Share Market

Investing in Mutual Funds wisely will help you to plan a perfect portfolio for yourself. When you start investing, creating the perfect portfolio will help you diversify your account and bring in steady returns. When choosing the funds for your portfolio, it is imperative to look at the type of assets that the funds invest in as well as the volatility involved.

You need to understand exactly, what you want to accomplish with your mutual fund portfolio. During this process, you should identify your goals and objectives of investing. Those who want to have enough money for retirement may have different investment objectives than someone who just wants to make a little extra money that they can use now. So, you need to set your objectives, clearly.

Also, understand and be aware of your risk tolerance. Some people are more comfortable with risk than others. You may be able to plan and have a portfolio of growth mutual funds that are highly volatile without worrying about it. Others who are least likely to take risks need to invest in bond funds or other types of mutual funds that carry a small amount of risk. Determining your risk tolerance in advance helps you avoid putting money into funds that are relevant for you.

Decide the core of your portfolio. Every portfolio should have a few core funds. You should be able to identify the funds that you will pick up for the long-term. You should also look at the historic returns that are provided on the mutual fund prospectus of each fund. Yesterday’s No. 1 can be tomorrow’s No. 10, or lower. Along with long term funds, put some money into other funds that can make up the outliers of your portfolio. By investing actively in some of these funds, you can increase the amount of returns that you generate over a given year.

Re-balance your portfolio every so often. With time, the value of some funds will increase and other funds will decrease. This will make some of your shares more valuable than others. In order to stick to the allocation that you have intended, you will have to sell some of your shares and buy shares in other funds. By doing this, you can stick to the same percentage of your holdings over the long-term.

A mutual fund can be looked at as a cooperative of investors. A number of people pool their investment money together to purchase stocks, bonds, securities of other investments. This fund is then managed by a fund manager who will be an expert in this area.

By pooling money, an individual investor can invest in companies and projects that may otherwise be too expensive to be involved with. Also investor, in the initial phases, does not have the time and expertise to analyze and invest in stocks and bonds. Mutual funds offer a viable investment alternative. A team of professional fund managers manages these funds with in-depth research inputs from investment analysts. Also being institutions with good bargaining power in markets, mutual funds have access to decisive corporate information which individual investors cannot access. Therefore, they are often an ideal starting point for a new investor.

The ability to invest in a number of companies is called diversification and helps to reduce the risk to an investor. Financial theory states that an investor can lessen 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 range of assets, this risk is substantially reduced. As might be imagined, this ability to diversify with very small sums of money and by paying very low fees makes mutual funds perfect for investors with restricted time, experience or money.

A Mutual Fund is a trust registered with the Securities and Exchange Board of India (SEBI), which 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. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. This pooled income is professionally managed on behalf of the unit-holders, and each investor holds a proportion of the portfolio i.e. entitled not only to profits when the securities are sold, but also subject to any losses in value as well.

Also there are some disadvantages of Mutual Funds like their high costs, possible tax consequences and over diversification. So, it is very important for one to understand the basics and then shop!

The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published in newspapers. The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) and thus the investors can access NAVs of all mutual funds at one place.

The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes. Investors can also look into other details like percentage of expenses of total assets as these have an effect on the yield and other useful information in the same half-yearly format.

The mutual funds are also required to send annual report or abridged annual report to the unit holders at the end of the year.

Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis. Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds.

Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc.

On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme. Investors may also look into the past track record of performance of the scheme or other schemes of the same mutual fund. They may also compare the performance with other schemes having similar investment objectives. Though past performance of a scheme is not an indicator of its future performance and good performance in the past may or may not be sustained in the future, this is one of the important factors for making investment decision.

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. Units are issued to the investors in accordance with quantum of money invested. They are known as unit holders. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them.

These days between work, family, and friends, most of us do not have the time to make or monitor personal investment decisions on a regular basis. Mutual funds have competent professionals who do all this for you. This is the reason why, the world over, they have become the most accepted means of investing.

