funds can invest in securities of foreign companies, after requisite permission from RBI. The objective behind launching offshore funds is to attract foreign capital for investment in the country of the issuing company. These funds facilitate cross border fund flow, which is a direct route for getting foreign currency. From the investment point of view, Offshore funds open up domestic capital markets to the international investors and global portfolio investments.
32. What are the different plans that mutual funds offer?
Mutual Funds in order to cater to a range of investors, have various investment plans. Some of the important investment plans include:
Growth Plan
Under the Growth Plan, the investor realises only the capital appreciation on the investment (by an increase in NAV) and does not get any income in the form of dividend.
Income Plan
Under the Income Plan, the investor realises income in the form of dividend. However his NAV will fall to the extent of the dividend.
Dividend Re-investment Plan
Here the dividend accrued on mutual funds is automatically re-invested in purchasing additional units in open-ended funds. In most cases mutual funds offer the investor an option of collecting dividends or re-investing the same.
Systematic Investment Plan (SIP)
Here the investor is given the option of preparing a pre-determined number of post-dated cheques in favour of the fund. He will get units on the date of the cheque at the existing NAV. For instance, if on 25th March, he has given a post-dated cheque for June 25th, he will get units on 25th June at existing NAV.
Systematic Withdrawal Plan
As opposed to the Systematic Investment Plan, the Systematic Withdrawal Plan allows the investor the facility to withdraw a pre-determined amount/units from his fund at a pre-determined interval. The investor’s units will be redeemed at the existing NAV as on that day.
Retirement Pension Plan
Some schemes are linked with retirement pension. Individuals participate in these plans for themselves, and corporates for their employees.
Insurance Plan
Some schemes launched by UTI and LIC offer insurance cover to investors.
33. Who is a custodian?
The custodian, an independent organisation, has the physical possession of all securities purchased by the mutual fund, and undertakes responsibility for its handling and safekeeping. For instance, the Stock Holding Corporation of India Ltd (SCHIL) is the custodian for most fund houses in the country.
34. What is an Asset Management Company (AMC)?
A highly regulated organisation that pools money from many people into a portfolio structured to achieve certain objectives. Hence it is termed as an Asset Management Company. Typically an AMC manages several funds - open-end /closed-end across several categories - growth, income, balanced. Every mutual fund has an AMC associated with it.
For instance, Alliance Capital Mutual Fund is associated with Alliance Capital Asset Management Company Ltd.
35. What is load?
It is a charge collected by a mutual fund when it sells units. It can be either front-end load (i.e., the charge is collected when an investor buys the units) or back-end load (i.e, the charge collected when the investor sells back the units). Some schemes do not charge any load and are called No Load Schemes
36. What is an ex-dividend date?
Normally, one business day after the record date. Investors purchasing unit on or after the ex-dividend date are not entitled to collect dividends or bonus units. The NAV falls by the amount of the dividend distributed and/or bonus issued. The terms ex-bonus and ex-dividend often are used synonymously.
For instance, if the record date for dividend is October 15th, then investors who don’t have their names in the list of unitholders as on that day, will not receive dividend. This works very similar to dividend and bonus declarations in the case of stocks.
37. What is an asset management fee?
The fee charged by the asset management company (AMC) for portfolio management. The fee charged on an annual basis is calculated as percentage of net assets under management.
A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI) that pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. In other words, a mutual fund allows an investor to indirectly take a position in a basket of assets.
2.Which was the First Mutual Fund to be set up in India?
Unit Trust of India is the first Mutual Fund set up under a separate act, UTI Act in 1963, and started its operations in 1964 with the issue of units under the scheme US-64.
3.Who is the Regulatory Body for Mutual Funds?
Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds mentioned above. All the mutual funds must get registered with SEBI. The only exception is the UTI, since it is a corporation formed under a separate Act of Parliament.
4.What are the broad guidelines issued for a MF?
SEBI is the regulatory authority of MFs. SEBI has the following broad guidelines pertaining to mutual funds : (1) MFs should be formed as a Trust under Indian Trust Act and should be operated by Asset Management Companies (AMCs). (2) MFs need to set up a Board of Trustees and Trustee Companies. They should also have their Board of Directors. (3) The net worth of the AMCs should be at least Rs.5 crore. (4) AMCs and Trustees of a MF should be two separate and distinct legal entities. (5) The AMC or any of its companies cannot act as managers for any other fund. (6) AMCs have to get the approval of SEBI for its Articles and Memorandum of Association. (7) All MF schemes should be registered with SEBI. (8) MFs should distribute minimum of 90% of their profits among the investors. (9) There are other guidelines also that govern investment strategy, disclosure norms and advertising code for mutual funds.
5.How do mutual funds diversify their risks?
