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What Are Mutual Funds?
A mutual fund is a managed group of owned securities of several corporations. These corporations receive dividends on the shares that they hold and realize capital gains or losses on their securities traded. Investors purchase shares in the mutual fund as if it was an individual security. After paying operating costs, the earnings (dividends, capital gains or loses) of the mutual fund are distributed to the investors, in proportion to the amount of money invested. Investors hope that a loss on one holding will be made up by a gain on another. Heeding the adage "Don't put all your eggs in one basket" the holders of mutual fund shares are able collectively to gain the advantage by diversifying their investments, which might be beyond their financial means individually.
A mutual fund may be either an open-end or a closed-end fund. An open-end mutual fund does not have a set number of shares; it may be considered as a fluid capital stock. The number of shares changes as investors buys or sell their shares. Investors are able to buy and sell their shares of the company at any time for a market price. However the open-end market price is influenced greatly by the fund managers. On the other hand, closed-end mutual fund has a fixed number of shares and the value of the shares fluctuates with the market. But with close-end funds, the fund manager has less influence because the price of the underlining owned securities has greater influence.
Advantages of Mutual Funds
A Mutual Fund can be defined as a trust wherein the savings of the investors with the same financial goal are pooled in. The collected money then goes for investment in capital market instruments. These can include debentures, shares and other such securities. These investments in turn yield an income. The income and capital appreciation are distributed amongst its unit holders. The advantages of mutual funds are many. Some of the advantages of mutual funds in India are listed below:
Mutual Funds Advantages
There are several advantages of investing in a Mutual Fund and that is why more and more people are taking to it. Some of the major benefits of mutual funds in India are as follows:
Diversification: The top Indian mutual funds create their portfolio designs in such a manner that the interested individuals who invest in mutual funds react differently even under similar economic conditions. This can be explained with an example. An increase in the rates of interest may lead to the diminishing of the asset value of securities in the portfolios. Again, an increase in the value may result to the appreciation in value of the other set of portfolio securities. Over time, a balance is created in the portfolio which leads to an overall increase of the portfolio, even if some security values diminish.
Professional Management: A majority of the mutual funds in India employ the leading professionals in their investments management. These managers make decisions on what securities, the buying and selling of the funds will take place.
Regulatory oversight: There are certain rules and regulations framed by the government which every Mutual fund are required to follow. This is to protect the investors from any fraudulent activities.
Liquidity: Getting your money out from the mutual fund is no difficult task. All you have to do is just write a check, make a telephone call and you are done.
Convenience: Mutual fund shares can be bought via phone, mail, or even over Internet.
Low cost: The expenses of the Mutual fund seldom cross the 1.5 % mark of the investment you make. The Index Funds expenses are usually lesser. Instead, the company stocks are bought by them which are found on the specific index.
Ease of process: Investing in a mutual fund is easy if you are a bank account holder and you posses a PAN card. All you will need to do is fill up the application form, attach the PAN card (for transactions over Rs 50,000), sign the cheque and your Mutual Fund investment is complete.
Well regulated: The SEBI (Securities Exchange Board of India) regulates the India mutual funds for the security and convenience of the investors. SEBI ensures that a transparency is maintained by keeping a strict vigilance on the mutual funds. This keeps the investor informed and helps him/her to make his/her choice. To keep a track whether the investment in Mutual Fund is in line with the objective or not, SEBI demands the disclosure of portfolios once in every six months.
Drawbacks of Mutual Funds
Mutual Funds, like every investment, have their own share of advantages and disadvantages. Before you venture out to make your investment in Mutual Funds, it is advisable that you do a thorough study of the pros and cons of Mutual Funds. Just like you can list a number of Mutual Funds advantages, you will find drawbacks of Mutual Funds as well if you do a market research. Some of the common drawbacks of Mutual Funds in India are listed below:
Disadvantages of Mutual Funds in India
There are several shortcomings of Mutual Funds in India. Some of these Mutual drawbacks are as follows:
No Guarantees: Every investment comes with some sort of risk. If the value of an entire stock market falls, it will directly affect the mutual fund shares as its values will also decline, irrespective of the portfolio balance. However, the risks involved in mutual funds are much lesser than buying and selling of stocks on your own. This is because when you are investing through a mutual fund you do not have this risk of money loss.
