What are Mutual Funds?

Mutual funds are in the form of Trust (usually called Asset Management Company) that manages the pool of money collected from various investors for investment in various classes of assets to achieve certain financial goals. We can say that Mutual Fund is trusts which pool the savings of large number of investors and then reinvests those funds for earning profits and then distribute the dividend among the investors. In return for such services, Asset Management Companies charge small fees. Every Mutual Fund / launches different schemes, each with a specific objective. Investors who share the same objectives invests in that particular Scheme. Each Mutual Fund Scheme is managed by a Fund Manager with the help of his team of professionals (One Fund Manage may be managing more than one scheme also).

Where do Mutual Funds usually invest their funds?

The Mutual Funds usually invest their funds in equities, bonds, debentures; call money etc., depending on the objectives and terms of scheme floated by MF. Now a day there are MF which even invest in gold or other asset classes.

 What is NAV ? 

NAV means Net Asset Value. The investments made by a Mutual Fund are marked to market on daily basis. In other words, we can say that current market value of such investments is calculated on daily basis. NAV is arrived at after deducting all liabilities (except unit capital) of the fund from the realisable.

Value of all assets and dividing by number of units outstanding. Therefore, NAV on a particular day reflects the realisable value that the investor will get for each unit if the scheme is liquidated on that date. This NAV keeps on changing with the changes in the market rates of equity and bond markets.

Therefore, the investments in Mutual Funds is not risk free, but a good managed Fund can give you regular and higher returns than when you can get from fixed deposits of a bank etc.

For example

A. If the market value of the assets of a fund is ₨ 100,000

B. The total number of units issued to the investors is equal to 10,000.

C. Then the NAV of this scheme = (A)/(B), i.e. 100,000/10,000 or 10.00

Concept of Mutual Fund

Many investors with common financial objectives pool their money. Investors, on a proportionate basis, get mutual fund units for the sum contributed to the pool.

The money collected from investors, is invested into shares, debentures and other securities by the fund manager. The fund manager realises gains or losses, and collects dividends or interest income. Any capital gains or losses from such investments are passed on to the investors in proportion of the number of units held by them

A mutual fund is a professionally-managed type of collective investment scheme that pools money from many investors to buy securities (stocks, bonds, short-term money market instruments, and/or other securities). A mutual fund has a fund manager that trades (buys and sells) the fund's investments in accordance with the fund's investment objective.

Advantages of mutual Funds:

• Built-In Diversification

Investing in a diversified portfolio can be very expensive. The nice thing about mutual funds is that they allow anyone to hold a diversified portfolio. The reason why investors invest in a diversified portfolio is because it increases the expected returns while minimizing the risk.

Therefore, many see mutual funds as a cost effective way to achieve this.

Liquidity

• Another nice advantage to mutual funds is that the assets are liquid. In financial jargon.
• liquidity basically refers to converting your assets to cash with relative ease. Mutual funds are considered liquid assets since there is high demand for many of the funds in the marketplace.
• Since this is the case, an investor can convert the asset to cash by quickly selling it to another investor.

Professional Management

• Mutual funds do not require a great deal of time or knowledge from the investor because they are managed by professional fund managers. This can be a big help to an inexperienced investor who is looking to maximize their financial goals.

Ease of Comparison

• Mutual funds are also convenient because they are easy to compare. This is because many mutual fund dealers allow the investor to compare the funds based on metrics such as level of risk, return and price. Because the information is easily accessible, the investor is able to make wise decisions.

Disadvantages of Mutual Funds:

Cost

1. One downside to mutual funds is that they have a high cost associated with them in relation to the returns they produce. This is because investors are not only charged for the price of the fund but they will often face additional fees. Depending on the fund, commission charges can be significant. You will also need to pay a fee that will go towards the fund manager.

