EXECUTIVE SUMMARY: The term paper contains the brief description of the mutual fund industry in general. It also includes the study of other investment products available in the market like Insurance plans, ULIP, Mutual Funds, Savings account, Provident funds, Postal savings and Fixed Deposits and Stocks available in the market.
The second part of the paper deals exclusively in Mutual Funds. It is widely believed that MF is a retail product designed to target small investors, salaried people and others who are intimidated by the stock market but, nevertheless, like to reap the benefits of stock market investing. At the retail level, investors are unique and are a highly heterogeneous group. Currently there are more than 2500 schemes with varied objectives and AMCs are competing against each other by launching new products or repositioning old ones. MF industry today is facing competition not only from within the industry but also from other financial products that provide many of the same economic functions as mutual funds but are not strictly MFs.
Thus the third part of the paper attempts to study the factors regarding investment in mutual funds. In this I explain the factors taken in mind before investing in mutual funds i.e. safety, risk, return.
WHAT IS INVESTMENT?
INVESTMENTS
Savings form an important part of the economy of any nation. With the savings invested in various options available to the people, the money acts as the driver for growth of the country. Indian financial scene too presents a plethora of avenues to the investors. Though certainly not the best or deepest of markets in the world, it has reasonable options for an ordinary man to invest his savings. An investment can be described as perfect if it satisfies all the needs of all investors. So, the starting point in searching for the perfect investment would be to examine investor needs. If all those needs are met by the investment, then that investment can be termed the perfect investment. Most investors and advisors spend a great deal of time understanding the
merits of the thousands of investments available in India. Little time, however, is spent understanding the needs of the investor and ensuring that the most appropriate investments are selected for him.
THE INVESTMENT NEEDS OF AN INVESTOR
By and large, most investors have eight common needs from their investments: 1. Security of Original Capital 2. Wealth Accumulation 3. Comfort Factor 4. Tax Efficiency 5. Life Cover 6. Income 7. Simplicity 8. Ease of Withdrawal 9. Communication.
Security of original capital: The chance of losing some capital has been a primary need. This is perhaps the strongest need among investors in India, who have suffered regularly due to failures of the financial system.
Wealth accumulation: This is largely a factor of investment performance, including both short-term performance of an investment and long-term performance of a portfolio. Wealth accumulation is the ultimate measure of the success of an investment decision.
Comfort factor: This refers to the peace of mind associated with an investment. Avoiding discomfort is probably a greater need than receiving comfort. Reputation plays an important part in delivering the comfort factor.
Tax efficiency: Legitimate reduction in the amount of tax payable is an important part of the Indian psyche. Every rupee saved in taxes goes towards wealth accumulation.
Life Cover: Many investors look for investments that offer good return with adequate life cover to manage the situations in case of any eventualities.
Income: This refers to money distributed at intervals by an investment, which are usually used by the investor for meeting regular expenses. Income needs tend to be fairly constant because they are related to lifestyle and are well understood by investors.
Simplicity: Investment instruments are complex, but investors need to understand what is being done with their money. A planner should also deliver simplicity to investors.
Ease of withdrawal: This refers to the ability to invest long term but withdraw funds when desired. This is strongly linked to a sense of ownership. It is normally triggered by a need to spend capital, change investments or cater to changes in other needs. Access to a long-term investment at short notice can only be had at a substantial cost.
Communication: This refers to informing and educating investors about the purpose and progress of their investments. The need to communicate increases when investments are threatened.
Security of original capital is more important when performance falls.
Performance is more important when investments are performing well.
Failures engender a desire for an increase in the comfort factor.
Perfect investment would have been achieved if all the above-mentioned needs had been met to satisfaction. But there is always a trade-off involved in making investments. As long as the investment strategy matches the needs of investor according to the priority assigned to them, he should be happy. The Ideal Investment strategy should be a customized one for each investor
Depending on his risk-return profile, his satisfaction level, his income, and his expectations. Accurate planning gives accurate results. And for that there must be an efficient and trustworthy roadmap to achieve the ultimate goal of wealth maximization.
