Share Market

A mutual fund is a portfolio, or collection, of individual securities (some combination of stocks, bonds, or money market instruments) managed according to a specific objective spelled out in the fund’s prospectus. A mutual fund allows investors to pool their money, and then the fund invests it on their behalf.

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.

Most equity mutual funds charged retail investors an entry load of 2.25% on their investments. This entry load was mandatorily payable irrespective of an investor’s mode of entry. The total amount collected as load for each scheme, as per SEBI stipulations, had to be maintained in a separate account by AMCs and could be utilized to meet selling and distribution expenses. 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.

SEBI has also mandated that of the exit load charged to the investor, a maximum of 1% of the redemption proceeds should be maintained in a separate account which can be used by the AMC to pay commissions to the distributor and to take care of other marketing and selling expenses and any balance should be credited to the scheme immediately. All these decisions are applicable to investments in and redemptions from mutual fund schemes from August 1st, 2009.

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.

The only goal of a Mutual Fund company is to earn good returns out of the investments. In order to achieve this goal, there are multiple players, working together, each player being a key entity involved in Mutual funds.

Sponsor:

Any registered company or a financial institution is called a sponsor. A sponsor is the most important entity of a fund. As per SEBI, a sponsor must have a good financial record in past.

Board of Trustees:

Mutual Funds in India have a Board of Trustees to run the fund. The power completely lies with the trust, thought the third party, AMC (Asset Management Company) is appointed by the trustees. They can even dismiss the Asset Management Company if it is found doing unethical practices or underperforming.

Custodian:

It is an independent entity that holds and safe keeps the assets. Mostly financial institutions or banks act as custodians.

Asset Management Company

It is the prime entity of any fund. It manages all the investments made by the investors. Records of pricing and accounting of data is looked after by these Asset Management Companies. It also calculates the Net Asset Value of the funds.

Fund Managers/ Portfolio Managers:

Under an Asset Management Company, there are Fund Managers or Portfolio Managers, who take necessary decisions related to the investments made by the investors. They are the person who monitor and manage your funds and investments.

There are some other entities involved with their prominent roles, which could be seen in the following flowchart:

Key entities involved in Mutual Fund: Flowchart

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India and can be broadly divided into four distinct phases:

First Phase (1964-87): The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under management.

Second Phase (1987-1993): It marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

Third Phase (1993-2003): With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed.

The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.

Fourth Phase – In February 2003, following the repeal of the Unit Trust of India Act 1963 the erstwhile UTI was bifurcated into two separate entities – The Specified Undertaking of the Unit Trust of India, representing broadly, the assets of US 64 scheme, schemes with assured returns and certain other schemes and UTI Mutual Fund conforming to SEBI Mutual Fund Regulations. As at the end of March 2008, there were 33 mutual funds, which managed assets of Rs. 5,05,152 crores (US $ 126 Billion) under 956 schemes. This fast growing industry is currently regulated by the Securities and Exchange Board of India (SEBI).

A Wide variety of Mutual Fund Schemes exists to cater to different needs and is categorized by Structure, Investment objective and other schemes.

By Structure

• Open Ended Scheme: These do not have a fixed maturity and one can conveniently buy and sell their units at Net Asset Value(NAV) related prices, at any point of time.
• Close Ended Scheme: Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called close ended schemes. One can invest in the scheme at the time of the initial issue and thereafter can buy or sell the units of the scheme on the stock exchanges where they are listed.
• Interval Scheme: These combine the character of open-ended and close-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during predetermined intervals.

By Investment Objective

• Growth Scheme: They aim to provide capital appreciation over the medium to long term and normally invest a majority of their funds in equities. They are ideal for investors in their prime earning years.
• Income Scheme: They aim to provide regular and steady income to investors and generally invest in fixed income securities. These are ideal for retired people.
• Balanced Scheme: They provide both growth and income by periodically distributing a part of the income and capital gains they earn and invest in both shares and fixed income securities in the proportion indicated in their offer documents. These are best for investors looking for a combination of income and moderate growth.
• Money Market Scheme: They provide easy liquidity, preservation of capital and moderate income and generally invest in safer and short term instruments. They are perfect for customers to invest their surplus funds for short periods.