Taxes: In a typical year, the mutual funds which are most efficiently managed have the capacity to sell anywhere from 20 - 70 % of their portfolio securities. If the money you invest in Mutual Fund earns a profit, you will be required to pay the taxes on the dividend received by you. You have to pay the taxes even if you make your money reinvest in Mutual Fund.
Fees and Commissions: An administrative fee is required by all kinds of funds to meet the expenses. There are many funds which even charge commission on sales or "loads" to pay financial consultants, brokers, financial institutions or financial planners. If you buy stocks or shares from Load Fund, you have to pay a commission on sales irrespective of the fact that you are consulting a financial advisor or a broker.
Risk Management: It depends on the right decision of the fund manager that you will get a satisfactory return or not. This is unlike Index Funds where there is no management risk involved because of the absence of managers.
Association of Mutual Funds in India
With the rise in mutual fund companies, a requirement for mutual fund association in India was experienced to operate as a non-profit organization. This led to the establishment of Association of Mutual Funds in India in 1995. Association of Mutual Funds in India is an important organ of all Asset Management Companies that are registered with Securities and Exchange Board of India. Till today, all the Asset Management Companies with Mutual Fund schemes are the members of Association of Mutual Funds in India. AMFI operates under the superintendence of its Board of Directors.
Association of Mutual Funds India, also referred to as AMFI, has helped the Indian Mutual Fund Industry to enter into a healthy and professional market, maintaining the market ethics and standards. It attempts to promote the interests of both Mutual Funds and unit holders.
Aims of Association of Mutual Funds in India
The aims of Association of Mutual Funds in India are as follows:
Association of Mutual Funds endeavors to maintain high standards in all fields of operation within the industry.
Association of Mutual Funds maintains an interaction with Securities and Exchange Board of India, and functions in accordance with the guidelines established by SEBI (Securities and Exchange Board of India).
Association of Mutual Funds in India takes up all India awareness program on behalf of the investors. This is done to facilitate proper comprehension of the concept and functioning of Mutual Funds.
At last but not the least association of mutual fund of India also circulate information related to Mutual Fund Industry.
Association of Mutual Funds in India: Sponsors
Some of the major sponsors of Association of Mutual Funds in India include:
SBI Fund Management Ltd.
BenchMark Asset Management Company Pvt.
UTI Asset Management Co Pvt. Ltd.
JM Financial Mutual Fund
Canbank Investment Management Services Ltd.
Jeevan Bima Sahayog Asset Management Company Ltd.
Top Mutual funds in India
Mutual Funds NAV - The Net Asset Value or NAV is the current market value of a fund's holdings that decrease the fund's liabilities which are usually expressed as a per share amount. For most funds, the NAV is determined on a daily basis after the closing of some trade on certain financial exchanges. Mutual funds NAVs are calculated after the trading day is over. If the NAV increases, it implies the value of the Shareholder's holdings increase. The Fund Company will then sell the shares at the particular price along with the sales fees. The open-ended mutual funds' NAV are published everyday while close -ended mutual funds' NAV are published weekly. To calculate the mutual fund's NAV, one must take the current market value of the fund's net assets. Divide this by the number of shares that are outstanding.
Best Mutual Funds - Some of the best mutual funds include:
Reliance Mutual Fund has reaped a lot and has regained the third position among fund houses after a change in fund management team. Reliance Vision Fund has returned 47.7% and 66% CAGR in the past three and five years respectively. This was against the category average of 43.6 and 45.!% CAGR. They have come out with the top two schemes and managed their risk elements well, outdone the Sensex and the category average too. Its strong focus is one equities and its knack for picking the winning stocks on the street.