According to basis financial theory, which states that an investor can reduce his total risk by holding a portfolio of assets instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially reduced.
6.Can mutual funds assumed to be risk-free investments?
No. Mutual fund investments are not totally risk free. In fact, investing in mutual funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds the controllable risks are substantially reduced.
7.What are the types risks involved in investing in mutual funds?
A very important risk involved in mutual fund investments is the market risk. When the market is in doldrums, most of the equity funds will also experience a downturn. However, the company specific risks are largely eliminated due to professional fund management.
8.What are the different types of funds offered by fund house?
Currently there exist balanced funds, Income fund, Growth funds, Sector funds etc. To get more details about the different funds and their features please visit our mutual fund glossary.
9.What are the different types of plans that mutual fund offers?
That depends on the strategy of the concerned scheme. But generally there are 3 broad categories. A dividend plan entails a regular payment of dividend to the investors. A reinvestment plan is a plan where these dividends are reinvested in the scheme itself. A growth plan is one where no dividends are declared and the investor only gains through capital appreciation in the NAV of the fund.
10.What are open-ended and closed-ended mutual funds?
In an open-ended mutual fund there are no limits on the total size of the corpus. Investors are permitted to enter and exit the open-ended mutual fund at any point of time at a price that is linked to the net asset value (NAV). In case of closed-ended funds, the total size of the corpus is limited by the size of the initial offer.
11.What is the investor’s exit route in case of a closed-ended fund?
According to Sebi regulations, all closed-ended funds have to be necessarily listed on a recognized stock exchange. Thus the secondary market provides an exit route in case of closed-ended funds.
12.Why should one choose to invest in a mutual fund?
For retail investor who does not have the time and expertise to analyze and invest in stocks and bonds, mutual funds offer a viable investment alternative. This is because:(1) Mutual Funds provide the benefit of cheap access to expensive stocks (2) Mutual funds diversify the risk of the investor by investing in a basket of assets (3) A team of professional fund managers manages them with in-depth research inputs from investment analysts. (4) Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information which individual investors cannot access.
13.How investors invest in Mutual Funds?
One can invest by approaching a registered broker of Mutual funds or the respective offices of the Mutual funds in that particular town/city. An application form has to be filled up giving all the particulars along with the cheque or Demand Draft for the amount to be invested.
14.What are the parameters on which a Mutual Fund scheme should be evaluated?
Performance indicators like total returns given by the fund on different schemes, the returns on competing funds, the objective of the fund and the promoter’s image are some of the key factors to be considered while taking an investment decision regarding mutual funds.
15.What is a Systematic Investment Plan and how does it operate?
A systematic investment plan is one where an investor contributes a fixed amount every month and at the prevailing NAV the units are credited to his account. Today many funds are offering this facility.
16.What are the benefits of s Systematic Investment Plan?
A systematic investment plan (SIP) offers 2 major benefits to an investor: (1) It avoids lump sum investment at one point of time (2) In a scenario of falling prices, it reduces your overall cost of acquisition by a process of rupee-cost averaging. This means that (3) at lower prices you end up getting more units for the same investment.
17.What is the difference between mutual funds and portfolio management schemes?
While the concept remains the same of collecting money from investors, pooling them and investing the funds, the target investors are different. In the case of portfolio management the target investors are high networth investors while in case of mutual funds the target investors are the retail investors.
18.Is investor eligible for rebate on income tax by investing in a MF?
Yes in case of certain specific Equity Linked Saving Schemes, tax benefits are available under Section 88 of the Income Tax Act. In such cases the fund prospectuses explicitly states that it is a tax saving fund. In such cases 20% of your contribution will qualify for rebate under Section 88 of the Income Tax Act.
19.Do investments in mutual funds offer tax benefit on capital gains?
Yes. If the capital gains earned by you during a financial year are invested in specified mutual funds then such capital gains are exempt from capital gains tax under Section 54EA and Section 54EB of the Income Tax Act.
20.Do mutual fund investments attract wealth tax?
No. Under the Wealth Tax Act, all financial assets, including mutual fund units are exempt totally from Wealth Tax.
21.If I gift mutual fund units, does it attract gift tax?
No. With effect from 1st October 1998, units of a mutual fund gifted by unitholders are no longer chargeable to Gift Tax.
22.Is dividend earned from mutual funds exempt from income tax?
Yes. Income from mutual funds in the form of dividends is entirely exempt from income tax provided the fund in question is a equity/growth fund where more than 50% of the portfolio is invested in equities.
23.What are my major rights as a unit holder in a mutual fund?
