Mutual Funds

About Mutual Funds

A vehicle for investing in stocks and bonds A mutual fund is not an alternative investment option to stocks and bonds, rather it pools the money of several investors and invests this in stocks, bonds, money market instruments and other types of securities. The owner of a mutual fund unit gets a proportional share of the fund�s gains, losses, income and expenses.

Each mutual fund has a specific stated objective
The funds objective is laid out in the fund's prospectus, which is the legal document that contains information about the fund, its history, its officers and its performance.

Some popular objectives of a mutual fund are -
Fund Objective: What the fund will invest in
Equity (Growth): Only in stocks
Debt (Income): Only in fixed-income securities
Money Market (including Gilt): In short-term money market instruments (including government securities)
Balanced: Partly in stocks and partly in fixed-income securities, in order to maintain a 'balance' in returns and risk

Managed by an Asset Management Company (AMC)
The company that puts together a mutual fund is called an AMC. An AMC may have several mutual fund schemes with similar or varied investment objectives. The AMC hires a professional money manager, who buys and sells securities in line with the fund's stated objective.

All AMCs Regulated by SEBI, Funds governed by Board of Directors
The Securities and Exchange Board of India (SEBI) mutual fund regulations require that the fund�s objectives are clearly spelt out in the prospectus. In addition, every mutual fund has a board of directors that is supposed to represent the shareholders' interests, rather than the AMC�s.

Why Choose Mutual Funds?
Mutual funds are investment vehicles, and you can use them to invest in asset classes such as equities or fixed income. We recommend that you use the mutual fund investment route rather than invest yourself, unless you have the required temperament, aptitude and technical knowledge.

We are not all investment professionals
We go to a doctor when we need medical advice or a lawyer for legal guidance. Similarly, mutual funds are investment vehicles managed by professional fund managers. And unless you rate highly on the Investment IQ Quiz, we recommend you use this option for investing. Mutual funds are like professional money managers, however a key factor in their favour is that they are more regulated and hence offer investors the ability to analyse and evaluate their track record.

Investing is becoming more complex
There was a time when things were quite simple - the market went up with the arrival of the first monsoon showers and every year around Diwali. Since India started integrating with the world (with the start of the liberalisation process), complex factors such as an increase in short-term US interest rates, the collapse of the Brazilian currency or default on its debt by the Russian government, have started having an impact on the Indian stock market.

Although it is possible for an individual investor to understand Indian companies (and investing) in such an environment, the process can become fairly time consuming. Mutual funds (whose fund managers are paid to understand these issues and whose asset management company invests in research) provide an option of investing without getting lost in the complexities.

Mutual funds provide risk diversification
Diversification of a portfolio is amongst the primary tenets of portfolio structuring. And a necessary one to reduce the level of risk assumed by the portfolio holder. Most of us are not necessarily well qualified to apply the theories of portfolio structuring to our holdings and hence would be better off leaving that to a professional. Mutual funds represent one such option.

Please contact us for more details. We will be happy to help you.

Benefits of Investing in Mutual Funds

1. Professional Money Management. Fund managers are responsible for implementing a consistent investment
strategy that reflects the goals of the fund. Fund managers monitor market and economic trends and analyse securities in order to make informed investment decisions.

Diversification. Diversification is one of the best ways to reduce risk. Mutual funds offer investors an opportunity to

diversify across assets depending on their investment needs.

Liquidity. Investors can sell their mutual fund units on any business day and receive the current market value on their investments within a short time period.

Affordability. The minimum initial investment for a mutual fund is fairly low for most funds (as low as Rs500 for some schemes).

Convenience. Most private sector funds provide you the convenience of periodic purchase plans, automatic withdrawal plans and the automatic reinvestment of interest and dividends.
Flexibility and variety. You can pick from conservative, blue-chip stock funds, sectoral funds, funds that aim to provide income with modest growth or those that take big risks in the search for returns. You can even buy balanced funds, or those that combine stocks and bonds in the same fund.
Tax benefits on Investment in Mutual Funds. Mutual funds have historically been more efficient from the tax point of view. A debt fund pays a dividend distribution tax of 12.5 per cent before distributing dividend to an individual investor or an HUF, whereas it is 20 per cent for all other entities. There is no dividend tax on dividends from an equity fund for individual investor.

Capital Gains Tax to be lower of -
10% on the capital gains without factoring indexation benefit and
20% on the capital gains after factoring indexation benefit.