Index Does Better

1. In some cases, the stock index may outperform the mutual fund. However, this is not always the case as it depends in large part on the mutual fund the investor has invested in, as well as the skill set of the fund manager. Therefore, it is a good idea to do your research before investing in a fund. If the historical data indicates that it consistently underperformed compared to an index, then it is not a wise investment.

Fees

1. The fees that are charged will depend on the type of mutual fund purchased. If a fund is riskier and more aggressive, the management fee will tend to be higher. In addition, the investor will also be required to pay taxes, transaction fees as well as other costs related to maintaining the fund.

Unpredictable

1. Although expected returns will be quoted, it is impossible to find a mutual fund with a guaranteed return. This is because all assets carry some degree of risk. However, some mutual funds will carry a higher level of risk than others depending on how well it is diversified

Types of Funds

a) Open-Ended - This scheme allows investors to buy or sell units at any point in time. This does not have a fixed maturity date.

Debt/ Income - In a debt/income scheme, a major part of the investable fund are channelized towards debentures, government securities, and other debt instruments. Although capital appreciation is low (compared to the equity mutual funds), this is a relatively low risk-low return investment avenue which is ideal for investors seeing a steady income.

Money Market/ Liquid - This is ideal for investors looking to utilize their surplus funds in short term instruments while awaiting better options. These schemes invest in short-term debt instruments and seek to provide reasonable returns for the investors.

Equity/ Growth - Equities are a popular mutual fund category amongst retail investors. Although it could be a high-risk investment in the short term, investors can expect capital appreciation in the long run. If you are at your prime earning stage and looking for long-term benefits, growth schemes could be an ideal investment.

3.i. Index Scheme - Index schemes is a widely popular concept in the west. These follow a passive investment strategy where your investments replicate the movements of benchmark indices like Nifty, Sensex, etc.

3.ii. Sectoral Scheme - Sectoral funds are invested in a specific sector like infrastructure, IT, pharmaceuticals, etc. or segments of the capital market like large caps, mid caps, etc. This scheme provides a relatively high risk-high return opportunity within the equity space.

3.iii. Tax Saving - As the name suggests, this scheme offers tax benefits to its investors. The funds are invested in equities thereby offering long-term growth opportunities. Tax saving mutual funds (called Equity Linked Savings Schemes) has a 3-year lock-in period.

Balanced - This scheme allows investors to enjoy growth and income at regular intervals. Funds are invested in both equities and fixed income securities; the proportion is pre- determined and disclosed in the scheme related offer document. These are ideal for the cautiously aggressive investors.

b) Closed-Ended - In India, this type of scheme has a stipulated maturity period and investors can invest only during the initial launch period known as the NFO (New Fund Offer) period.

Capital Protection - The primary objective of this scheme is to safeguard the principal amount while trying to deliver reasonable returns. These invest in high-quality fixed income securities with marginal exposure to equities and mature along with the maturity period of the scheme.

Fixed Maturity Plans (FMPs) - FMPs, as the name suggests, are mutual fund schemes with a defined maturity period. These schemes normally comprise of debt instruments which mature in line with the maturity of the scheme, thereby earning through the interest component (also called coupons) of the securities in the portfolio. FMPs are normally passively managed, i.e. there is no active trading of debt instruments in the portfolio. The expenses which are charged to the scheme, are hence, generally lower than actively managed schemes.

c) Interval - Operating as a combination of open and closed ended schemes, it allows investors to trade units at pre-defined intervals 

KEY PLAYERS IN A MUTUAL FUND

This section provides business analysis of key players in the Indian mutual fund market, including Reliance Capital, BOB and HDFC, Standard chartered.

✓ ICICI Prudential Mutual Fund:

ICICI Prudential Asset Management Companies (AMC) is one of the leading asset management company in India.

ICICI Prudential AMC’s Endeavour is to bridge the gap between savings & investment to help create long term wealth & value for investors through innovation, consistency & sustained risk adjusted performance.

Invest in ICICI Prudential Mutual Fund schemes at your convenience and fulfill your long term & short term financial goals.