Some important rights are mentioned below: (1) Unit holders have a proportionate right in the beneficial ownership of the assets of the scheme and to the dividend declared. (2) They are entitled to receive dividend warrants within 42 days of the date of declaration of the dividend. (3) They are entitled to receive redemption cheques within 10 working days from the date of redemption. (4) 75% of the unit holders with the prior approval of SEBI can terminate AMC of the fund. (5) 75% of the unit holders can pass a resolution to wind-up the scheme.
24. What is a fund house/family?
A group of funds managed under one umbrella. The most basic fund family would include a stock, bond and money market-portfolio, although many funds have variants like sector funds, balanced funds.
For instance, Zurich India Mutual Fund is a fund house with several funds under it.
25. What are a fund’s net assets?
The total value of a fund's cash and securities less its liabilities or obligations.
26. What is a fund portfolio?
A group of securities held by the mutual fund. A portfolio could be a mixture of stocks, bonds and cash.
27. What is the portfolio turnover of a fund supposed to mean?
A measure of the amount of buying and selling activity in a fund.Turnover is defined as the lesser of securities sold or purchased during a year divided by the average of monthly net assets. A turnover of 100 percent, for example, implies positions are held on average for about a year.
28. How are mutual funds classified?
Mutual Funds can be classified into the following 3 broad categories:
1. Portfolio classification
2. Functional classification
3. Geographical classification
29. How are mutual funds classified based on their portfolios?
Portfolio classification of mutual funds is done on the following basis:
Growth Funds
Investment objective: Capital appreciation of equity shares
Investment avenue: Equity shares of companies with high growth potential
For eg. Morgan Stanley Growth Fund
Income Funds
Investment objective: Providing safety of investments and regular income
Investment avenue: Bonds, debentures and other debt related instruments as well as equity shares of companies with high dividend payouts.
There are 2 aspects of income funds viz. low investment risk with constant income and high investment risk generating high income.
For eg. Templeton Income Fund
Balanced Funds
Investment objective: Modest risk of investment and reasonable rate of return Investment avenue: Judicious mix of equity shares, preference shares as well as bonds, debentures and other debt related instruments.
For eg. GIC Balanced Fund
Money Market Mutual Funds (MMMFs)
Investment objective: To take advantage of the volatility in interest rates in the money market Investment Avenue: Certificate of deposits (CDs), call money market, commercial papers. Investors can participate indirectly in the money market through MMMFs.
For eg. IDBI-PRINCIPAL Money Market Fund 1997
Specialised Funds
Investment Objective: To take advantage of conditions in a particular sector or a specific income producing security
Investment Avenue: Specialised investments in securities of companies in certain sectors or specific income producing securities
For eg. Kothari Pioneer's Internet Opportunities
Fund
Leveraged Funds
Investment objective: To increase the value of the portfolio and benefit the shareholders by gains exceeding the cost of borrowed funds
Investment avenue: Speculative and risky investments, like short sales to take advantage of declining market.
Not common in India
Index Funds
Investment Objective: To increase the value of the portfolio in line with the benchmark index (for eg. BSE Sensex, SP CNX 50)
Investment Avenue: Investments only in those shares that form a part of the benchmark index, in exactly the same proportion, so that the value of the index fund varies in proportion with the benchmark index.
For e.g. UTI Nifty Index Fund
Hedge Funds
Investment Objective: To hedge risks in order to increase the value of the portfolio
Investment Avenue: Employ speculative trading principles - buy rising shares and sell shares whose prices are likely to fall.
Not common in India
30. How are mutual funds classified functionally?
Functional classification of mutual funds is done on the following basis:
Open ended scheme
Investors under this scheme are free to join the fund or withdraw from the fund at any time after an initial lock-in period. Such funds announce sale and repurchase prices from time to time. In an open-ended scheme, investors can resell units in the fund to the issuing mutual fund at the net asset value (NAV) of the units. This is because open-ended schemes are permitted to buy/sell their own units. For e.g. Alliance Capital 1995 Fund
Close-ended scheme
Unlike the open-ended schemes, close-ended schemes do not issue units for repurchase redemption on a periodic basis. Its units can be redeemed only on termination of the scheme, or through dealings in the secondary market. In such schemes, the period of the scheme is specified at the outset. They have a definite target amount for the funds and cannot sell more after initial offering. For eg. UTI Mastergain 1986
31. How are mutual funds classified geographically?
Mutual funds can be classified geographically on the following basis:
Domestic funds
Domestic fund houses launch funds, which mobilise savings of the nationals within the country. These schemes could fall under any of the categories mentioned under portfolio classification and functional classification. Schemes launched by Indian MFs like GIC MF, UTI LIC MF, SBI MF, Canbank MF, Bank of Baroda MF, Bank of India MF, Morgan Stanley, Templeton, Alliance.
