Types of Mutual funds

In the past few posts, we are discussing about mtual funds. Let’s take the discussions further today in this post where we will discuss about the kinds of mutual funds that are traded in the market.

Well classifying mutual funds lands up at uts different type. These can be classified as

1.Mutual Funds By Structure

2. Mutual funds By Investment Objectives

3.Mutual Funds By Load

4.Mutual funds By Schemes

Mutual Fund By Structure:

Open-ended Funds

Open-end mutual fund is available for subscription through out the year and as such do not have a fixed maturity. You can conveniently buy and sell units at Net Asset Value ("NAV") related prices whenever you wish.

Closed-ended Funds

Unlike the open ended mutual funds, closed-funds have stipulated maturity period that range from 3 years to 15 years. And these kinds of funds are open for subscription only for a fixed period of time.Once they have been subscribed, they are realized only at maturity.

Interval Funds

Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices.

By Investment Objective

Growth Funds

The apple-eye of investors, growth fund are known for investing a big part of its corpus in equities. As such the returns from such funds are exceptionally good .Growth schemes are ideal for investors having a long-term outlook seeking growth over a period of time.

Income Funds

The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income.

Balanced Funds

Balanced funds have their corpus inveted in both equities and fixed income securities. So they provide you both return as well as balanced growth.In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls. These are ideal for investors looking for a combination of income and moderate growth.

Money Market Funds

Money market funds strives to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market.

Mutual funds By Load

Load Funds

A mutual fund that charges commission for entry or exit is known as Load fund.So every time you sell units in the fund, commission is payable.Typically entry and exit loads range from 1% to 2%.

No-Load Funds

A No-Load Fund is one that does not charge a commission for entry or exit. That is, no commission is payable on purchase or sale of units in the fund.

Mutual Funds By Schemes

Tax Saving Schemes

Tax saving schemes offer tax rebates to the investors under specific provisions of the Income Tax law of the government. For example if you invest in ELSS schemes, you are allowed deductions under section 88 of the Income tax act.

Industry Specific Schemes

Industry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like Infrastructure, FMCG, Pharmaceuticals etc.

Index Schemes

Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50

Sectoral Schemes

Sectoral Funds are those, which invest exclusively in a specified industry or a group of industries or various segments such as 'A' Group shares or initial public offerings.

Advantages of Investing in Mutual Funds

The earlier post in this series on mutual funds, gave you a good insight into where to invest your money! Here let us discuss what the advantages of investing in mutual funds are. Well like everything, these do come with their own sets of disadvantages but we will keep this post restricted till the the advantages only and these are outlined below:

1.       Diversification of Portfolio

Well as we had been saying and you must be knowing out of practical experience, putting all the eggs in the same basket is not only risky but very risky. And this is why mutual funds give you the benefit of srpraedinng of risk.  When investing in a single stock, you run the risk of losing it all in case of poor performance of that particular stock . Investment in mutual funds however ensures that you are putting money in different stocks at the same time. So your risk element is minimized.

2.       Professional Management

It is a well known thing that investment decisions demand skills. Analyzing the market dynamics and forming a decision to make your money pay you dividends, is an art that is known to professionals who are skilled in this aspect. And since mutual funds are managed by investment professionals, you are spared of the onerous task of forming your own impression about the market.

3.       Liquidity

Liquidity is one of the best features of mutual funds. Unless, has been mentioned in the offer document, you can redeem your units whenever you wish. Nowadays, the funds are integrated to your bank account. As such money get credited to your account within a days time.

4.       Ease of Process

If you have a bank account, a PAN number and money to invest, you are ready to invest in mutual funds. Just give a call to any AMC and an executive will be at your doorstep to collect your investments! Can you think of anything easier than this?

5.       Regulated by SEBI

Mutual Funds are regulated by the Securities and Exchange Board of India ( SEBI), which helps provide comfort to the investors. Sebi requires the mutual funds to disclose their portfolios at least six monthly, which helps you keep track whether the fund is investing in line with its objectives or not. So if you think, you will be kept in dark about your money transactions, you are mistaken.

Mutual Funds vs Shares – Where To invest

What forms the best way to invest – mutual fund or shares. Well if you seek my opinion, I feel it all depends on your own requirement and your appetite for risk!  Mutual funds are passive form of investing and stocks active way to be in the market. But there are benefits associated with either of them in the same manner as there are disadvantages.

For a newbie, it is always better to go for mutual fund, as it gives yo the option to beat the market as it is constituted of diverse stocks. The same advantage mitigates the risk element considerably in mutual fund investment. Add to it the variety of flavor they present to the  investor. From sector based funds such as tech, financial, retail or energy to commodities to foreign indexes, mutual funds are known for their diversity.