✓ UTI Mutual Fund:

UTI mutual fund has earned the credit of being one of the first mutual fund company of independent India. The clients have been happy while investing in this AMC as UTI online has been proved to be one of the most promising PSU in the country. A government backed up UTI Mutual Fund AMC is the most secure investing opportunity for any client.

UTI mf online has been one of the most prominent of all as the it had a monopoly for 24 years in the mutual fund market. As they know that they are putting their money into the hands of the authority of India. Thus, it is a matter of fact that UTI mutual funds is the most secure of all the other available option for the clients to invest in UTI mutual fund online.

✓ AXIS Mutual Fund:

The best axis mutual fund schemes performance provides you consistent growth with high returns in future. Diversification plays a vital role as it reduces risk which in turn helps those investors who engage their money in axis mutual funds. As each and every investor have different goals so axis mf has come up with wide range of best schemes which in turn helps every investors to fulfill their dreams. Best axis mutual funds online India schemes available in order to plan your retirement so that you will not depend on your children's money.

✓ IDBI Mutual Fund:

In order to cater the divergent needs of various investors, IDBI bank mutual fund has various investment schemes which can be purchased through online mode. IDBI MF has subdivided the plans into different categories which include the following:

Equity Fund: To provide high returns and capital growth, IDBI mutual fund has made certain investments in the equity and equity-related instruments, which fall under this class. IDBI MF online performance is focused on making a worthwhile mutual fund investment and hence ensures high profits to the investors.

Debt Funds: IDBI mutual funds online investment sip plans provide short-term investment benefits. The best IDBI mutual funds of this category invest the capital into debt and money market instruments.

IDBI Gold Fund: It has planned a strategy in which allotment of funds is made in the IDBI Gold Exchange Traded Fund, to generate returns on the basis of the market index. The risk factors associated with this fund offered by IDBI mutual fund are comparatively higher, but IDBI MF gold fund also offers unexpectedly higher returns.

Exchange Traded Fund: This strategy of IDBI mutual fund online aims to fetch returns as per the performance of gold in the domestic market. It is an exchange traded IDBI mutual fund scheme online investment which results in high yields as per the market performance.

 ✓ Reliance Mutual Fund:

Reliance Mutual Fund was established on 30-06-1995. Its new branch of the subsidiary Reliance Capital Limited. Sharing the same visions as of Late Mr. Dhirubhai Ambani. This AMC, is a fast growing and an overachieving company in the industry. “In his lifetime Dhirubhai has created more wealth with Indians than any other”, says Anil Ambani. With the goal of making India financially independent Late, Mr. Dhirubhai Ambani had laid the foundation of Ambani Group. Branching from it is the more refined form of wealth creation for the clients is Reliance Mutual Funds.

Key Issues of Mutual Funds

- What are the key factors fueling growth into the Indian mutual fund market?

- Which are the fastest growing products?

- What are the key growth prospects?

- What are the key challenges for the market?

- How the market is likely to move in future?

There are many Challenges Facing Mutual Funds which is of prime concern to the people who have an investment spree.

People find mutual fund investment so much interesting because they think they can gain high rate of return by diversifying their investment and risk. But, in reality this scope of high rate of returns is just one side of the coin. On the other side, there is the harsh reality of highly Fluctuating Rate of Returns. Though there are other disadvantages also, this concern of fluctuating returns is most possibly the greatest challenge faced by the mutual fund.

The Issue of Fluctuating Returns

In spite of being a diversified investment solution, mutual funds investment in no way guarantees any return. If the market prices of major shares and bonds fall, then the value of mutual fund shares are sure to go down, no matter how diversified the mutual fund portfolio be. It can be said that mutual fund investment is somewhat lower risky than Direct

Investment in stocks. But, every time a person invests in mutual fund, he unavoidably carries the risk of losing money.