Offshore Funds
Offshore funds can invest in securities of foreign companies, after requisite permission from RBI. The objective behind launching offshore funds is to attract foreign capital for investment in the country of the issuing company. These funds facilitate cross border fund flow, which is a direct route for getting foreign currency. From the investment point of view, Offshore funds open up domestic capital markets to the international investors and global portfolio investments.
32. What are the different plans that mutual funds offer?
Mutual Funds in order to cater to a range of investors, have various investment plans. Some of the important investment plans include:
Growth Plan
Under the Growth Plan, the investor realises only the capital appreciation on the investment (by an increase in NAV) and does not get any income in the form of dividend.
Income Plan
Under the Income Plan, the investor realises income in the form of dividend. However his NAV will fall to the extent of the dividend.
Dividend Re-investment Plan
Here the dividend accrued on mutual funds is automatically re-invested in purchasing additional units in open-ended funds. In most cases mutual funds offer the investor an option of collecting dividends or re-investing the same.
Systematic Investment Plan (SIP)
Here the investor is given the option of preparing a pre-determined number of post-dated cheques in favour of the fund. He will get units on the date of the cheque at the existing NAV. For instance, if on 25th March, he has given a post-dated cheque for June 25th, he will get units on 25th June at existing NAV.
Systematic Withdrawal Plan
As opposed to the Systematic Investment Plan, the Systematic Withdrawal Plan allows the investor the facility to withdraw a pre-determined amount/units from his fund at a pre-determined interval. The investor’s units will be redeemed at the existing NAV as on that day.
Retirement Pension Plan
Some schemes are linked with retirement pension. Individuals participate in these plans for themselves, and corporates for their employees.
Insurance Plan
Some schemes launched by UTI and LIC offer insurance cover to investors.
33. Who is a custodian?
The custodian, an independent organisation, has the physical possession of all securities purchased by the mutual fund, and undertakes responsibility for its handling and safekeeping. For instance, the Stock Holding Corporation of India Ltd (SCHIL) is the custodian for most fund houses in the country.
34. What is an Asset Management Company (AMC)?
A highly regulated organisation that pools money from many people into a portfolio structured to achieve certain objectives. Hence it is termed as an Asset Management Company. Typically an AMC manages several funds - open-end /closed-end across several categories - growth, income, balanced. Every mutual fund has an AMC associated with it.
For instance, Alliance Capital Mutual Fund is associated with Alliance Capital Asset Management Company Ltd.
35. What is load?
It is a charge collected by a mutual fund when it sells units. It can be either front-end load (i.e., the charge is collected when an investor buys the units) or back-end load (i.e, the charge collected when the investor sells back the units). Some schemes do not charge any load and are called No Load Schemes
36. What is an ex-dividend date?
Normally, one business day after the record date. Investors purchasing unit on or after the ex-dividend date are not entitled to collect dividends or bonus units. The NAV falls by the amount of the dividend distributed and/or bonus issued. The terms ex-bonus and ex-dividend often are used synonymously.
For instance, if the record date for dividend is October 15th, then investors who don’t have their names in the list of unitholders as on that day, will not receive dividend. This works very similar to dividend and bonus declarations in the case of stocks.
37. What is an asset management fee?
The fee charged by the asset management company (AMC) for portfolio management. The fee charged on an annual basis is calculated as percentage of net assets under management.
Why Mutual Funds
Ok, enuff of gyaan on MFs. Now, i know they are fairy. But will they be good to me. Why should i go with them.
Professional Money Management
Fund managers are responsible for implementing a consistent investment strategy that reflects the goals of the fund. Fund managers monitor market and economic trends and analyze securities in order to make informed investment decisions.
Diversification
Diversification is one of the best ways to reduce risk (to understand why, read The need to Diversify). Mutual funds offer investors an opportunity to diversify across assets depending on their investment needs.
Liquidity
Investors can sell their mutual fund units on any business day and receive the current market value on their investments within a short time period (normally three- to five-days).
Affordability
The minimum initial investment for a mutual fund is fairly low for most funds (as low as Rs500 for some schemes).
Convenience
Most private sector funds provide you the convenience of periodic purchase plans, automatic withdrawal plans and the automatic reinvestment of interest and dividends.Mutual funds also provide you with detailed reports and statements that make record-keeping simple. You can easily monitor the performance of your mutual funds simply by reviewing the business pages of most newspapers or by using our Mutual Funds section in Investor’s Mall.
Flexibility and variety
You can pick from conservative, blue-chip stock funds, sectoral funds, funds that aim to provide income with modest growth or those that take big risks in the search for returns. You can even buy balanced funds, or those that combine stocks and bonds in the samefund.
Tax benefits on Investment in Mutual Funds (in India)
1) 100% Income Tax exemption on all Mutual Fund dividends2) Capital Gains Tax to be lower of - 10% on the capital gains without factoring indexation benefit and 20% on the capital gains after factoring indexation benefit.3) Open-end funds with equity exposure of more than 50% are exempt from the payment of dividend tax for a period of 3 years from 1999-2000
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.