Other Scheme

• Tax Saving Scheme: They offer tax benefits to the investors and promote long term investment in equities.
• Index Scheme: They attempt to duplicate the performance of a particular index such as the BSE Sensex, or the NSE 50 (NIFTY).
• Sector specific scheme: They invest in specific sectors such as Technology, Banking, Pharma.
• Special Schemes: Fixed Maturity Plans, Exchange Traded Funds, Capital Protection Oriented Schemes, Gold Exchange Traded Funds, Quantitative Funds, Funds investing Abroad, and Funds of Funds come under Special Schemes.

The investor picks up a Mutual Fund that suits him best and gives him maximum return.

With changing economic conditions, one has to plan his investments properly to have a contended life. Unforeseen expenses and future uncertainty could be unmanageable and thus investments have become a fundamental requirement for all of us.

Mutual Funds, being a good opportunity of investment have become very popular in the recent past. Mutual Funds are the portfolio of stock market shares and collection of other financial products, run by Government trusts, public and private financial institutions. The money is collected from various investors and the capital raised is then invested in various options like gold, bond, equity etc. Mutual Funds can be Open Funded or Closed Ended. There are various types of Mutual Funds to suit your investment requirements. These are growth funds, income funds, balanced funds, money market funds, etc.

At the end of each day, the market opens and Mutual Funds are priced, based on the securities. The investment company’s best assessment value of a portfolio holding is known as NAV- the Net Asset Value/ Price per share. 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, some fees is charged from the investors. There are also some `no load funds’ that have no sales charge.

The fees of the Mutual Funds could be divided into two categories:

1. Ongoing yearly fees

2. Transaction fees paid when we buy or sell shares.

Due to many hidden costs, tagged as financial implications with big jargons, most of the investors are unaware of what are they actually paying for!

Buying of Mutual Funds can be done by contacting fund companies directly or through brokers, banks, insurance agents etc. Sales charge needs to be paid if we buy it from a third party.

There is an extensive set of regulation of Mutual Funds. These must observe a strict set of rules controlled by the Securities and Exchange Commission.

There is a mutual fund table used by investors to collect data about a particular mutual fund. Today, many websites have these tables online to help the investors. The table gives details like fund name, net asset value, trade time, price change, previous close price, year-to-date return, net assets and yield.

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!

Leverage is a tool, and like all tools it can be used prudently or not. For example, many investors believe that owning shares in a major commercial bank is a prudent investment. But how do commercial banks generate profits? A typical commercial bank’s mandate can be defined as an “absolute return strategy using a portfolio of debt securities leveraged 10-to-1 or more, where the investment style seeks to realize a consistent spread on the assets in excess of the cost of leverage.”

There are numerous ways leverage is defined in the investment industry, and there is no consensus on exactly how to measure it. Leverage can be defined as the creation of exposure greater in magnitude than the initial cash amount posted to an investment, where leverage is created through borrowing, investing the proceeds from short sales, or through the use of derivatives. Thus leverage may be broadly defined as any means of increasing expected return or value without increasing out-of-pocket investment.

There are three primary types of leverage:

1. Financial Leverage: This is created through borrowing leverage and/or notional leverage, both of which allow investors to gain cash-equivalent risk exposures greater than those that could be funded only by investing the capital in cash instruments.

2. Construction Leverage: This is created by combining securities in a portfolio in a certain manner. How one constructs a portfolio will have a significant effect on overall portfolio risk, depending on the amount and type of diversification in the portfolio, and the type of hedging applied (e.g., offsetting some or all of the long positions with short positions).

3. Instrument Leverage: This reflects the intrinsic risk of the specific securities selected, as different instruments have different levels of internal leverage (e.g., $100,000 invested in equity options versus $100,000 invested in government bonds). While the use of leverage is central to the hedge fund industry, hedge funds vary greatly in the degree and nature of their use of leverage. Leverage allows hedge funds to magnify their exposures and thus magnify their risks and returns. However, a hedge fund’s use of leverage must consider margin and collateral requirements at the transaction level, and any credit limits imposed by trading counterparties such as prime brokers. Therefore, hedge funds are often limited in their use of leverage by the willingness of creditors and counterparties to provide the leverage.