Cut to investment in shares or individual stocks, you know that you’re up for some more fun in the stock markets as the risk factor associated here is more. And since the risk element is more, you know there are chances for you to make more money! It is in fact a a high risk, high reward affair. Let’s assume for example that you have invested Rs 10,000 in the stocks of a particular company! No win case of bearish market, there would be a complete loss of the investment while on a bearish one, you would end up making handsome profits. This would not have been the case in the safe and secure world of mutual funds.

So if you are comparing between stocks and mutual funds from investment point of view, then  you need to understand the individual requirement of the investor and proceed accordingly.

Understanding the concept of mutual funds

Taking the discussions on mutual funds further, let’s discuss the concept of mutual fund. As has been accentuated in the post earlier, mutual funds are nothing but money pooled from a group of investors that is invested in a common scheme. The fund thus created out of “mutual” objective of profit making is managed by a fund manager who generally undertakes the responsibility of managing the entire fund. Once there is any sort of appreciation and income from the fund, these investments are passed on to the investors in proportion to the number of units owned by them.

The entire process can be demonstrated by way of a diagram below

Now you understand that mutual fund is basicllay a collection of shares, stocks or debentures where you invest your money through a fund manager. Now since the mutual funds are constituted of shares, any effect in the prices of the shares are reflected in the Net Asset value of the scheme. A Net Asset value are the total market value of the scheme and is arrived at by dividing the market value of scheme's assets by the total number of units issued to the investors.

Let’s try to understand this by the help of an example –
Lets say that the market value of a particular fund is Rs 5,00,000.
The total number of units issued to investors is 50,000.
Net Asset value of this particular scheme thus is Market Value of Fund/ Number of units . That is Rs 5,00000/50,000 = Rs 10.
Now suppose you own 10 units of this particular scheme, so your total investment to this particular scheme would be NAV * No of units . that is Rs 10 *10 = Rs 100.

Now in the future if the net asset value of this fund increases owing to the better performance of stocks constituting this, then you stand to gain . While if the NAV falls from the level when you purchased it, your fund would loose.

Mutual Funds: Genesis and Growth

Starting from this post, I would try to educate my readers about mutual funds.  This post will cover basic things about mutual funds and its genesis. We will eventually settle into nitty gritty of the matter in the upcoming posts.

So let’s start with the basic! What are mutual funds after all?

Mutual fund is a trust that pools thesavings of a number of investors who share a common financial goal. Mutual funds issue units to the investors, which represent an equitable right in the assets of the mutual fund. So if you are a part of the pool, you own units in the mutual fund  which represent an equitable right in the assets of the fund.

Though mutual fund gained unprecedented popularity in the decades of 1980 and 1990, the idea of pooling money to invest in a common asset has been a very old concept. Historians take King William I of Netherland to be the originator of this concept who in the year 1822 launched the first mutual funds. Some other historians are of the view that originally the idea belonged to a dutch merchant named  Adriaan van Ketwich whose investment trust created in 1774 was behind the king’s mutual fund! Ketwich was the first to theorize that  diversification would  make the investments really appealing to the smaller investors  who could pool in their money with small capital contribution.

The creation of the Massachusetts Investors' Trust in Boston, Massachusetts, heralded the arrival of the modern mutual fund in 1924. The fund went public in 1928, eventually spawning the mutual fund firm known today as MFS Investment Management. Eventually it kept on expanding in us and elsewhere in the world!

Mutual Fund Industry in India

The first step towards the formation of a mutual fund in India was taken by the constitution of Unit Trust of India in 1963.  The UTI was formed through the legislation of an Act in the parliament and it was the government and the RBI that took keen interest in attracting the small investors to invest. UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US-64) and it was able to  attract the largest number of investors in any single investment scheme over the years.

It came up with other schemes over a period of time and enjoyed complete monopoly  in the regulated Indian markets. In 1978, RBI  was de-linked from it and the  entire control was transferred to the hands of Industrial Development Bank of India (IDBI). The funds kept doing good  and by 1987, total assets under its management rose to Rs 6700 crores.

In November 1987, SBI Mutual Fund from the State Bank of India became the first non-UTI mutual fund in India. It was closely followed by  Canbank Mutual Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. And with these players the total asset under management of the industry also rose to  Rs. 47,004 crores.

The year 1993 saw the entry of private firms into the fund management industry and gave a complete new meaning to the Indian mutual fund industry as they came loaded with innovative products and investment techniques. Within a period of one year there were about, 11 private sector funds  in the industry! The mutual fund industry witnessed robust growth and stricter regulation from the SEBI after the year 1996.

Today the market has grown for better and most mutual funds company are  private players in today’s industry

Best SIPs of 2012

Here in this last post on SIP, lets discuss the best performing mutual funds that take the SIP route in 2012. mentioned below is a list of the same.