Though i didn't want to write this piece ...but let's be fair ..
Disadvantages of Investing Mutual Funds:
1. Professional Management-Some funds doesn’t 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.
Professional Money Management
Fund managers are responsible for implementing a consistent investment strategy that reflects the goals of the fund. Fund managers monitor market and economic trends and analyze securities in order to make informed investment decisions.
Diversification
Diversification is one of the best ways to reduce risk (to understand why, read The need to Diversify). Mutual funds offer investors an opportunity to diversify across assets depending on their investment needs.
Liquidity
Investors can sell their mutual fund units on any business day and receive the current market value on their investments within a short time period (normally three- to five-days).
Affordability
The minimum initial investment for a mutual fund is fairly low for most funds (as low as Rs500 for some schemes).
Convenience
Most private sector funds provide you the convenience of periodic purchase plans, automatic withdrawal plans and the automatic reinvestment of interest and dividends.Mutual funds also provide you with detailed reports and statements that make record-keeping simple. You can easily monitor the performance of your mutual funds simply by reviewing the business pages of most newspapers or by using our Mutual Funds section in Investor’s Mall.
Flexibility and variety
You can pick from conservative, blue-chip stock funds, sectoral funds, funds that aim to provide income with modest growth or those that take big risks in the search for returns. You can even buy balanced funds, or those that combine stocks and bonds in the samefund.
Tax benefits on Investment in Mutual Funds (in India)
1) 100% Income Tax exemption on all Mutual Fund dividends2) Capital Gains Tax to be lower of - 10% on the capital gains without factoring indexation benefit and 20% on the capital gains after factoring indexation benefit.3) Open-end funds with equity exposure of more than 50% are exempt from the payment of dividend tax for a period of 3 years from 1999-2000
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.
Though i didn't want to write this piece ...but let's be fair ..
Disadvantages of Investing Mutual Funds:
1. Professional Management-Some funds doesn’t 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.
Mutual Funds simplified
Net Asset Value or NAV
NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the AMC at the end of every business day.
How is NAV calculated?
The value of all the securities in the portfolio in calculated daily. From this, all expenses are deducted and the resultant value divided by the number of units in the fund is the fund’s NAV.
Expense Ratio
AMCs charge an annual fee, or expense ratio that covers administrative expenses, salaries, advertising expenses, brokerage fee, etc. A 1.5% expense ratio means the AMC charges Rs1.50 for every Rs100 in assets under management.A fund's expense ratio is typically to the size of the funds under management and not to the returns earned. Normally, the costs of running a fund grow slower than the growth in the fund size - so, the more assets in the fund, the lower should be its expense ratio.
Load
Some AMCs have sales charges, or loads, on their funds (entry load and/or exit load) to compensate for distribution costs. Funds that can be purchased without a sales charge are called no-load funds.
Open- and Close-Ended Funds
1) Open-ended FundsAt any time during the scheme period, investors can enter and exit the fund scheme (by buying/ selling fund units) at its NAV (net of any load charge). Increasingly, AMCs are issuing mostly open-ended funds.2) Close-Ended FundsRedemption can take place only after the period of the scheme is over. However, close-ended funds are listed on the stock exchanges and investors can buy/ sell units in the secondary market (there is no load).
Important documents
Two key documents that highlight the fund's strategy and performance are 1) the prospectus (legal document) and the shareholder reports (normally quarterly).
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).
inputs from moneycontrol.com
NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the AMC at the end of every business day.
How is NAV calculated?
The value of all the securities in the portfolio in calculated daily. From this, all expenses are deducted and the resultant value divided by the number of units in the fund is the fund’s NAV.
Expense Ratio
AMCs charge an annual fee, or expense ratio that covers administrative expenses, salaries, advertising expenses, brokerage fee, etc. A 1.5% expense ratio means the AMC charges Rs1.50 for every Rs100 in assets under management.A fund's expense ratio is typically to the size of the funds under management and not to the returns earned. Normally, the costs of running a fund grow slower than the growth in the fund size - so, the more assets in the fund, the lower should be its expense ratio.
Load
Some AMCs have sales charges, or loads, on their funds (entry load and/or exit load) to compensate for distribution costs. Funds that can be purchased without a sales charge are called no-load funds.
Open- and Close-Ended Funds
1) Open-ended FundsAt any time during the scheme period, investors can enter and exit the fund scheme (by buying/ selling fund units) at its NAV (net of any load charge). Increasingly, AMCs are issuing mostly open-ended funds.2) Close-Ended FundsRedemption can take place only after the period of the scheme is over. However, close-ended funds are listed on the stock exchanges and investors can buy/ sell units in the secondary market (there is no load).