Hedge funds’ use of leverage, combined with illiquid positions, whose full value cannot be realized quickly,can make them vulnerable to “liquidity shocks” in the event of significant margin calls. While banks and securities firms often have trading desks with positions similar to those of hedge funds, these institutions have liquidity sources and other income sources that can minimize their vulnerability to liquidity shocks.

Steps. Choose an online Forex Firm

What to look for in an online Forex Firm:

1. Low Spreads.

In Forex Trading the ‘spread’ is the difference between the buy and sell price of any given currency pair. The lower the spread saves the trader money. Most firms offer 4-5 pip preads in the Major Currency pairs. The best firms offer clients 3-5 pips.

2. Low minimum account openings.

For those that are new to trading, and for those that don’t have thousands of dollars in risk capital to trade, being able to open a mini trading account with only $200 is a great feature for new traders.

3. Instant automatic execution of your orders.

You want instant execution of your orders and the price you see and ‘click’ is the price that you should get. Don’t settle with a firm that re-quotes you when you click on a price or a firm that allows for price ‘slippage’.This is very important when trading for small profits.

4. High Leverage

You want high leverage—the ability to trade a large amount with a small margin deposit. Some of the best firms offer .25% or 400:1 leverage.

5. Hedging Capability

You want the flexibility of opening positions on the same currency pair in opposite directions without them eliminating each other and without margin increase!

Steps: When to Enter and Exit Your Trades:

We will be looking at 3 different ways to day trade the Forex Markets. In a trading session, you may look for 1 or more of these approaches.

The 3 techniques are as follows:

1. Trade the Breakout

2. Trade the Trend

3. Trading Tops and Bottoms

When is the best time to trade?

Because the Forex Market is open 24hrs a day, and traded on a global scale, the question to ask is, ‘when should I trade?’. The good news is that no matter what time zone or hemisphere you live in globally, there are always good opportunities to trade.

The three major trading ‘sessions’ are as follows (all in Eastern Standard Time):

1. New York open 8:00 AM to 4:00 PM

2. Japanese/Australian open 7:00 PM to 3:00 AM

3. London open 3:00 AM to 8:00 AM

Often, the best times to trade is at the beginning 3-5 hours of the above mentioned opening times, because the major currency pairs tend to move the most in a particular direction.

Before you attempt to trade currencies, you should have a firm understanding of currency quoting conventions, how forex transactions are priced, and the mathematical formulae required to convert one currency into another.

Currency exchange rates are usually quoted using a pair of prices representing a “bid” and an “ask.” Similar to the manner in which stocks might be quoted, the “ask” is a price that represents how much you will need to spend in order to purchase a currency, and the “bid” is a price that represents the (lower) amount that you will receive if you sell the currency. The difference between the bid and ask prices is known as the “bid-ask spread,” and it represents an inherent cost of trading the wider the bid-ask spread, the more it costs to buy and sell a given currency, apart from any other commissions or transaction charges.

Generally speaking, there are three ways to trade foreign currency exchange rates:

1. On an exchange that is regulated by the Commodity Futures Trading Commission

(CFTC). An example of such an exchange is the Chicago Mercantile Exchange, which offers currency futures and options on currency futures products. Exchange-traded currency futures and options provide traders with contracts of a set unit size, a fixed expiration date, and centralized clearing. In centralized clearing, a clearing corporation acts as single counterparty to every transaction and guarantees the completion and credit worthiness of all transactions.

2. On an exchange that is regulated by the Securities and Exchange Commission (SEC).

An example of such an exchange is the NASDAQ OMX PHLX (formerly the Philadelphia Stock Exchange), which offers options on currencies (i.e., the right but not the obligation to buy or sell a currency at a specific rate within a specified time).

3. In the off-exchange market.

In the off-exchange market (sometimes called the over-thecounter, or OTC, market), an individual investor trades directly with a counterparty, such as a forex broker or dealer; there is no exchange or central clearinghouse. Instead, the trading generally is conducted by telephone or through electronic communications networks (ECNs).

