DEFINITION:

“A mutual fund is a professionally managed investment scheme, usually run by an asset management company that brings together a group of people & invests their money in stocks, bonds & other securities.”

 

INTRODUCTION:

Mutual funds are the most popular investment types for the everyday investor. Because they are easy to use in many in many ways, investing for dummies. A mutual fund is a kind of investment that uses money from many investors to invest in stocks, bonds & other types of investment. A fund manager decides how to invest the money & for this he is paid a fee, which comes from the money in the fund. All the MUTUAL FUNDS are registered with SEBI.

In simpler terms, mutual funds are like baskets. Each basket holds certain types of stocks, bonds or a bland of stocks & bonds to combine for one mutual fund portfolio.

Eg:   An investor who buys a fund called XYZ international stock is buying one investment security, the basket that holds dozens or hundreds of stocks from all around the globe, hence the “International” monike.

TIP’S FOR BEGINNERS INVESTING IN MUTUAL FUNDS

• Start saving & investing early in life.
• Try to understand the fund in which you are investing.
• Check the past performance of your mutual fund.
• Don’t avoid Index fund.
• Experience of fund managing team
• Do not commit common mistakes
• Understanding the risk involved
• Keep your investment objective clear.
• The NAV does not matter.
• Diversify your investment over time.
• Have an investment discipline.
• Invest in stocks if you are prepared to take risks.
• Never forgot your mutual fund investment.
• Stay invested for a longer period of time.

 

NAV ( NET ASSET VALUE )

NET ASSET VALUE is the total asset value (net of expenses) per unit of the fund & is calculated by AMC (asset management company) at the end of every business day. In order to calculated the NAV of a mutual fund, you need to take current market value of the funds assets minus the liabilities, if any & divide it by the number of share outstanding. NAV is calculated as follows.

NAV Rs. = MARKET/FAIR VALUE OF SECURITIES + ACCRUED          INCOME + RECEIVABLE + OTHER ASSETS + ACCRUED   EXPENSES – PAYABLES – OTHER LIABILITIES

/ NO.OF UNITS OUTSTANDING OF THE SCHEME/OPTION

Eg. If the market value of securities of mutual fund scheme is Rs. 500 lakh & the mutual fund has issued 10lakh units of Rs. 10lakh each to investors, then the NAV unit of the fund is Rs.50.

 

ADVANTAGES OF MUTUAL FUND

DIVERSIFICATION

Mutual funds provide the benefits of diversification across different sectors & companies. A single mutual fund can hold securities from hundreds or even thousands of issuers. This by investing in a mutual fund, you can gain from the benefits of diversification & asset allocation, without investing a large amount of money that would required to build an individuals portfolio. The diversification considerably reduces the risk of serious monetary loss due to problems in a particular company or industry.

AFFORDABILITY

You can begin buying units or shares with a relatively small amount of money.

Eg. Rs. 500 for the initial purchase.

Some mutual funds also permits you to buy more units on a regular basis with even smaller installments.

Eg. Rs.50 per month.

 

LOW TRANSACTION COST

Due to economics of scale, mutual funds pay lower transaction costs. The benefits are passed on to mutual fund investors which may not be enjoyed by an individual who enters the market directly.

TRANSPARENCY

Funds provide investors with updated information pertaining to the markets & schemes through fact sheets, offer documents, annual report etc.

 

 

DISADVANTAGES OF MUTUAL FUNDS

·      High Expense Ratios and Sales Charges

If you’re not paying attention to mutual fund expense ratios and sales charges, they can get out of hand. Be very cautious when investing in funds with expense ratios higher than 1.20%, as they will be considered on the higher cost end. Be weary of 12b-1 advertising fees and sales charges in general. There are several good fund companies out there that have no sales charges. Fees reduce overall investment returns.

·      Management Abuses

Churning, turnover and window dressing may happen if your manager is abusing his or her authority. This includes unnecessary trading, excessive replacement and selling the losers prior to quarter-end to fix the books.

·      Tax Inefficiency

Like it or not, investors do not have a choice when it comes to capital gain payouts in mutual funds. Due to the turnover, redemptions, gains and losses in security holdings throughout the year, investors typically receive distributions from the fund that are an uncontrollable tax event.

·      Poor Trade Execution

If you place your mutual fund trade any time before the cut-off time for same-day NAV, you’ll receive the same closing price NAV for your buy or sell on the mutual fund. For investors looking for faster execution times, maybe because of short investment horizons, day trading, or timing the market, mutual funds provide a weak execution strategy.