Mutual funds curtail risk by creating a diversified portfolio while providing the essential liquidity. Additionally, you benefit from the expediency of not having to bother with too much paperwork or repeat transactions. It is our belief that investors vary in their investment needs based on their individual financial goals.

In order to make investments, investors have to pay certain fees. These fees/expenses are mentioned as follows:

• Distribution charges: The charges for marketing and distribution of the fund’s shares to investors.

• Front-end load or sales charge: It is the commission paid to a third party/ broker, when an investor purchases a share. The amount deducted from an investor’s account and reduces the amount invested.

• Back- end load: Sometimes, when shares are redeemed, an amount needs to be paid by the investors called back-end load. These are also called contingent deferred sales charges (or CDSCs). Like front-end loads, back-end loads are also deducted from an investor’s account.

• 12b-1 fee: It is an annual fee charged for marketing and distribution services. This fee is computed as a percentage of a fund’s assets, subject to a maximum of 1% of assets.

• Management fee: It is paid to the professionals- fund managers or sponsors who manage and monitor the portfolio of the investor. The management fee is paid by the fund and is included in the expense ratio.

• Other fund expenses: There could be some other expenses like-

• Board of directors’ (or board of trustees’) fees and expenses
• Fund accounting fee
• Custody fee
• Legal and accounting fees
• Registration fees
• Shareholder transaction fees
• Securities transaction fees
• Transfer agent services

Tax savings has been the biggest motivator for most investments worldwide, so many a times governments have initiated a lot reform through this tax savings. Deduction under Section 80Chas been introduced from the Financial Year 2005-06 and a deduction of up to Rs. 1,00,000 is allowed from Taxable Income in respect of investments made in some specified schemes which are provided below:

1. Life Insurance Premiums

2. Contributions t o Employees Provident Fund/GPF

3. Public Provident Fund (maximum Rs 70,000 in a year)

4. NSC (National Savings Certificates)

5. Unit Linked Insurance Plan (ULIP)

6. Repayment of Housing Loan (Principal)

7. Equity Linked Savings Scheme (ELSS) of Mutual Funds

8. Tuition Fees including admission fees or college fees paid for full-time education of any two children of the assessed (Any development fees or donation or payment of a similar nature shall not be eligible for deduction).

9. Infrastructure Bonds issued by Institutions/ Banks such as IDBI, ICICI, REC, PFC etc.

10. Interest accrued in respect of NSC VIII issue.

11. Pension scheme of LIC of India or any other insurance company.

12. Fixed Deposit with Banks having a lock-in period of 5 Years

Under Section 80D deduction of up to Rs 40,000 can be claimed in respect of premium paid by cheque towards health insurance policy of various General Insurance companies. Under section 24(b) interest on borrowed capital for the purpose of house purchase or construction is deductible from taxable income up to Rs. 1, 50,000.

The following incomes are completely exempted from income tax without any upper limit.

1. Interest on PPF/GPF/EPF.

2. Interest on GOI tax free bonds.

3. Dividends on Shares and on Mutual Funds.

4. Any capital receipt from life insurance policies i.e., sums received either on death of the insured or on maturity of life insurance plans.

5. Interest on savings bank account in a post office.

6. Long term capital gain on sale of shares and equity mutual funds if the security transaction tax is paid/imposed on such transactions.

7. Dividend income from companies /equity-oriented Mutual Funds is completely exempt in the hands of investors. Dividend is also tax-free in the hands of investors in case of debt-oriented Mutual Fund schemes.

These days between work, family, and friends, most of us do not have the time to make or monitor personal investment decisions on a regular basis. Mutual funds have competent professionals who do all this for you. This is the reason why, the world over, they have become the most accepted means of investing.

Mutual funds curtail risk by creating a diversified portfolio while providing the essential liquidity. Additionally, you benefit from the expediency of not having to bother with too much paperwork or repeat transactions. It is our belief that investors vary in their investment needs based on their individual financial goals.