SBI Magnum Contra Fund is a diversified equity scheme that adheres to the Contrarian strategy. SMCF is aims to invest in scrips and those sectors which are currently out-of-fashion and hold potential. These scrips and sectors are available at cheaper valuations and are appreciative when markets realize their potential. SMCF has outperformed the category average across all time periods and has returned a good 65.3 %in the past five years as against 45.1% by the category average and 34.1% by Sensex.
DSP Merill Lynch Opportunities Fund (DMOF) is a diversified equity fund that invests in scrips in various market caps. This company has been a fairly consistent player over time.
The DSP ML Tiger Fund has been one of the best schemes from the fund house and has performed better than DSPML Opportunities Fund. This is a more thematic fund and carries a high risk factor as compared to DMOF which is more diversified and better equipped for the next three years.
Franklin India Flexi Cap is all about multi cap funds that aim to invest in scrips across all market capitalization. When large-cap stocks start doing well, these schemes tilt towards large-cap stocks. When mid cap scrips do well, they invest more in mid-cap stocks. FIFCF in the past has returned 64.4% while the Sensex returned 64%. It had one of the lowest downside risk figures of all schemes. This scheme has grown by 66% in one and a half years. The fund size is of trivial importance as this fund house can manage 4 large schemes like Franklin India Blue chip Fund (Rs 2,546.01 crore) and Franklin India Prima Fund (Rs 1,790.39 crore).
HDFC Equity Fund has been in the top two quartiles owing to its superior risk adjusted return. HEF invests in large cap stocks that have a lower risk compared to mid-cap stocks. The large cap companies are well-established with a relatively sound, long term record. As compared to the small and medium companies, they are less volatile. HEF has limited its exposure to the mid-cap stocks segment to just 25% and has remained a large cap oriented equity fund. It has just 34% of the corpus in mid-caps and 54% in large caps.
Prudential ICICI Dynamic Fund has 34% of the corpus in mid-caps and 54% in large caps. PIDF follows the strategy of a bottom-up stock picking strategy and prefers investing in those companies that have the potential to compound cash flows over the several years. Considering the past two years, PIDP comes fifth on the list of 86 schemes. It has returned 6.5% against 50% by category average and 51% by Sensex.
SBI Mutual Fund is a fully owned subsidiary of the State Bank of India. It is India's premier bank with the largest banking operation in the country. SBI Mutual Fund incorporates certain working philosophy in their strategy while they put in investors' money in its stable in order to have a full control of the risks concentrating for growth at a reasonable price. It does locate certain competitive advantage before investing. The strategy of top down and bottom up approaches are followed. While the former is for sector allocation, the latter is for stock selection.
While looking at investment opportunities and scenario, SBI Mutual Funds employ a multi stage filtering process that includes a first level look at liquidity, the second level is at management quality, the third level is for competitive position and the fourth is for the share price evaluation. It aims at the risk adjusted returns based on the investors' risk tolerance level in the debt sector. The following four steps are followed :
1. To Manage the schemes on the basis of a portfolio
2. An Active management of interest drawn rate risk.
3. A Credit risk management using the conservative approach
4. A Continuous and consistent monitoring.
Reliance Mutual Fund (RMF) - this was established under the Indian Trusts Act, 1882. The sponsor of Reliance Mutual Fund is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is the trustee. RMF was formed for launching the various schemes under which units were distributed to the Public. This aims at the capital market and provides investors the opportunities to make innumerable investments in diversified securities.
