Mutual Fund
- Part 1 -

Paikhomba *

The spread of the banking system has been a major factor in promoting financial intermediation in the economy and in the growth of financial savings. With progressive liberalization of economic policies, there has been a rapid growth of capital market and financial services industry including merchant banking, leasing and venture capital. Consistent with this evolution of the financial sector, the mutual fund industry has also come to occupy an important place.

Mutual funds are a revolutionary idea. If you do not have time or interest for investing in individual stocks but would like to share the riches of enterprise system that is reflected in the stock market, mutual funds offer a relative easy solution.

Concept of mutual fund

A mutual fund is a trust that pools the saving of a number of investors with common financial goals. The collected money is invested in various instruments like debentures, shares, etc. The income generated from these instruments and the capital appreciation is shared by the investors in proportion to the number of units owned by them.

Mutual funds are highly cost efficient and very easy to invest in. By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading cost than if they tried to do it on their own. Also, one doesn't have to figure out which stocks or bonds to buy. But the biggest advantage of mutual funds is diversification.

Benefits of investing in Mutual Fund:

Professional management. Qualified professionals manage your money, but they are not alone. They have a research team that continuously analyses the performance and prospects of companies. They also select suitable investments to achieve the objectives of the scheme. It is a continuous process that takes time and expertise which will add value to your investment. Fund managers are in a better position to manage your investments and get higher returns.

Diversification. The cliché, "don't put all your eggs in one basket" really applies to the concept of intelligent investing. Diversification lowers your risk of loss by spreading your money across various industries and geographic regions. It is a rare occasion when all stocks decline at the same time and in the same proportion. Sector funds spread your investment across only one industry so they are less diversified and therefore generally more volatile.

More choice. Mutual funds offer a variety of schemes that will suit your needs over a lifetime. When you enter a new stage in your life, all you need to do is sit down with your financial advisor who will help you to rearrange your portfolio to suit your altered lifestyle.

Affordability. As a small investor, you may find that it is not possible to buy shares of larger corporations. Mutual funds generally buy and sell securities in large volumes which allow investors to benefit from lower trading costs. The smallest investor can get started on mutual funds because of the minimal investment requirements. You can invest with a minimum of Rs.500 in a Systematic Investment Plan on a regular basis.

Tax benefits. This is a huge plus. Indian mutual fund investors, especially those in the equity segment, enjoy amazing tax benefits. The short term capital gain on equities attract 15% tax and for Long term gains (if sell after 1 year) attract zero tax. Dividend from mutual funds received by the unit holders is tax free in the hands of the unit holders.

Liquidity. With open-end funds, you can redeem all or part of your investment any time you wish and receive the current value of the shares. Funds are more liquid than most investments in shares, deposits and bonds. Moreover, the process is standardised, making it quick and efficient so that you can get your cash in hand as soon as possible.

Rupee-cost averaging. With rupee-cost averaging, you invest a specific rupee amount at regular intervals regardless of the investment's unit price. As a result, your money buys more units when the price is low and fewer units when the price is high, which can mean a lower average cost per unit over time. Rupee-cost averaging allows you to discipline yourself by investing every month or quarter rather than making sporadic investments.

Transparency. The performance of a mutual fund is reviewed by various publications and rating agencies, making it easy for investors to compare fund to another. As a unit holder, you are provided with regular updates, for example daily NAVs, as well as information on the fund's holdings and the fund manager's strategy.

Regulations. All mutual funds are required to register with SEBI (Securities Exchange Board of India). They are obliged to follow strict regulations designed to protect investors. All operations are also regularly monitored by the SEBI

Types of funds:

Mutual funds offer a wide variety of choices to investors depending on their financial goals and risk tolerance. Depending on investment objectives, funds can be broadly classified in the following types:

o Aggressive growth means that you will be buying into stocks which have a chance for dramatic growth and may gain value rapidly. This type of investing carries a high element of risk with it since stocks with dramatic price appreciation potential often lose value quickly during downturns in the economy. It is a great option for investors who do not need their money within the next five years, but have a more long-term perspective. Do not choose this option when you are looking to conserve capital but rather when you can afford to potentially lose the value of your investment.

o As with aggressive growth, growth seeks to achieve high returns; however, the portfolios will consist of a mixture of large, medium and small sized companies. The fund portfolio chooses to invest in stable, well established, blue-chip companies together with a small portion in small and new businesses.

The fund manager will pick, growth stocks which will use their profits grow, rather than to pay out dividends. It is a medium - long-term commitment, however, looking at past figures, sticking to growth funds for the long-term will almost always benefit you. They will be relatively volatile over the years so you need to be able to assume some risk and be patient.

(To be continued)