CHOOSING THE RIGHT INVESTMENT OPTIONS
After understanding the concept of investment, the investors would like to know how to go about the task of investment, how much to invest at any moment and when to buy or sell the securities, This depends on investment process as investment policy, investment analysis, valuation of securities, portfolio construction and portfolio evaluation and revision. Every investor tries to derive maximum economic advantage from his investment activity. For evaluating an investment avenues are based upon the rate of return, risk and uncertainty, capital appreciation, marketability, tax advantage and convenience of investment. The following Table should give the clear picture relating to the investors' investment decisions in various financial market instruments. The choice of the best investment options will depend on personal circumstances as well as general market conditions. For example, a good investment for a long-term retirement plan may not be a good investment for higher education expenses. In most cases, the right investment is a balance of three things: Liquidity, Safety and Return.
INVESTMENT OPTIONS IN INDIA
Fixed Deposits - They cover the fixed deposits of varied tenors offered by the commercial banks and other non-banking financial institutions. These are generally a low risk prepositions as the commercial banks are believed to return the amount due without default. By and large these FDs are the preferred choice of risk-averse Indian investors who rate safety of capital & ease of investment above all parameters. Largely, these investments earn a marginal rate of return of 6-8% per annum.
Government Bonds - The Central and State Governments raise money from the market through a variety of Small Saving Schemes like national saving certificates, Kisan Vikas Patra, Post Office Deposits, Provident Funds, etc. These schemes are risk free as the government does not default in payments. But the interest rates offered by them are in the range of 7% - 9%.
Money-back insurance - Insurance in India is mostly sold and bought as investment products. They are preferred because of their add-on benefits like financial life-cover, tax-savings and satisfactory returns. Even if one does not manage to save money and invest regularly in financial
instruments, with insurance, the policyholder has no choice. If he does not pay his premiums on time, his insurance cover will lapse. Money-back Insurance schemes are used as investment avenues as they offer partial cash-back at certain intervals. This money can be utilized for children's education, marriage, etc.
Endowment Insurance - These policies are term policies. Investors have to pay the premiums for a particular term, and at maturity the accrued bonus and other benefits are returned to the policyholder if he survives at maturity.
Bullion Market - Precious metals like gold and silver had been a safe heaven for Indian investors since ages. Besides jewellery these metals are used for investment purposes also. Since last 1 year, both Gold and Silver have highly appreciated in value both in the domestic as well as the international markets. In addition to its attributes as a store of value, the case for investing in gold revolves around the role it can play as a portfolio diversifier.
Stock Market - Indian stock markets particularly the BSE and the NSE, had been a preferred destination not only for the Indian investors but also for the Foreign investors.. Although Indian Markets had been through tough times due to various scams, but history shows that they recovered very fast. Many types of scrip had been value creators for the investors. People have earned fortunes from the stock markets, but there are people who have lost everything due to incorrect timings or selection of fundamentally weak companies.
Real Estate- Returns are almost guaranteed because property values are always on the rise due to a growing world population. Residential real estate is more than just an investment. There are more ways than ever before to profit from real estate investment.
Mutual Funds - There is a collection of investors in Mutual funds that have professional fund managers that invest in the stock market collectively on behalf of investors. Mutual funds offer a better route to investing in equities for lay investors. A mutual fund acts like a professional fund manager, investing the money and passing the returns to its investors. All it deducts is a management fee and its expenses, which are declared in its offer document.
Unit Linked Insurance Plans - ULIPs are remarkably alike to mutual funds in terms of their structure and functioning; premium payments made are converted into units and a net asset value (NAV) is declared for the same. In traditional insurance products, the sum assured is the corner stone; in ULIPs premium payments is the key component.
REVIEW OF LITERATURE:
Invest In Mutual Funds To Earn More
By: Balajee Kannan | -
Investors are nowadays getting attracted to invest in equities, especially retail investors. There are a lot of risks in investing directly in stocks, as there are a lot of chances of losing money. Instead Mutual Funds is a good option to invest safely and get the advantage of the equity markets.
Mutual funds recruit experienced management professionals who have vast experience in investment analysis. They research the profile of the company, future earnings, promoters profile
Invest In Mutual Funds In India
By: Ryan G
There used be a time when people kept large sums of money in banks to increase its value, but today when where bank rates are going down and are mostly below the rate of inflation, it may not be the brightest of ideas. This is the age of investment. So look towards the stock market and start investing to gain profits.
Mutual funds in India will give you are great opportunity of doing so as it is cost efficient and also an easy way of investing.