Important documents
Two key documents that highlight the fund's strategy and performance are 1) the prospectus (legal document) and the shareholder reports (normally quarterly).
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).
inputs from moneycontrol.com
Types of Mutual Funds 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:
A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate 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.
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 manager’s 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.
inputs from mutualfundsindia.com
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:
A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate 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.
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 manager’s 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.
inputs from mutualfundsindia.com
Let's talk Mutual Funds
Stock Market has always been scary for me and i guess there are many who would support me in this. I always wanted to make some money through the stocks but the numbers always bewildered me. Thanks to Mutual Funds. They are my favourites. MFs are the tools rescued me from the demons of stocks.
So, what exactly is a Mutual Fund..
A vehicle for investing in stocks and bonds
A mutual fund is not an alternative investment option to stocks and bonds, rather it pools the money of several investors and invests this in stocks, bonds, money market instruments and other types of securities.
Buying a mutual fund is like buying a small slice of a big pizza. The owner of a mutual fund unit gets a proportional share of the fund’s gains, losses, income and expenses.
So a mutual fund is simply 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 pooled money into specific securities (usually stocks or bonds). When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund.
Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest in (you don't have to figure out which stocks or bonds to buy). If you would like to know the history of mutual funds, click here.
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.
Each mutual fund has a specific stated objective
The fund’s objective is laid out in the fund's prospectus, which is the legal document that contains information about the fund, its history, its officers and its performance.
Some popular objectives of a mutual fund are -
Fund Objective What the fund will invest in
Equity (Growth) Only in stocks
Debt (Income) Only in fixed-income securities
Money Market (including Gilt) In short-term money market instruments(including government securities)
Balanced Partly in stocks and partly in fixed-income securities, in order to maintain a 'balance' in returns and risk
Managed by an Asset Management Company (AMC)
The company that puts together a mutual fund is called an AMC. An AMC may have several mutual fund schemes with similar or varied investment objectives.
The AMC hires a professional money manager, who buys and sells securities in line with the fund's stated objective.
All AMCs Regulated by SEBI, Funds governed by Board of Directors
The Securities and Exchange Board of India (SEBI) mutual fund regulations require that the fund’s objectives are clearly spelt out in the prospectus.
In addition, every mutual fund has a board of directors that is supposed to represent the shareholders' interests, rather than the AMC’s.
Inputs from www.moneycontrol.com & other sources
So, what exactly is a Mutual Fund..
A vehicle for investing in stocks and bonds
A mutual fund is not an alternative investment option to stocks and bonds, rather it pools the money of several investors and invests this in stocks, bonds, money market instruments and other types of securities.
Buying a mutual fund is like buying a small slice of a big pizza. The owner of a mutual fund unit gets a proportional share of the fund’s gains, losses, income and expenses.
So a mutual fund is simply 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 pooled money into specific securities (usually stocks or bonds). When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund.
Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest in (you don't have to figure out which stocks or bonds to buy). If you would like to know the history of mutual funds, click here.
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.
Each mutual fund has a specific stated objective
The fund’s objective is laid out in the fund's prospectus, which is the legal document that contains information about the fund, its history, its officers and its performance.
Some popular objectives of a mutual fund are -
Fund Objective What the fund will invest in
Equity (Growth) Only in stocks
Debt (Income) Only in fixed-income securities
Money Market (including Gilt) In short-term money market instruments(including government securities)
Balanced Partly in stocks and partly in fixed-income securities, in order to maintain a 'balance' in returns and risk
Managed by an Asset Management Company (AMC)
The company that puts together a mutual fund is called an AMC. An AMC may have several mutual fund schemes with similar or varied investment objectives.
The AMC hires a professional money manager, who buys and sells securities in line with the fund's stated objective.
All AMCs Regulated by SEBI, Funds governed by Board of Directors
The Securities and Exchange Board of India (SEBI) mutual fund regulations require that the fund’s objectives are clearly spelt out in the prospectus.
In addition, every mutual fund has a board of directors that is supposed to represent the shareholders' interests, rather than the AMC’s.
Inputs from www.moneycontrol.com & other sources
Some more key points to manage money
Debts
The most important thing is avoiding unmanageable or crippling debts. That means high-interest debts such as credit cards, store cards, or loans that you don't really need. Note that this doesn't include low-interest student loans, business start-up loans, or mortgages, which can be seen as long-term investments in a way.
Before you start saving or spending, or investing, pay off those debts. You will lose more money on high debt interest payments than you're ever likely to make with most savings and investments - you'll be better off in the long run if you work harder at ditching the debt.