How mutual funds earn money
A mutual fund is a means of investing that enables individuals to share the risks of investing with other investors. All contributors to the fund experience an equal share of gains and losses for each dollar invested. A mutual fund owns the securities of several corporations. A mutual fund pools money from hundreds and thousands of investors to construct a portfolio of stocks, bonds, real estate, or other securities, according to the kind of investments the mutual fund trades. Investors purchase shares in the mutual fund as if it was an individual security. Fund managers hired by the mutual fund company are paid to invest the money that the investors have placed in the fund. Heeding the adage "Don't put all your eggs in one basket" the holders of mutual fund shares are able to gain the advantage of diversification which might be beyond their financial means individually.
Performance of Mutual Funds
Mutual Funds are professionally run companies which collect money from various investors and invest or deploy those funds in diversified portfolios like stocks, shares, bonds and various other securities for returns. The portfolio administrator has the duty to invest underlying security of the fund, pulling in capital gains or losses and transposing proceeds to the investors. Unit Trust of India happens to be the first organization to introduce the idea of Mutual Fund in India. The performance of mutual funds began rising with the liberalization of India.
Performance of Mutual Funds: Unit Trust of India
Unit Trust of India Mutual Funds governed the Indian mutual fund market for about 50 years. It had no competitors till the year 1988. It is only in 1988 that few mutual fund companies were set up to compete the Unit Trust of India. Despite the emergence of various Mutual Fund companies in 1988, UTI Mutual Fund remained in he topmost position. UTI Mutual Funds consistently exhibited excellence in this field, and this contributed to the performance of Mutual Funds in India . Back in 1992, 24 million UTI Mutual Fund shareholders were promised high returns. UTI Mutual Funds schemes sold the thought of gaining profits by investing in mutual funds to Indian people. This happened to be an extremely helpful measure in drawing more and more investors. Moreover, there was no risk in investing in mutual funds.
Performance of Mutual Funds: Current Scenario
Different Indian mutual fund companies have plans of introducing pension schemes. They are also planning to introduce open-ended mutual funds. According to experts, if certain restrictions are removed, the system will become more beneficial and flexible.
Types of Mutual Funds in India
These days, different types of Indian Mutual Fund Schemes have come up which cater to your various financial needs like financial position, return expectations, risk tolerance and others. Here is a list of the different types of Mutual Fund in India.
Indian Mutual Fund Schemes
Open-ended Mutual Fund Schemes in India - There is no fixed maturity for the open-ended mutual fund schemes. One has to deal directly with the Mutual Fund for his/her redemptions and investments. Liquidity is the key feature here. Buying and selling of the units becomes convenient at the related prices of the NAV (net asset value). Some of the open-ended fund schemes in India are ING OptiMix Active Debt Multi - Manager FoF Scheme, ICICI Prudential Very Cautious Plan and Birla Sun Life AAF - Aggressive Plan.
Close-ended Mutual Fund Schemes in India - Close -ended schemes are those which have a specified maturity period (which generally ranges from 2 - 15 years). At the time of initial public issue one can make direct investment in the scheme and can also get the benefit of buying and selling of the units. Due to demand and supply in the market plus the policy holders' expectations and various other market factors, the market price may vary from NAV (Net Asset Value). Some of the close-ended fund schemes in India are ING Vysya Dynamic Asset Allocation Fund and Kotak Dynamic Asset Allocation Scheme.
Tax-saving Mutual fund Schemes in India - Individuals, companies, partnership firms, and body corporate are some of the investing parties in the various Mutual Funds available in the market primarily to enjoy the benefits of tax saving. The Indian Mutual Funds are guided by principles of general contract framed by SEBI. It provides certain tax benefits to the fund holders. It is mandatory that tax benefits should be declared in a column which reads "objects of the offering". SBI Mutual Funds, Prudential ICICI and Bajaj Capital are some of the tax saving Mutual fund companies in India.
Open-ended Mutual Fund Schemes
What are Open-ended Mutual Fund Schemes?
