A Mutual Fund is a vehicle that mobilise the savings of a number of investors who share a common
investment objective. The money thus collected is invested by the professionals in different types
of securities depending upon the nature of the scheme. These could range from shares to debentures
to money market instruments. The income earned through these investments and the capital
appreciation realized by the scheme are 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 portfolio at a relatively low cost. Anybody with an
investible surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual
Fund scheme has a defined investment objective and strategy,so whenever the money is mobilized to
fulfill investment objective that vehicle is called “ Mutual Fund “. Mutualfund primary role is to
assist investor in earning the income and building the wealth of investors, by participating in
various opportunities available in market.
An open-end fund is one that is available for investor to enter and exit at any point of time . Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.
A closed-end fund has a fixed maturity. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of new fund offer and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed.
The aim of income funds is to provide regular and steady income to investors. Such schemes generally
invest in fixed income securities such as bonds, corporate debentures and Government securities.
Income Funds are ideal for capital stability and regular income. They invest in short term or long
term maturity as per horizon of investor.
An investor with a low risk appetite and medium term horizon should invest in debt funds.
Tax treatments- Governments encourage investments in capital markets and has given many tax sops.
Under i) 80(c) investments done up to one lakh fifty in specific mutual funds schemes which is
called ELSS (Equity Linked Saving Schemes.) are exempt from tax.
Rajiv Gandhi Scheme provides deduction u/s 80ccg of income tax.
The aim of balanced funds is to provide both growth and regular income. Such schemes periodically
distribute a part of their earning and invest both in equities and fixed income securities in the
proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes
may not normally keep pace, or fall equally when the market falls. These are ideal for cautious
investors looking for a combination of income and moderate growth.
An investor with a cautious risk appetite and medium to long term horizon should invest in balanced
funds.
The aim of money market funds is 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. Returns on these schemes may
fluctuate depending upon the interest rates prevailing in the market. These are ideal for Corporate
and individual investors as a means to park their surplus funds for short periods.
An investor with a lowest risk appetite and short term horizon should invest in Liquid funds.
The aim of growth funds is to provide their value for money over the medium to long term. Such
schemes normally invest a majority of their corpus in equity shares and equity related instruments.
It has been proved that returns from stocks, have outperformed most other kind of investments held
over the long term. Growth schemes are ideal for investors having a long term outlook seeking growth
over a period of time.eg diversified funds
An investor with a high risk appetite and long term horizon should invest in equity funds.
You avail of the services of experienced and skilled FUND MANAGERS who are backed by a dedicated investment research team which analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme.
Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk. You achieve this diversification through a Mutual Fund with far less money than you can do on your own.
Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient.
Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities.
Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.
In open-ended schemes, you can get your money back promptly at net asset value related prices from the Mutual Fund itself. With close-ended schemes, you can sell your units on a stock exchange at the prevailing market price or avail of the facility of direct repurchase at NAV related prices which some close-ended and interval schemes offer you periodically.
You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook.
Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience.
Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.
All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI.
All investments whether in shares, debentures or deposits involve risk: share value may go down
depending upon the performance of the company, the industry, state of capital markets and the
economy; generally, however, longer the term, lesser the risk; companies may default in payment of
interest/ principal on their debentures/bonds/deposits; the rate of interest on an investment may
fall short of the rate of inflation reducing the purchasing power.
While risk cannot be eliminated, skillful management can minimise risk. Mutual Funds help to reduce
risk through diversification and professional management. The experience and expertise of Mutual
Fund managers in selecting fundamentally sound securities and timing their purchases and sales, help
them to build a diversified portfolio that minimises risk and maximises returns
Investment done in mutual fund is known as mutual fund investing. Mutual funds investing require a investment objective to be fulfilled.
There are generally four types of mutual fund investing :
There are many ways to calculate your returns, though the two most popular methods are Absolute
returns and Annualised returns.
Understanding Absolute returns
Absolute return is the simple increase (or decrease) in your investment in terms of
percentage. It does not take into account the time taken for this change. So if an investment’s
current market value is Rs. 5,25,000 and your invested amount was Rs. 2,75,000 then your absolute
return will be:
[(5,25,000-2,75,000)/2,75,000] = 90.9%
Notice how irrelevant the date of investment or date of redemption is. Ideally, you should use the
absolute returns method if the tenure of your investment is less than 1 year. For periods of more
than 1 year, you need to annualise returns; which means you need to find out what the rate of return
is per annum.
Understanding Annualised returns
A compound annual growth rate (CAGR) is what measures the rate of return over an investment period.
It is a smoothened rate because it measures the growth of an investment as if it had grown at a
steady rate, on an annually compounded basis.
CAGR = [(Current Value / Beginning Value) ^ (1/# of Years)]-1
How can I find the CAGR using the computer?
To calculate a CAGR, use the XIRR function in MS Excel.
| 8-Jan-06 | 1,00,000 | Enter the date and the investment value |
| 31-Dec-12 | 2,00,000 | Enter the current value and the current date |
| XIRR formula | 10.43% |
Please remember to put a negative sign as the XIRR formula calculates the return on cash flows. Thus
to find returns there has to be a cash inflow and cash outflow, which should be indicated with the
use of positive and negative signs.
Rights of a Mutual Fund Unitholder
A unit holder in a Mutual Fund scheme governed by the SEBI (Mutual Funds) Regulations, is
entitled to :
Receive unit certificates or statements of accounts confirming the title within 6 weeks from the
date of closure of the subscription or within 6 weeks from the date of request for a unit
certificate is received by the Mutual Fund.Receive information about the investment policies,
investment objectives, financial position and general affairs of the scheme.
Receive dividend within 42 days of their declaration and receive the redemption or repurchase
proceeds within 10 days from the date of redemption or repurchase.
Vote in accordance with the Regulations to:-
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