The Other Challenges

Diversification or Over Diversification- In order to diversify the investment, many times the mutual fund companies get involved in Over Diversification. The risk of holding a single financial security is removed by diversification. But, in case of over diversification, investors diversify so much that many time they end up with investing in funds that are highly related and thus the benefit of risk diversification is ruled out.

Taxes-Every year, most of the mutual funds sell substantial amount of their holdings. If they earn profit by this sell, then the investors receive the Profit Income. For most of the mutual funds, the investors are bound to pay taxes on these incomes, even if they reinvest the income.

Costs- Most of the mutual funds charge Shareholder Fees and Fund Operating Fees from the investors. In the year, in which mutual fund fails to make profit and the investors get no return, these fees only blow up the losses.

 1.4 Mutual Fund SWOT Analysis

Mutual funds are among the financial products that benefit from conducting a SWOT analysis. By reviewing their strengths, weaknesses, opportunities and threats, an individual investor can be better informed on where to invest their money, and be positioned to shift gears along with the market.

STRENGTHS:

• Large numbers of potential customers are base.
• Government support by way of tax concession for MF investors.
• Volatility of bank interest rate.
• Better scope for accessing market information.
• Offer liquidity to the investors at any time.
• Offers variety of products to the investors.
• The size of the market is large.

WAEKNESS:

• Poor participation of retail investors.
• Lack of focus.
• Under performance.
• Poor service conditions.
• Distribution network is confines only to metro cities.

OPPORTUNITIES:

• Huge untapped market in semi-urban and rural areas.
• High level of savings habit among the people.
• Liberalized business environment.
• Using on-line mode of trading systems.
• Investment opportunities abound in the international market.
• Failures of non bank financial company operations.

THREATS:

• Increasing competition among the players.
• High level of volatility in the stock market.
• Possibility of more stringent regulations by SEBI , RBI , AMFI , etc ., in future.
• 12

1.5 PESTEL Analysis of Mutual Funds

Political Analysis:-

• In India, SEBI (Mutual Fund) Regulations, 1996 regulates the structure of mutual funds.
• Mutual funds in India are constituted in the form of a Public Trust created under The
• Indian Trusts Act, 1882.
• The stability of the government and people faith into it acts as an important return
• factor.
• The impact of foreign investment.
• Forced renegotiation of contracts
• A requirement that a minimum percentage of supervisory positions be held by locals

Economic Analysis:-

• India's population is young, with 54% under the age of 25and 80% under 45 and the percentage of working population is rising rapidly.
• If we see the position of BSE Sense as compared to other major indexes in the world then we find that BSE has been the best performer.
• India – Potential 'Services Capital' of the World-With services becoming increasingly tradable, India is well placed in terms of costs and skill sets and over the past 13 years.
• Inflation affects the Return-Inflation has always lowered the actual return from bank savings except the year 2002.
• Impact of Various Changes-With the increase in global trade and finance, there is a need for level playing field as the WTO has laid down common rules to facilitate smooth trade among member countries irrespective of their size.

Socio-Cultural Analysis:-

• The most important factor shaping in today's global economy is the process of globalization.
• The increasing share of India and other emerging market economies in world trade.
• To fund future needs, to meet contingencies, to maintain same standard of living after
• retirement.
• Standard of living of population tends to improve.

Technological Analysis:-

• Indian companies are moving in search of low-cost markets, technology is driving growth in production and competition is becoming more intense.
• The outburst in communication technology has led to greater integration of Indian financial markets across the world.
• The outburst of technology has made it possible for the foreign companies to look for Indian market and returns associated with it.
• All the legal framework and associated work has become easy to handle.
• Wide range of products with affordable and competitive schemes to tap the market.
• Needs to collaborate with other sectors of the economy such as banking and telecommunications.
• Companies are also required to take advantage of the growing opportunity in the commodities market. Further, the mutual funds could also enable the small investors to participate in the real estate boom through real estate mutual funds.
• With a strong regulatory framework, clear guidelines and the talent to back it up, the Indian mutual fund industry is in a position to cater to the new breed of investors who are keen to diversify their risks.