Choosing The Best Mutual Fund For Investments
By: Ryan G | -
Mutual funds are the best options since you can broadly diversify by owning a large array of stocks or an investment instrument. In addition to this, they also allow you to acquire a handsome income over a period of time.
A mutual fund investment allows you a good amount of leverage since the risks are minimized. There are a lot of factors you might need to take into consideration, if you want to make some good amount of money.
Hedge Fund Vs Mutual Fund, Understanding The Differences
By: Dwayne Strocen | -
In 1949 Australian Alfred Jones was credited with the term "hedge fund". Historically it derives its name from the use of hedging to manage risk while achieving superior returns. Today, a hedge fund is an un-regulated investment vehicle designated for sophisticated, also known as the "Accredited Investor".
Mutual funds gained popularity in the 1980's. Prior to this time, the problem of the small investor was in obtaining sufficient knowledge to make informed investment decisions.
THE GLOBAL GROWTH OF MUTUAL FUNDS
Fernando, Deepthi:
With few exceptions, mainly in Asia, mutual funds grew explosively in most countries around the world during the 1990s. Equity funds predominated in Anglo-American countries while bond funds predominated in most of Continental Europe, and in middle-income countries. Capital market development (reflecting investor confidence in market integrity, liquidity, and efficiency) and financial system orientation were the main determinants of mutual fund growth. Restrictions on competing products acted as a catalyst for the development of money market and (short-term) bond funds.
TOPIC OF THE STUDY: MUTUAL FUNDS:
INTRODUCTION OF MUTUAL FUNDS:
Mutual Funds over the years have gained immensely in their popularity. Apart from the many advantages that investing in mutual funds provide like diversification, professional management, the ease of investment process has proved to be a major enabling factor. However, with the introduction of innovative products, the world of mutual funds nowadays has a lot to offer to its investors. With the introduction of diverse options, investors needs to choose a mutual fund that meets his risk acceptance and his risk capacity levels and has similar investment objectives as the investor. With the plethora of schemes available in the Indian markets, an investors needs to evaluate and consider various factors before making an investment decision. Since not everyone has the time or inclination to invest and do the analysis himself, the job is best left to a professional. Since Indian economy is no more a closed market, and has started integrating with the world markets, external factors which are complex in nature affect us too. Factors such as an increase in short-term US interest rates, the hike in crude prices, or any major happening in Asian market have a deep impact on the Indian stock market. Although it is not possible for an individual investor to understand Indian companies and investing in such an environment, the
process can become fairly time consuming. Mutual funds (whose fund managers are paid to understand these issues and whose Asset Management Company invests in research) provide an option of investing without getting lost in the complexities. Most importantly, mutual funds provide risk diversification: diversification of a portfolio is amongst the primary tenets of portfolio structuring, and a necessary one to reduce the level of risk assumed by the portfolio holder. Most of the investors are not necessarily well qualified to apply the theories of portfolio structuring to their holdings and hence would be better off leaving that to a professional. Mutual funds represent one such option.
Definition- A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised 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. The flow chart below describes broadly the working of a mutual fund:
ORGANISATION OF A MUTUAL FUND
There are many entities involved and the diagram below illustrates the organizational set up of a mutual fund.
Mutual funds
Mutual fund is vehicle that facilitates a number of investors to pool their money and have it jointly managed by a professional money manager
Sponsor
Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. The Sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund.
Trustee
Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). The main responsibility of the Trustee is to safeguard the interest of the unit holders and ensure that the AMC functions in the interest of investors and in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.
Asset Management Company (AMC)
The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. At least 50% of the directors of the AMC are independent directors who are not associated with the Sponsor in any manner. The AMC must have a net worth of at least 10 crores at all times.
Transfer Agent
The AMC if so authorised by the Trust Deed appoints the Registrar and Transfer Agent to the Mutual Fund. The Registrar processes the application form, redemption requests and dispatches account statements to the unit holders. The Registrar and Transfer agent also handles communications with investors and updates investor records.
RISKS OF MUTUAL FUND INVESTMENTS
Investor psychology risk: The investor psychology is such that most of the investors be it mutual fund investors or direct capital market investors, behave like reactionaries. They enter the market when share prices start rising and they get panicky and exit when the share prices are falling. Therefore, whether it is shares of a company or mutual fund units, investors resort to selling their investments when the markets start looking down. Because of this there will be more than normal demand on the mutual fund manager to redeem the units. To honor the redemption demands of the existing unit holders during the worst market times, mutual funds are forced to sell more stocks at the prevailing low prices. As a result of this, along with the redeeming unit holders all the other unit holders who have invested in the fund suffer. This means that irrespective of one being a long term buy and hold investor, he suffers because of investing in mutual funds.