Emergency money
Once your debts are paid off, get yourself some money saved up for a rainy day. You really never know when you're going to have an emergency, or need that cash cushion. An unexpected pregnancy, a job loss, essential household repairs, or a new interview suit can be made less of a worry by keeping some cash to one side.
Keep it in an instant or easy access account, and check from time to time that you're getting a competitive rate of interest on it. If you're really good at money management, you could just keep the sum in your current account, if it pays enough interest.
Ideally, if you're working, have enough money saved to cover three to six months of basic living costs. If that's unrealistic, just save whatever you can, even if it's only a pound here and there. Anyone who is on a very tight budget, such as living on benefits, should concentrate on breaking even, and avoiding debt wherever possible.
Basic savings and investments
Once the debts are paid off, and you have some emergency money saved, think about some of the less risky ways to save and invest. That could be high interest savings accounts, property, pensions, bonds, and perhaps insurance, and so on. You won't always make a fortune with these, but if you research the market and choose carefully, they have traditionally been safer long-term choices.
Taking more of a risk
This is only for people who have a stable financial foundation first! With riskier investments, you might make more money, but you also run the risk of losing the lot. This includes unit trusts, shares in single companies, and alternative investments. Don't be greedy and get sucked in by offers of high returns, always read around the subject and do your own research before committing to a purchase.
The most important thing is avoiding unmanageable or crippling debts. That means high-interest debts such as credit cards, store cards, or loans that you don't really need. Note that this doesn't include low-interest student loans, business start-up loans, or mortgages, which can be seen as long-term investments in a way.
Before you start saving or spending, or investing, pay off those debts. You will lose more money on high debt interest payments than you're ever likely to make with most savings and investments - you'll be better off in the long run if you work harder at ditching the debt.
Emergency money
Once your debts are paid off, get yourself some money saved up for a rainy day. You really never know when you're going to have an emergency, or need that cash cushion. An unexpected pregnancy, a job loss, essential household repairs, or a new interview suit can be made less of a worry by keeping some cash to one side.
Keep it in an instant or easy access account, and check from time to time that you're getting a competitive rate of interest on it. If you're really good at money management, you could just keep the sum in your current account, if it pays enough interest.
Ideally, if you're working, have enough money saved to cover three to six months of basic living costs. If that's unrealistic, just save whatever you can, even if it's only a pound here and there. Anyone who is on a very tight budget, such as living on benefits, should concentrate on breaking even, and avoiding debt wherever possible.
Basic savings and investments
Once the debts are paid off, and you have some emergency money saved, think about some of the less risky ways to save and invest. That could be high interest savings accounts, property, pensions, bonds, and perhaps insurance, and so on. You won't always make a fortune with these, but if you research the market and choose carefully, they have traditionally been safer long-term choices.
Taking more of a risk
This is only for people who have a stable financial foundation first! With riskier investments, you might make more money, but you also run the risk of losing the lot. This includes unit trusts, shares in single companies, and alternative investments. Don't be greedy and get sucked in by offers of high returns, always read around the subject and do your own research before committing to a purchase.
Some general principles of managing money
Here are some good ways to get your finances under control:
- Determine your spendable monthly income.
- If you have additional sources of income (i.e. interest income, alimony, child support), include them also, calculating the monthly income using the above chart.
- Find out what you spend
- Write down everything you buy and exactly how much it costs (tax included) for at least one month. This will allow you to see where your money really goes. Keeping up with this may require a little discipline and hard work, but the results will be well worth it. This is an especially important step for getting your finances under control. Many people do not know how much they really spend and what types of things they spend their money on.
- Use the two-list system to make a budget
Create two columns. In the left column, list your monthly income. In the right column, list your monthly expenses. If your expenses total more than your income, see "Learn to Economize" below.
While it is not possible to plan for every expense, your expense budget should include all of the areas on which you spend money, not just the major ones like food, rent and insurance. Don't try to leave categories out and 'borrow' the money from these hidden areas of your budget. Be honest. If you know that you spend $20 a month on tanning or videos, include it in your budget. For periodic expenses, such as car insurance, figure out how much you need to put in your savings account each month so that the money will be available when it is due, and build this into your budget.
Learn to economize.
Should you find out that your spending exceeds your income, here are a few tips on how to reduce your expenses:
- Comparison shop for the cheapest prices on the things you need to buy.
- Consider buying generic or 'off' brands instead of name brands.
- Shop at garage sales or thrift stores for household items and clothing. You can save a lot of money this way.
- Don't buy on impulse. Stay out of shops that sell only expensive items--like electronics stores.
- Cook your own meals instead of eating out. Cook from scratch--packaged or prepared meals are usually more expensive.
- Always turn off lights and electrical equipment when they're not in use and keep your thermostat set low in the winter (60 when you're not there and at night and 68 when you are home) and high in the summer. Better yet, turn your air conditioner off and just use a fan in the summer.