The Basics of Mutual Funds

1. Net Asset Value or NAV. NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the AMC at the end of every business day.

NAV calculation.The value of all the securities in the portfolio in calculated daily. From this, all expenses are deducted and the resultant value divided by the number of units in the fund is the fund�s NAV.

Expense Ratio.AMCs charge an annual fee, or expense ratio that covers administrative expenses, salaries, advertising expenses, brokerage fee, etc. A 1.5% expense ratio means the AMC charges Rs1.50 for every Rs100 in assets under management.A fund's expense ratio is typically to the size of the funds under management and not to the returns earned. Normally, the costs of running a fund grow slower than the growth in the fund size - so, the more assets in the fund, the lower should be its expense ratio.

Load.Some AMCs have sales charges, or loads, on their funds (entry load and/or exit load) to compensate for distribution costs. Funds that can be purchased without a sales charge are called no-load funds. Currently Mutual Funds do not charge any entry load to investors while purchasing but in case of early withdrawal there is an exit load to most of the funds of 1% of fund value.

Open-Ended Funds.At any time during the scheme period, investors can enter and exit the fund scheme (by buying/ selling fund units) at its NAV (net of any load charge). Increasingly, AMCs are issuing mostly open-ended funds.
Close-Ended Funds.Redemption can take place only after the period of the scheme is over. However, close-ended funds are listed on the stock exchanges and investors can buy/ sell units in the secondary market (there is no load).

Please contact us for more details. We will be happy to help you.

The Mutual Funds Check List Before You Invest

Draw up your asset allocation.
Allocate available assets across different asset classes based on your level of risk capacity and risk tolerance.

Identify funds that fall into your Buy List
Find mutual funds that meet your preferences. Check the objective of the fund whether the same is in line with your investment goal.

Obtain and read the offer documents
Offer documents informs about the fund�s objective which is the legal document that contains information about the fund, its history, its officers and its performance. You could do this by either asking your broker or the asset management companies.

Match your objectives
Read through the offer documents and check to see whether the mutual funds identified meet your investment needs in terms of equity share and bond weightings, downside risk protection, tax benefits offered, dividend payout policy, sector focus and other parameters of relevance to you.

Check out performance comparison
Refer to the past t performance of the fund and take appropriate decision in selecting the fund though the repetition of the past Performance is not guarantee in future. comparisons must be used only to compare the same type of fund. They are meaningless otherwise.

Think hard about investing in sector funds
Investing in specific sector funds is recommended for aggressive investors. However, if you are not in close touch with the developments in the sector or do not review your portfolio regularly, we would not recommend investing in sector funds.

Look for 'load' costs
Management fees, annual expenses of the fund and sales loads can take away a significant portion of your returns. As a general rule, 1% towards management fees and 0.6% towards annual expenses should be acceptable. Try and avoid funds that have a sales load, unless of course they have a consistent track record of being a top-performer.

Does the fund change fund managers often?
Since you will be giving past track record a consideration, you are inadvertently relying on the continuity of the fund manager. Stay away from mutual funds whose fund managers change often.

Look for size and credentials
As far as possible avoid investing in funds with an asset base of less than Rs25 crores. Which means that we are recommending you invest in funds only after they have established a track record. And unless it is a really exciting new (theme) fund that fits into your asset allocation plan, try and avoid new funds.

Customer Service
Check out the customer service delivery mechanism of the mutual fund you choose. Can you get in touch with them easily? How long do they take to disburse payments? How often do they send you portfolio updates? And investor newsletters? These questions are important to address because shortcomings on any of these factors could affect your overall returns.

Diversify, but not too much
Do not hold just one fund in each asset category. Its good to diversify your risk between different funds, but do not overdo it.

Style, not returns matter first in the long-term
Don't let a top performing fund veer you away from a disciplined approach. Stick to your chosen asset allocation plan.

Monitor regularly and review
Try to review your mutual fund holdings atleast once a quarter. If you follow the same principles to review as you did to identify the mutual funds you invested in, you will be able to take `sell decisions' very easily.

Invest regularly, choose the S-I-P
Try to make mutual fund investing an integral part of your savings and wealth-building plan. The systematic investment plan option offered by mutual funds is a strongly recommended approach for you to execute this process.

Please contact us for more details. We will be happy to help you.

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