Mutual funds vary in their investment objectives, thus providing you with the suppleness to create an investment plan based on personal financial goals. Investment experts advise growth investments such as equity funds and stocks as a good choice for funding needs that are five years or more away, income funds to fulfill medium-term needs and liquid funds for short-term requirements.

Mutual fund units are not insured by the government, or any government agency, and do not have any other type of insurance, unlike certain types of checking or savings accounts and certificates of deposit. There is no assurance that when you sell your shares, you will be given what you paid for them. However, because mutual fund investments are more risky than insured investments, they generally offer potential for higher long-term returns.

Investors differ in their investment needs based on their personal financial goals. It is recommended that you should, at the very beginning, identify your own financial goals, be it planning for a comfortable retired life or children’s education. After defining the financial goals, you need to plan for them in an organized manner and look at investments that help achieve these goals. It is always recommended to figure out your investments, wisely, beforehand.

To build a successful investment strategy, you should carefully structure your investment plan so that you can achieve your goals without taking more risk than you can afford or are comfortable with. You also need to consider how much time you have to reach your different goals and your personal circumstances.

Investment experts advocate that growth investments, such as equity funds and stocks, are a good option for funding needs that are 5 years or more away, income funds to meet medium-term needs, and liquid funds for short-term requirements.

The Systematic is an investment mode – a means to invest in mutual funds and not an investment avenue. When an investor chooses to invest via an SIP, he makes investments (usually) in smaller denominations at regular time intervals as opposed to making a single lump sum investment. The underlying intention is to benefit from the volatility in equity markets by lowering the average purchase cost. Systematic Investment Plan (SIP) is a way of investing specifically designed for those who are interested in building wealth over a long-term. It is useful for those who want to get their investments going, but don’t have a large sum of money to invest at one particular point of time. The cardinal rule of building your corpus is to stay focused, invest regularly and maintain discipline in your investing pattern.

As mentioned earlier, the most important role of a Systematic Investment Plan is to lower the average purchase cost of an investment over the long-term. This is possible when equity markets experience a turbulent phase. Since the investment amount for each SIP installment is fixed, the investor gains by receiving a higher number of mutual fund units.

Systematic Investment Plan (SIP) is the winning strategy in present market scenario. Small investors can make their investments in Mutual Funds through SIP. They can enjoy the volatility by investing regularly. Since the amount invested per month is a constant, the investor ends up buying more units when the price is low and fewer units when the price is high. Therefore, the average unit cost will always be less than the average sale price per unit, irrespective of the market rising, falling, or fluctuating.

Let us take an example. Suppose the monthly SIP is for Rs 1,000 and the fund’s net asset value (NAV) is Rs 50; this will lead to 20 units being credited to the investor. However, in the next month on account of the volatile markets, the fund’s NAV falls to Rs 40. This will lower the average purchase cost; as a result, the investor will have 25 units credited to his account. This is how an SIP can help investors benefit from volatility in equity markets.

Systematic Investment Plan works in a well-diversified equity fund in the long run. When people put forth arguments that it does not work for them, they have either not chosen a right fund or are looking at a 12 month horizon.

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. Units are issued to the investors in accordance with quantum of money invested. They are known as unit holders. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

The Term Net Asset Value (NAV) is used by investment companies to measure net assets. It is calculated by subtracting liabilities from the value of a fund’s securities and other items of value and dividing this by the number of outstanding shares. It is equivalent to the share price of individual scrip/ company e.g., if the Nest Asset Value of any Mutual Fund is Rs. 75, in order to purchase one unit of that fund. An investor has to pay Rs. 75.

The value of a collective investment fund based on the market price of securities held in its portfolio. Units in open ended funds are valued using this measure. Closed ended investment trusts have a net asset value but have a separate market value. NAV per share is calculated by dividing this figure by the number of ordinary shares. Investments trusts can trade at net asset value or their price can be at a premium or discount to NAV. The professionals called fund managers analyze the market conditions and make necessary investment decisions in order to achieve maximum profit. Finally, the earnings are passed on to the investors. In return of the services offered, a fee is charged from the investors. There are also some `no load funds’ that have no sales charge.