Tip 1-You should be fully aware of the power of a position. Never arrive at a market judgement while you have a position.

Tip 2 – Ascertain a stop and a profit objective before you enter a trade. Place stops based on market info, and not your account balance. If a proper stop is too costly, it isn’t worth it to go ahead with the trade.

Tip 3 – Remember not to add to a position that is losing. Averaging don’t work in forex trading.

Tip 4 – Trading systems that work efficiently in an up market need not work in a down market. Always keep this in mind.

Tip 5 – If you decide to exit a trade that means you are capable of perceiving changing circumstances. Never think you can pick a price, exit at the market.

Tip 6 – In a bull market you should never sell a dull market and in a bear market you should never buy a dull market

Tip 7 – Sell the factual news and buy the news that you hear Tip 8 – Up trending, range bound and down trending are three types of markets and you should have a different trading scheme for each of them.

Tip 9 – When everyone else is in, time is up for you to get out.

Tip 10 – Never enter a new trade in the direction of a gap and never let the market make you make a trade.

Tip 11 – It helps for you to read the previous day chart each day to get an idea of what the market already did. It will definitely remind you about the trend and patterns that happened yesterday.

Tip 12 – Never change your unit of trading unless under a plan of attained goals. It helps to have a plan for lessening size when your trading is cold or market volume is down.

Tip 13 – Never continue trading non stop even when you are on a winning streak.

Take your profit for the day and then stop trading can preserve your winning.

Tip 14 – Flexibility is an essential element of successful day trading. You should do your homework so as to understand the full potential for both sides of the market.

This will enable you to make your trades on the basis of what the market is doing at the time of the trade.

Tip 15 – Never worry about a missed chance. There is always another one waiting for you.

Tip 16 – If you convert a scalp or day trade into a position trade that means you did not take into account the risks involved in the trade properly.

Tip 17 – There is no meaning in looking for secrets in the market. You will only find matters that no one cares about.

Tip 18 – Asking for someone else’s opinion is not advisable because they probably did not do as much homework as you did.

When 95% of traders lose money, what makes you think you can win? To see your chances of succeeding as a forex trader, here is a checklist for you to see and become one of the elite traders, who make tremendous long term profits.

Following are a few ways to lose money. You may wish to change your mind immediately if you are thinking of trying any of them. Do this to avoid losses and continue your forex education!

1. Following a Forex Robot with Simulated Gains – You can apparently achieve success without any effort as promised by these. You are asked to accept their track records simulated going backwards. Your equity will get destroyed by trying them.

2. Day trading and Scalping – Due to the random short term volatility, simply doesn’t work.

Like the robots, even people selling these always have simulated track records.

Many more of these all fall into the category of trying to find someone else to give you success. This does not work in forex markets.

Apart from needing a trading edge, you also have to understand ways and reasons of it leading you to success. Let’s look at this in detail.

Success Comes From Within

The combination of a simple robust helping you to understand and trade with discipline is what forex trading is about.

You need to know what you are doing to trade with discipline. This translates into having confidence, which you definitely don’t get from someone telling you what to do. You get confidence by from your own knowledge and learning.

Discipline & Losses

As you have to keep executing trading signals through losing periods, discipline is hard. This has to be continued till you hit a home run, even when the market is fooling you and taking your money.

A Trading Edge

What separates out your forex trading system from the 95% losers is your trading edge. You can answer what is your trading edge and how will it help you beat the majority. You don’t have one if you don’t know what it is.

Few succeed in the simple looking forex trading. These elements are present in the winners’ forex trading strategy:

Using simple robust forex trading system

– Having solid grounding in the basics of forex trading

– Knowing exactly why their system will lead them to success

– Having confidence and discipline to stick with their plan

– Knowing only they are responsible for their Forex trading success

You have to stand alone, be confident of your actions and be disciplined to follow your plan in forex trading.

Success is in YOUR Hands

Sounds simple, however it is actually depends on your approach to forex trading – with the right mindset and getting right education. The trader beats himself, rather than the market beating the trader in forex trading.

Learn the basic fundamentals, get a suitable system, become confident, get an edge and be disciplined. Do all of these to enjoy currency trading success