WHAT ARE VARIOUS TYPES OF MUTUAL FUNDS 

A common man is so much confused about the various kinds of Mutual Funds that he is afraid of investing in these funds as he can not differentiate between various types of Mutual Funds with fancy names. Mutual Funds can be classified into various categories under the following heads:-

 How Does a Mutual Fund Scheme Different from a Portfolio

Management Scheme ?

 In case of Mutual Fund schemes, the funds of large number of investors is pooled to form a common investible corpus and the gains / losses are same for all the investors during that given peirod of time. On the other hand, in case of Portfolio Management Scheme, the funds of a particular investor remain identifiable and gains and losses for that portfolio are attributable to him only. Each investor's funds are invested in a separate portfolio and there is no pooling of funds.

 Are MFs suitable for Small Investors or Big investors ? Why

Should I Invest in a Mutual Fund when I can Invest Directly in the Same Instruments?

We have already mentioned that like all other investments in equities and debts, the investments in Mutual funds also carry risk. However, investments through Mutual Funds is considered better due to the following reasons :-

 (a) Your investments will be managed by professional finance managers who are in a better position to assess the risk profile of the investments;

 (b) In case you are a small investor, then your investment cannot be spread into equity shares of various good companies due to high price of such shares. Mutual Funds are in a much better position to effectively spread your investments across various sectors and among several products available in the market. This is called risk diversification and can effectively shield the steep slide in the value of your investments.

Thus, we can say that Mutual funds are better options for investments as they offer regular investors a chance to diversify their portfolios, which is something they may not be able to do if they decide to make direct investments in stock market or bond market. These are particularly good for small investors who have limited funds and are not aware of the intricacies of stock markets. For example, if you want to build a diversified portfolio of 20 scrips, you would probably need Rs 2,00,000 to get started (assuming that you make minimum investment of Rs 10000 per scrip). However, you can invest in some of the diversified.

                                          

What are risks by investing funds in Mutual Funds :

We are aware that investments in stock market are risky as the value of our investments goes up or down with the change in prices of the stocks where we have invested. Therefore, the biggest risk for an investor in Mutual Funds is the market risk. However, different Schemes of Mutual Funds have different risk profile, for example, the Debt Schemes are far less risk than the equity funds. Similarly, Balance Funds are likely to be more risky than Debt Schemes, but less risky than the equity schemes.

What is the difference between Mutual Funds and Hedge Funds :

Hedge Funds are the investment portfolios which are aggressively managed and uses advanced investment strategies, such as leveraged, long, short and derivative positions in both domestic and international markets with a goal of generating high returns. .In case of Hedged Funds, the number of investors is usually small and minimum investment required is large. Moreover, they are more risky and generally the investor is not allowed to withdraw funds before a fixed tenure.

Some other important Terms Used in Mutual Funds

Sale Price : It is the price you pay when you invest in a scheme and is also called "Offer Price". It may include a sales load. Repurchase Price : - It is the price at which a Mutual Funds repurchases its units and it may include a back-end load. This is also called Bid Price.

Redemption Price : It is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related.

Sales Load / Front End Load : It is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’ load. Schemes which do not charge a load at the time of entry are called ‘No Load’schemes.

Repurchase / ‘Back-end’ Load : It is a charge collected by a Mutual Funds when it buys back/Repurchase the units from the unit holders.

What Do Mutual Fund Investors

Really Care About?

Recent studies use mutual fund flows to infer which asset pricing model investors use. Among the tested models, the Capital Asset Pricing Model (CAPM) was found to be “closest to the true asset pricing model.” We show that, in fact, fund flow data is most consistent with investors relying on fund rankings (Morningstar ratings) and chasing recent returns. We also show that investors do not adjust for market beta or exposures to other risk factors when allocating capital among mutual funds. Flows are weaker for high-volatility funds only because Morningstar penalizes funds for high total volatility.