We can calculate the NAV by taking the current market value of the fund’s net assets (securities held by the fund minus any liabilities) and divide it by the number of shares outstanding. So if a fund had net assets of Rs.50 lakh and there are one lakh shares of the fund, then the price per share (or NAV) is Rs.50.00.

In Mutual Funds, Assured Return Schemes are those schemes that assure a specific return to the unit holders irrespective of performance of the scheme. A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document.

Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year.

A powerful insight into assured–returns products is obtained by noticing that there is an option embedded in the product. When a fund sells a product where the unit holder receives all the upside potential, but his downside is capped at a fixed level: (a) the unit holder is getting a put option and (b) the fund is short–selling this put option. In order to evade itself, the fund needs to buy a put option, the price of which should really figure in every NAV calculation.

Assured returns schemes thus consist of Mutual Fund selling put options without hedging away that risk. This should make them exactly as uncomfortable as short selling put options on NSE’s upcoming options market. In terms of prudential regulation, regulators should be exactly as uncomfortable with a large short position on a put option market (which would require initial margin) as with a MF which assures returns (which has paid no initial margin).

Some investors look for investment options which guarantee them a fixed amount of return year after year because they believe they stand to gain without taking any risk. However, they could be exposing themselves to a much bigger risk – the risk of not keeping ahead of inflation.

This is why it may be sensible to have an investment portfolio that consists of more than just guaranteed return schemes. One can also consider investing in Fixed Income Funds. Fixed-income funds have the potential to earn a rate of interest commensurate with market interest rates. Credit ratings of companies are rapidly changing. Well-diversified income funds are able to spread this risk as research analysts are were equipped to track company credit rating changes. Investing through a bond/ fixed income fund does not mean giving up liquidity as is normally required with fixed deposits such as assured returns schemes.

A mutual fund represents a pool of financial resources obtained from individuals and companies, which is invested in the money and capital markets. This process represents another method for economic savers to channel funds to companies and government units that need extra funds. Mutual Funds, being a good opportunity of investment have become very popular in the recent past.

Unlike individual stocks, whose value vary minute by minute, mutual funds are priced at the end of each day the market opens, based on what the securities in the portfolio are worth. The price per unit of a mutual fund is recorded as the net asset value (NAV).

Mutual Fund loads are the price of buying a unit. It is a fee charged when an investor makes a transaction in the units of the mutual fund. Most funds sell units at a premium to its underlying net asset value, and purchase them at the net asset value. When the fund company charges a load when it sells units, it is called Sales Load or Entry load. Schemes that do not charge a load are called ‘No Load’ schemes. When it charges a load at the time of buying the units back from the unit holder, it is called Repurchase or “Back-end” or exit load.

A load fund charges an up-front fee and is used as a commission payment for sales representatives. These fees can be as high as 8.5 percent. A no-load fund does not charge a sales fee, although a small annual fee can be charged to cover certain administrative expenses. This small fee, which is called a 12b-1 fee, usually ranges between 0.25 and 0.35 percent of assets.

Securities and Exchange Board of India (SEBI) has put a ban on entry-load from August 1 2009. SEBI has stipulated that upfront commission to distributors would be paid by the investor directly to the distributor, based on his assessment of various factors including the service rendered by the distributor.

Mostly people tend to advice on avoiding investing on load funds. But many studies have shown that both kinds of mutual funds almost tender the same return. Like the names suggest, they only differ in the fees, charged.

It is always wise to understand the costs properly to avoid losses. We should always be aware of the tough financial jargons used by the professionals and investors so that investing for us becomes smooth and meaningful. It only takes some time to brush up our financial knowledge and then start investing like a pro!