What are mutual funds and what are the best funds to buy at this time. Why??

What are mutual funds and what are the best funds to buy at this time. Why??..

Answer / nitin juneja

Stocks
Stocks represent shares of ownership in a public company.
Examples of public companies include Reliance, ONGC and
Infosys. Stocks are considered to be the most common owned
investment traded on the market.
Bonds
Bonds are basically the money which you lend to the
government or a company, and in return you can receive
interest on your invested amount, which is back over
predetermined amounts of time. Bonds are considered to be
the most common lending investment traded on the market.
There are many other types of investments other than stocks
and bonds (including annuities, real estate, and precious
metals), but the majority of mutual funds invest in stocks
and/or bonds.
TOP

Working of Mutual Fund

TOP

Regulatory Authorities
To protect the interest of the investors, SEBI formulates
policies and regulates the mutual funds. It notified
regulations in 1993 (fully revised in 1996) and issues
guidelines from time to time. MF either promoted by public
or by private sector entities including one promoted by
foreign entities is governed by these Regulations.

SEBI approved Asset Management Company (AMC) manages the
funds by making investments in various types of securities.
Custodian, registered with SEBI, holds the securities of
various schemes of the fund in its custody.

According to SEBI Regulations, two thirds of the directors
of Trustee Company or board of trustees must be independent.
The Association of Mutual Funds in India (AMFI) reassures
the investors in units of mutual funds that the mutual
funds function within the strict regulatory framework. Its
objective is to increase public awareness of the mutual
fund industry.
AMFI also is engaged in upgrading professional standards
and in promoting best industry practices in diverse areas
such as valuation, disclosure, transparency etc.
TOP

What is a Mutual Fund?
A mutual fund is just the connecting bridge or 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 gathered money into specific securities
(stocks or bonds). When you invest in a mutual fund, you
are buying units or portions of the mutual fund and thus on
investing becomes a shareholder or unit holder of the fund.
Mutual funds are considered as one of the best available
investments as compare to others they are very cost
efficient and also easy to invest in, thus 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, by minimizing risk & maximizing
returns.
TOP

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).
TOP

Types of Mutual Funds Schemes 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.

The risk return trade-off indicates that if investor is
willing to take higher risk then correspondingly he can
expect higher returns and vise versa if he pertains to
lower risk instruments, which would be satisfied by lower
returns. For example, if an investors opt for bank FD,
which provide moderate return with minimal risk. But as he
moves ahead to invest in capital protected funds and the
profit-bonds that give out more return which is slightly
higher as compared to the bank deposits but the risk
involved also increases in the same proportion.
Thus investors choose mutual funds as their primary means
of investing, as Mutual funds provide professional
management, diversification, convenience and liquidity.
That doesn’t mean mutual fund investments risk free. This
is because the money that is pooled in are not invested
only in debts funds which are less riskier but are also
invested in the stock markets which involves a higher risk
but can expect higher returns. Hedge fund involves a very
high risk since it is mostly traded in the derivatives
market which is considered very volatile.
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.
TOP

Types of returns
There are three ways, where the total returns provided by
mutual funds can be enjoyed by investors:
• Income is earned from dividends on stocks and
interest on bonds. A fund pays out nearly all income it
receives over the year to fund owners in the form of a
distribution.
• If the fund sells securities that have increased in
price, the fund has a capital gain. Most funds also pass on
these gains to investors in a distribution.
• If fund holdings increase in price but are not sold
by the fund manager, the fund's shares increase in price.
You can then sell your mutual fund shares for a profit.
Funds will also usually give you a choice either to receive
a check for distributions or to reinvest the earnings and
get more shares.
TOP

Pros & cons of investing in mutual funds:
For investments in mutual fund, one must keep in mind about
the Pros and cons of investments in mutual fund.
Advantages of Investing Mutual Funds:
1. Professional Management - The basic advantage of funds
is that, they are professional managed, by well qualified
professional. Investors purchase funds because they do not
have the time or the expertise to manage their own
portfolio. A mutual fund is considered to be relatively
less expensive way to make and monitor their investments.
2. Diversification - Purchasing units in a mutual fund
instead of buying individual stocks or bonds, the investors
risk is spread out and minimized up to certain extent. The
idea behind diversification is to invest in a large number
of assets so that a loss in any particular investment is
minimized by gains in others.
3. 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.
4. Liquidity - Just like an individual stock, mutual fund
also allows investors to liquidate their holdings as and
when they want.

5. Simplicity - Investments in mutual fund is considered to
be easy, compare to other available instruments in the
market, and the minimum investment is small. Most AMC also
have automatic purchase plans whereby as little as Rs.
2000, where SIP start with just Rs.50 per month basis.
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.

Is This Answer Correct ?

8 Yes

0 No