- Try using public transportation instead of your car, and don't make long trips if you don't have to.
- Use credit cards only when necessary (such as ordering merchandise via the web). Immediately write a check to the credit card company for the amount you spent and hold it until the bill comes, paying the balance off every month. While they can be useful in some situations, credit cards can get you into some serious debt in a hurry.
- Determine your spendable monthly income.
- If you have additional sources of income (i.e. interest income, alimony, child support), include them also, calculating the monthly income using the above chart.
- Find out what you spend
- Write down everything you buy and exactly how much it costs (tax included) for at least one month. This will allow you to see where your money really goes. Keeping up with this may require a little discipline and hard work, but the results will be well worth it. This is an especially important step for getting your finances under control. Many people do not know how much they really spend and what types of things they spend their money on.
- Use the two-list system to make a budget
Create two columns. In the left column, list your monthly income. In the right column, list your monthly expenses. If your expenses total more than your income, see "Learn to Economize" below.
While it is not possible to plan for every expense, your expense budget should include all of the areas on which you spend money, not just the major ones like food, rent and insurance. Don't try to leave categories out and 'borrow' the money from these hidden areas of your budget. Be honest. If you know that you spend $20 a month on tanning or videos, include it in your budget. For periodic expenses, such as car insurance, figure out how much you need to put in your savings account each month so that the money will be available when it is due, and build this into your budget.
Learn to economize.
Should you find out that your spending exceeds your income, here are a few tips on how to reduce your expenses:
- Comparison shop for the cheapest prices on the things you need to buy.
- Consider buying generic or 'off' brands instead of name brands.
- Shop at garage sales or thrift stores for household items and clothing. You can save a lot of money this way.
- Don't buy on impulse. Stay out of shops that sell only expensive items--like electronics stores.
- Cook your own meals instead of eating out. Cook from scratch--packaged or prepared meals are usually more expensive.
- Always turn off lights and electrical equipment when they're not in use and keep your thermostat set low in the winter (60 when you're not there and at night and 68 when you are home) and high in the summer. Better yet, turn your air conditioner off and just use a fan in the summer.
- Try using public transportation instead of your car, and don't make long trips if you don't have to.
- Use credit cards only when necessary (such as ordering merchandise via the web). Immediately write a check to the credit card company for the amount you spent and hold it until the bill comes, paying the balance off every month. While they can be useful in some situations, credit cards can get you into some serious debt in a hurry.
Why manage my money, when i can earn them !
Wouldn’t it be great to win the lottery or inherit a fortune and suddenly have enough money to pay off all your debts and enjoy being rich for the rest of your life! If we are realistic, it is not likely to happen. And even if the dream came true, you would probably find that having a lot of money does not end financial concerns. Even millionaires need to know how to manage money.
While some of us are wise enough to think of managing our money, we don't do it b'coz of various reasons.
"It's not important. I'll worry about it tomorrow".
"Wish someone else would sort out my finances for me. Too scary to look at. No idea where to start. When I win the lottery... "
These are some of the logical(?) grounds we give to convince ourselves to do the sin.
Managing your money is an essential life skill, and once you know what you're doing, it really isn't so difficult. Once you've left home, the only person responsible for your financial health is you, so it's good to know the essentials.
Money management skills and good practices are needed no matter how much or how little one has. Financial planning is important. While it’s hard to think about planning for the future when pay day is a week away and your wallet and checkbook are empty, you can learn to manage dollars carefully.
Manage Your Money will help you:
Know what you want to do with money.
Know where your money goes.
Know how to save money for your goals.
Plan your spending in advance.
Know your credit limits and how to keep control.
I am no great money manager. I still think a lot and act a little. In this blog i'll try to give you folks some insight into managing your money ...well..managing your money in a better way.
While some of us are wise enough to think of managing our money, we don't do it b'coz of various reasons.
"It's not important. I'll worry about it tomorrow".
"Wish someone else would sort out my finances for me. Too scary to look at. No idea where to start. When I win the lottery... "
These are some of the logical(?) grounds we give to convince ourselves to do the sin.
Managing your money is an essential life skill, and once you know what you're doing, it really isn't so difficult. Once you've left home, the only person responsible for your financial health is you, so it's good to know the essentials.
Money management skills and good practices are needed no matter how much or how little one has. Financial planning is important. While it’s hard to think about planning for the future when pay day is a week away and your wallet and checkbook are empty, you can learn to manage dollars carefully.
Manage Your Money will help you:
Know what you want to do with money.
Know where your money goes.
Know how to save money for your goals.
Plan your spending in advance.
Know your credit limits and how to keep control.
I am no great money manager. I still think a lot and act a little. In this blog i'll try to give you folks some insight into managing your money ...well..managing your money in a better way.
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