Open-ended Mutual Fund Schemes is one of the types of Mutual Funds in India. An Open-ended Mutual Fund does not restrict itself to a given set of number for the shares. In other words, the number of shares remains non-confined and thereby technically it serves as an open ended instrument. A majority of the Mutual Funds in India are open-ended. The Open-ended Mutual Fund Schemes in India are more common than the closed-ended Mutual Fund Schemes.
Features of Open-ended Mutual Fund
These are the following characteristics of the Indian open-ended Mutual Funds:
This type of fund permits the investors to purchase the shares or sell the shares directly, any time.
Based on the current NAV (Net Asset Value), this type of fund issues fresh shares to the investors and redeem them once the investor makes a decision to sell the shares.
The open-ended Indian mutual fund schemes have high liquidity as the investors can put and take out their many as and when they require.
The total assets of the open-ended Mutual Fund fluctuate with the in and out flow of money.
The fund can issue limitless shares and individual share value remains unaffected by the shares outstanding.
The net asset value (NAV) of the fund determines the value of each share.
Benefits of Open-ended Mutual Fund Schemes in India
Open ended Mutual Funds provide a number of benefits which are as follows:
These funds maintain a lot of flexibility. This is to say that one can draw your money out any point of time.
The funds can be diversified under the various kinds of investment opportunities. This way you can reap the fruits of different investment options.
Most of the open mutual funds do not charge any fees while transferring various funds within the same family.
Risks of Open-ended Mutual Fund
There are also some risks involved with the open-ended Mutual Fund, which are as follows:
The returns are affected when sudden redemptions result in a decline in the value of portfolio.
The fund returns may also get affected by the various types of market forces.
Open ended Mutual Funds cannot be traded in the stock market.
Close-ended Mutual Fund Schemes
There are different types of mutual fund schemes that are available in India. These include open-ended mutual fund schemes, close-ended mutual fund schemes and tax-saving mutual fund schemes. Opting for the close-ended mutual fund schemes in India will provide you with certain advantages that other types of mutual fund schemes would not. An increasing number of Indians are now opting to invest their money in close-ended mutual fund schemes.
Tax-saving Mutual Fund Schemes
Investors in India opt for the tax-saving mutual fund schemes for the simple reason that it helps them to save money. The tax-saving mutual funds or the equity-linked savings schemes (ELSS) receive certain tax exemptions under Section 88 of the Income Tax Act. That is one of the reasons why the investors in India add the tax-saving mutual fund schemes to their portfolio. The tax-saving mutual fund schemes are one of the important types of mutual funds in India that investors can opt for.
Future of Mutual Funds in India
Future of Mutual Funds in India - An Overview
Financial experts believe that the future of Mutual Funds in India will be very bright. It has been estimated that by March-end of 2010, the mutual fund industry of India will reach Rs 40,90,000 crore, taking into account the total assets of the Indian commercial banks. The estimation was based on the December 2004 asset value of Rs 1,50,537 crore. In the coming 10 years the annual composite growth rate is expected to go up by 13.4%. Since the last 5 years, the growth rate was recorded as 9% annually. Based on the current rate of growth, it can be forecasted that the mutual fund assets will be double by 2010.
Indian Mutual Funds Future - Growth Facts
In the past 6 years, Mutual Funds in India have recorded a growth of 100 %.
In India, the rate of saving is 23 %.
In the future, there lies a big scope for the Indian Mutual Funds industry to expand.
Several asset management companies which are foreign based are now entering the Indian markets.
A number of commodity Mutual Funds will be introduced in the future. The SEBI (Securities Exchange Board of India) has granted the permission for the same.
More emphasis is put on the effective Mutual Funds governance.
There is also enough scope for the Indian Mutual funds to enter into the semi-urban and rural areas.
Financial planners will play a major role in the Mutual Funds market by providing people with proper financial planning.
Future of Indian Mutual Funds- Conclusion
Looking at the past developments and combining it with the current trends it can be concluded that the future of Mutual Funds in India has lot of positive things to offer to its investors.