Common Myths Associated With Systematic Investment Plans Busted

Myth 1 - You cannot invest a lump sum in the same account in which you are doing an SIP: 

It is a general assumption among most people that if they are making an investment through systematic investment plan and they  have a surplus to invest, they cannot put it into that particular account.  Truth is you can push any surplus amount to a SIP account. For example if you are doing an SIP of Rs 5,000 a month and suddenly have a surplus of Rs 1,00,000, you can add it into your account while still continue paying the SIP amount in the coming months.SIP is just a payment mode, not a scheme!

Myth 2 - If I miss investing for a particular month, will they prosecute me?

People carry on hangovers and bad experiences till death. The same hold true here. The fear that people have of EMI’s passes on even to the SIP. Truth is, nobody is going to prosecute you if you miss your payment of SIP. You are after all investing in SIP and not making a payment for settlement of a loan! As a matter of discipline, you should not miss any month; however, missing one month's investment is not a crime!

Myth 3 -SIP is only for small investors

 Nothing can be farther from the truth. SIP can be done with minimum amount of   Rs 500 and the maximum amount you can put in depends on you. So if you wish to do an SIP with a denomination of amount that runs into thousands each month, nobody is going to stop you! SIP is just a way of investing and anybody can invest any amount of money through it per his convenience.

Myth no. 4 : Markets are high to start a SIP

Well, if that's what you think, then you should be starting a SIP immediately. That's because as the market corrects you would by accumulating more number of units, with every fall in the NAV, thus enabling you to lower you average purchase cost. And, as the markets, post the correction surge once again, you would gain as the yield will work to be higher.

Systematic Withdrawal plan (SWP) is the best way to take out the money from corpus invested through SIP

If you think Systematic Withdrawal Plan is the best way to take money out of your SIP account, you are overlooking many factors like transaction costs that are involved every month.  So unlike Systematic investment, systematic withdrawal is not at all suitable and should be avoided.

Benefits of Systematic Investment Plan

In the earlier post, we had discussed about Systematic Investment Plans . Lets make an effort to understand how it is better than other vehicles of investing in mutual fund.

We have already discussed that Systematic investment plans give  the investor an option to save regularly( just like a recurring bank deposit) and then invest these savings  in a planned manner in mutual funds. These small periodical savings become big chunk of money over a period of time. With this disciplined manner, the investor enjoys the benefits of compounding.

 Another advantage of SIP is that an investor  can enter or exit the market irrespective of the time. The biggest problem in the equity market is to know when is the right time to invest or to exit. SIP actually helps you to solve the timing issue to enter and exit the market.  In a falling market, you tend to add more units while in a rising market , you end up gaining on the NAV front. So it provides you ample opportunity to spread out risk.

SIP provides you with the option of  maintaining a diversified portfolio. 

Diversification reduces the overall impact on the returns from a portfolio, on account of a loss in a particular company/sector.

But the best advantage of going in for the SIP is that it doenot strain our day today finance.  You can start an SIP with as low an amount as Rs 500 per month . This makes investing lot easier and very favourable among the small investors.

Last but not the least even though the fund amount is small, your fund is managed by professionals who know the market . Thus for many of us who do not have the desired expertise and are too busy with our vocation to devote sufficient time and effort to investing in equity, mutual funds offer an attractive alternative. 

Systematic Investment Plans

I bet you people must have heard about Systematic investment plans! there is no way you should not have! I mean they are the apple eyes for all investors in down markets. In case you are still ignorant about these and how they work, don't be remorseful! Because starting from this post, let's make some effort in understanding what are SIP's and how they operate! 

So let's start with basics! What are Systematic Investment plans?

Most investors run this serious misconception that SIPs are a sort of mutual fund. Well, if you also took it that way, then don't be mortified! Systematic Investment Plans ( SIPs) are actually a mode to invest in mutual funds! It is a method through which you keep on investing in mutual funds.

More so like the recurring deposits, these are actually a commitment by the investor where he agrees to to invest a predetermined sum of money for a predetermined period of time, in mutual funds.

How does systematic investing work?

Let's assume that you are committed to invest Rs. 5,000 in a SIP every month. Now what happens is that this particular amount is used by the mutual fund company to buy units of stock from the market every month. this keeps on adding to your portfolio every month and thus with every subsequent investment, more and more  units of different Net Asset value ( NAV) build up your portfolio.

So how does it help you? Well the logic is quiet simple. In falling market situations, you tend to add more units to your portfolio. Similarly in rising markets your risk is minimized. This tendency of giving the benefit of cost averaging makes, SIP the best option to scout for in volatile market situation where you cannot predict any thing.

Why? Well it's pretty logical! parting with Rs. 5000 every month might not pinch you but when you think of investing Rs. 60,000 at one go, it simply hurts. Ain't it? That is exactly why SIPs are easier than one time investments.

That's all for today.We will discuss more about SIPS in the successive posts that will be following this post!