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Mutual Funds

How does a Mutual fund work? A Mutual Fund is a trust that pools the savings of a number of investors who share common financial goal,  investments may be in shares, debt securities, money market securities or a combination of these. Those securities are professionally managed on behalf of the unit-holders, and each investor holds a pro-rata share of the portfolio i.e. entitled to any profits when the securities are sold, but subject to any losses in value as well.

 

The income earned through these investments and the capital appreciation realized 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 basket of securities at a relatively low cost.

History of Mutual Fund in India
  • Pioneer of mutual fund is UTI in 1963.
  • Actual growth started in 1987.
  • The dramatic improvement through quality wise and quantity wise.
  • Main reason for its poor growth is new concept in the country.
  • Large sections of Indian investor are yet to be intellectual with this concept.
  • Hence the it is prime responsibility of all Mutual Fund companies , to make the product correctly abreast of selling.
  • There are four 4 phases according to the development of sector  
 
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Online Investments In Mutual Fund
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Benefits of Investing online
  • Invest in any scheme through a new folio or invest through your existing folio(s)
  • Redeem units or a specific amount directly to your Bank account.
  • Set up Systematic Plans (SIP, STP, SWP)
  • View your account statements.
So go ahead and experience the world of your very own paperless and personalized online investing. And it is very much safe and secure too.

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Equity Oriented Scheme

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These schemes, also commonly called Growth Schemes, seek to invest a majority of their funds in equities and a small portion in money market instruments. Such schemes have the potential to deliver superior returns over the long term. However, because they invest in equities, these schemes are exposed to fluctuations in value especially in the short term.  

Equity schemes are hence not suitable for investors seeking regular income or needing to use their investments in the short-term. They are ideal for investors who have a long-term investment horizon. The NAV prices of equity fund fluctuates with market value of the underlying stock which are influenced by external factors such as social, political as well as economic.

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Index Scheme

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Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weight age comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.
There are also exchange traded index funds launched by the mutual funds, which are traded on the stock exchanges.

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Sector Specific Scheme

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These are the funds/schemes, which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert.

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Tax Saving Scheme

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These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.

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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, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.

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These schemes are commonly known as balanced schemes. These schemes invest in both equities as well as debt. By investing in a mix of this nature, balanced schemes seek to attain the objective of income and moderate capital appreciation and are ideal for investors with a conservative, long-term orientation. Balanced Fund and Gift Fund are examples of hybrid schemes.

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These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.

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Gilt Scheme

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These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as are the case with income or debt oriented schemes.

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Arbitrage Fund

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Arbitrage is one of the most effective ways to insulate against market volatility. An arbitrage fund buys equities in the cash market and simultaneously sells in the futures market, thus ensuring market neutrality for the investment.  In other words, it is a unique asset class by itself where returns are generated by capturing the pricing differential between the cash and the futures markets. It is also termed as a market-neutral fund where the returns are not going to be impacted by volatility in the market.  

For any arbitrage fund, the following market conditions are beneficial  -- a bullish market and a volatile market.  While the fund performs very well in bullish markets, a volatile market gives it opportunities for early exit, thus enhancing the overall yield of the portfolio. However, a prolonged bear phase is not an ideal situation for this kind of product. 
 
Difference between Arbitrage Fund & Income Fund both in terms of risk and returns
In terms of returns, an arbitrage fund is better than an income product. An income product has a fixed yield-to-maturity while in an arbitrage product, the yields are better due to lower cost of carry and are usually in the range of 10-14%.
Secondly, the risk parameters are similar or lower than an income product.  An arbitrage fund does not carry any credit rating risk and interest rate risk, while the returns can be much higher than an income product. Added to this, a mutual fund arbitrage product enjoys all the tax benefits enjoyed by mutual fund products Derivatives in India have more often been used for speculation purposes than for hedging and arbitrage. What are your views on this? Both in India and the world over, derivatives have been widely used as a leverage product but as the trends are changing and the investors are maturing, the other tools like hedging and risk free arbitrage strategies are also being widely used. 

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Exchange-traded funds (ETFs) are mutual fund schemes that are listed and traded on exchanges like stocks. ETFs trading value is based on the net asset value (NAV) of the assets it represents. Generally, ETFs invest in a basket of stocks and try to replicate a stock market index such as the S&P CNX Nifty or BSE Sensex, a market sector such as energy or technology, or a commodity such as gold or petroleum. 

Recently, the Securities and Exchange Board of India (SEBI) amended its regulations and allowed mutual funds launch gold exchange-traded funds (GETFs) in India. Two mutual funds, UTI mutual fund and Benchmark Mutual Fund, has been launched. These funds got  listed on the National Stock Exchange (NSE).

A gold-exchange traded fund unit is like a mutual fund unit backed by gold as the underlying asset and would be held mostly in demat form. An investor would get a securities certificate issued by the mutual fund running the Gold-ETF defining the ownership of a particular amount of gold. GETFs are designed to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell through trading of a security on a stock exchange.   With gold being one of the important asset classes, GETFs will provide a better, simpler and affordable method of investing as compared to other investment methods like bullion, gold coins, gold futures, or jewelry.

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Maturity Plan

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Safe, predictable and better post-tax returns than bank FDs
Rising interest rates not only mean rising EMIs but also offer an opportunity to earn higher returns. Debt schemes are now offering attractive returns with short-term rates in the region of 8-10%. Call money rates have been moving higher to about 7.5-8% due to tight liquidity conditions. With the RBI deciding to raise the cash reserve ratio (CRR), liquidity conditions have worsened. Tightness in the money markets is expected to continue till the end of the current financial year and investors can consider investing in short term options like FMPs or floating rate schemes. Fixed maturity plans, or FMPs as they are popularly called, are close-ended funds with a fixed tenure and invest in a portfolio of debt products whose maturity coincides with the maturity of the product.  The primary objective of a FMP is to generate income while protecting the capital by investing in a portfolio of debt and money market securities. The tenure can be of different maturities, ranging from one month to five years. FMPs can be compared to fixed deposits of a bank. While a fixed deposit offers a 'guaranteed' return, returns in FMPs are only 'indicative'. Typically, the fund house fixes a 'target amount' for a scheme, which it ties up informally with borrowers before the scheme opens. That way it knows the interest rate it will earn on its investments, providing the 'indicative return' to investors. 

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Monthly Income Plan

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Monthly income plans, or MIPs, as they are more popularly known, are a category of mutual funds that invest mainly in debt instruments. Only about 10-20-% of the assets are allocated to equity stocks. But the very name  – monthly income plan – is a misnomer, as these funds do not guarantee a monthly income. Like any other fund, the returns are market-driven. Though many fund houses strive to declare a monthly dividend, they have no such obligation. MIPs are launched with the objective of giving a monthly income to investors, but the periodicity depends upon the option chosen by the investor. These are generally monthly, quarterly, half-yearly and annual options. A growth option is also available, where the investors do not receive regular dividends, but gains in the form of capital appreciation.

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