Choice Risks: One of the basic and common problem mutual fund investor's faces is that all the experts recommend different schemes/ funds. Naturally, all of them cannot be and will not be right. Investors are also advised to stay invested for long-term to reap good returns. These experts also suggest different funds at different times. This means investors need to move from fund to fund from time to time. Of course, to be in the well-being fund, one needs to move from fund to fund intermittently. Staying invested for a long term and being in the well-doing fund cannot happen simultaneously unless and except when one is very fortunate enters a magic fund, which does better than all other funds at all times. In an tempt to stay invested for a long-term and to be in the well-doing fund, the investor, whether educated and informed, will have to be satisfied with disappointment.
Cost Risks: Mutual Funds charge huge fees that they can get away with and that too in the most confusing manner possible. The fund managers never intend to make their costs clear to their clients. It would not be painful for the investors to pay for the expenses and costs of the funds when they derive satisfactory returns. But, the irony is that investors have to pay for the sales charges, annual fees and many other expenses irrespective of how the fund has performed.
Prediction Risks: Nobody can predict the capital market perfectly and can always find good investments. Similarly, the fund manager's predictions of future actions and outcomes are, of necessity, subject to error.
Jargon Risks: The newsletters and other documents that are distributed to the investors do report so much and that too in such a language filled with technical jargons that it will not be very easy for an investor to understand and follow the report.
Competition Risks: Return is ultimate measure of job performance for any investment, be it in a mutual fund or otherwise. Performance is the matter of comparison and the evaluation is intended to measure how the fund has performed vis-à-vis its past performance, peers and market. At present, Mutual Funds are required to report their performance including returns on a quarterly basis. Therefore, to prove that the fund is performing well, managers focus on quarterly returns. Buying & Selling of stocks at the end of quarter will be done to report better quarterly returns and to make funds holdings look better based on recent market action. In this process, where the competition is not really productive, fund managers incur expenses & losses that are naturally passed on to the unit holders.
Management Change Risks: It is not uncommon for a Mutual Fund to have changes in its management. The change in the funds management may affect the achievement of the objectives of the fund. The fund company may, for various reasons, replace a fund manager or may be the fund manager himself may resign from his job for any reason. This change will be significant since the fund manager controls the fund investments.
Judgment Risks: Investors may not know more than the fund manager about the investment strategy and whatever judgement the investor makes will not be fool proof.
Credit Risk: The possibility that a bond issuer will fail to repay interest and principal in a timely manner. Also called default risk. .
Industry Risk: The possibility that a group of stocks in a single industry will decline in price due to developments in that industry.
Inflation Risk: The possibility that increases in the cost of living will reduce or eliminate a fund's real inflation-adjusted returns.
Interest Rate Risk: The possibility that a bond fund will decline in value because of an increase in interest rates.
Manager Risk: The possibility that an actively managed mutual fund's investment adviser will fail to execute the fund's investment strategy effectively resulting in the failure of stated objectives.
Market Risk. The possibility that stock fund or bond fund prices overall will decline over short or even extended periods. Stock and bond markets tend to move in cycles, with periods when prices rise and other periods when prices fall.
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ADVANTAGES OF INVESTING MUTUAL FUNDS:
1. Professional Management - The basic advantage of funds is that, they are professional managed, by well qualified professional. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investments. The professional fund managers
who supervise fund's portfolio take desirable decisions viz., what scripts are to be bought, what investments are to be sold and more appropriate decisions
2. Diversification of Risk - Purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others.
3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors.
4. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when they want. Mutual funds units can either be sold in the share market as SEBI has made it obligatory for closedended schemes to list themselves on stock exchanges. For open-ended schemes investors can always approach the fund for repurchase at net asset value (NAV) of the scheme. Such repurchase price and NAV is advertised in newspaper for the convenience of investors as to timings of such buy and sell. They have extensive research facilities at their disposal, can spend full time to investigate and can give the fund a constant supervision.
5. Simplicity - Investments in mutual fund is considered to be easy, compare to other available instruments in the market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basis.
