Mutual Funds

You have heard and read about mutual funds and even seen your friends and colleagues reap rich rewards from investing in them. Then what's keeping you from taking the plunge? Worldwide, the Mutual Fund, or Unit Trust as it is called in some parts of the world, has a long and successful history. The popularity of the Mutual Fund has increased manifold. In developed financial markets, like the United States, Mutual Funds have almost overtaken bank deposits and total assets of insurance funds. As of date, in the US alone there are over 5,000 Mutual Funds with total assets of over US$3 trillion (Rs. 100 lakh crores).

WHAT IS A MUTUAL FUND?

A mutual fund is a professionally managed collective investment fund formed with the purpose of raising money from a large number of investors, and deployment as per the stated objective of the scheme. An Asset Management Company manages and monitors these investments in order to maximize benefits to its investors. Mutual Funds mainly cater to small investors and manage the portfolio in a manner that provides regular income, growth, safety, liquidity and diversification.

WHAT ARE THE ADVANTAGES OF INVESTING IN A MUTUAL FUND?

The advantages of investing in a Mutual Fund are:

Professional Management	Diversification
Convenient Administration.	Return Potential
Low Costs	Liquidity
Transparency	Flexibility
Choice of Schemes	Well Regulated
Low Investment	Tax Benefits

WHY NOT DIRECTLY MAKE INVESTMENTS YOURSELF?

You may not have access to adequate market information.

You may not have adequate knowledge of investment avenues

You may not have ample time for making and managing an array of investments.

The macro and micro economic scenario is dynamic and changing very fast. Multiple factors are affecting investments (oil prices, FOREX reserve level, economic scenario across the continent, politics, inflation etc.). Keeping track of all these factors and their implications is not an easy task for the common man.

BASIC TERMS THAT ONE SHOULD KNOW:

UNITS: Unit means the interest of the unit holders in a scheme. Each unit represents one undivided share in the assets of a scheme. The value of each unit changes, depending on the performance of the fund.

CORPUS: This is a total collection of funds from investors, available for investment.

NAV: Net Asset Value is the value of a unit of a scheme on any given business day. NAV reflects the market value of the fund's investments that day after accounting for all expenses. The market value of the investments is determined on the basis of their prices on the principal stock exchange.

LOAD : The load charged at the time of investment is known as entry load. It is meant to cover the cost that the AMC spends in the process of acquiring subscribers - commission payable to brokers, advertisement, registrar expenses, etc. Some AMC do not charge an entry load but they charge an exit load, i.e., they deduct a load before paying out the redemption proceeds.

OPEN ENDED SCHEMES ; On the basis of structure, mutual fund schemes can be divided into two basic categories: open - ended and close ended schemes. Open-ended schemes are the ones, which sells and repurchases units on an ongoing basis, i.e. Barring few UTI and few specialty schemes like Child Care Plans, MF Tax Saving Schemes, all the schemes are open-ended schemes.

CLOSE ENDED SCHEMES : as the name suggests these are the schemes that have a pre -specified lock in period.

SCHEMES OF MUTUAL FUND:

DEBT SCHEMES: In this type of schemes, the corpus is invested in fixed income bearing instruments like bonds, debentures, fixed deposits, Gilts, etc. within this category also we have three kinds of schemes based on the nature of investment viz. Liquid funds (Invests mainly in Call Money Market, T-Bills and other various short tenure instruments. It is an ideal option for parking short-term Funds). Income Funds (It invests its corpus in Medium to Long term Fixed Interest Income bearing Instruments.) Gilt Funds (Invests its entire corpus in Government of India Securities)

EQUITY SCHEMES : The corpus of the scheme will be invested primarily in Equity and Equity related instruments depending upon their pre ~ stated objective of Capital appreciation. Within this category we have various alternative schemes such as Index Schemes (which invests its corpus in companies forming part of the index which they propose to back approximately in the same proportion so as to mirror returns generated by the bench - mark Index) Sector Specific Schemes (the sector specific schemes proposes to invest in particular sector, which will be at the forefront of the economy such Pharma, FMCG, IT.) Diversified Schemes (such schemes generally invests in diversified equity and equity related instruments).

BALANCED SCHEMES: Such Schemes proposes to have an appropriate mix of equity securities and fixed income securities depending upon the prevailing market outlook for each asset class.