6 Safety of Investments-Besides depending on the expert supervision of fund managers, the legislation in a country (like SEBI in India) also provides for the safety of investments. Mutual funds have to broadly follow the laid down provisions for their regulations, SEBI acts as a watchdog and attempts whole heatedly to safeguard investor's interests.
7. Tax Shelter: Depending on the scheme of mutual funds, tax shelter is also available. As per the Union Budget-2003, income earned through dividends from mutual funds is 100% tax-free at the hands of the investors. Close ended schemes ELSS schemes with a minimum of 3 years lock in period also provide tax exemption to the investor. Long term Capital gains are also exempted from tax for equity funds.
9. The concept of Systematic Investment plan and Rupee cost averaging- Unlike other equity linked product and shares or stocks Mutual funds provide the added benefit of Systematic Investment plan. Here the money may be invested over a longer horizon of time in equal installments. Our natural instinct might be to stop investing if the price starts to drop-but
history suggests that the best time to invest may be when you are getting good value. Rupee-cost averaging can be an effective strategy with funds or stocks that can have sharp ups and downs, because it gives you more opportunities to purchase shares less expensively. The benefit of this
approach is that, over time, you may reduce the risk of having bought shares when their cost was highest.
DISADVANTAGES OF INVESTING MUTUAL FUNDS:
1. Professional Management- Some funds don't perform as their management is not dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or not the so-called professionals are any better than mutual fund or investor himself, for picking up stocks.
2. Costs - The biggest source of AMC income is generally from the entry & exit load which they charge from investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.
3. Dilution - Because funds have small holdings across different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.
4. Taxes - when making decisions, fund managers don't consider investor's personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.
TYPES OF MUTUAL FUND SCHEMES
TYPES OF MUTUAL FUND SCHEMES :
BY STRUCTURE
Open - Ended Schemes:
An open-end fund is one that is available for subscription all through the year. These do
not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset
Value ("NAV") related prices. The key feature of open-end schemes is liquidity.
2. Close - Ended Schemes:
A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15
years. The fund is open for subscription only during a specified period. Investors can
invest in the scheme at the time of the initial public issue and thereafter they can buy or
sell the units of the scheme on the stock exchanges where they are listed. In order to
provide an exit route to the investors, some close-ended funds give an option of selling
back the units to the Mutual Fund through periodic repurchase at NAV related prices.
SEBI Regulations stipulate that at least one of the two exit routes is provided to the
investor.
BY INVESTMENT OBJECTIVE:
Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.
Income Schemes: Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.
Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).
Money Market Schemes: Money Market Schemes aim 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.
The risk return trade-off indicates that if investor is willing to take higher risk then correspondingly he can expect higher returns and vise versa if he pertains to lower risk instruments, which would be satisfied by lower returns. For example, if an investors opt for bank FD, which provide moderate return with minimal risk. But as he moves ahead to invest in capital protected funds and the profit-bonds that give out more return which is slightly higher as compared to the bank deposits but the risk involved also increases in the same proportion.
Thus investors choose mutual funds as their primary means of investing, as Mutual funds provide professional management, diversification, convenience and liquidity. That doesn't mean mutual fund investments risk free. This is because the money that is pooled in are not invested only in debts funds which are less riskier but are also invested in the stock markets which involves a higher risk but can expect higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives market which is considered very volatile.
BY NATURE
1. Equity fund:
These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund manager's outlook on different stocks. The Equity Funds are sub classified depending upon their investment objective, as follows:
· Diversified Equity Funds.
· Mid-Cap Funds.
· Sector Specific Funds.
· Tax Savings Funds (ELSS).
Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.
2. Debt funds:
The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:
Gilt Funds: Invest their corpus in securities issued by Government, popularly known as
Government of India debt papers. These Funds carry zero Default risk but are associated with
Interest Rate risk. These schemes are safer as they invest in papers backed by Government.
Income Funds: Invest a major portion into various debt instruments such as bonds, corporate
debentures and Government securities. They provide a fixed return over each period of time.
MIPs: Invests maximum of their total corpus in debt instruments while they take minimum
exposure in equities. It gets benefit of both equity and debt market. These scheme ranks
slightly high on the risk-return matrix when compared with other debt schemes.
Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds
primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial
Papers (CPs). Some portion of the corpus is also invested in corporate debentures.
Liquid Funds: Also known as Money Market Schemes, These funds provide easy liquidity
and preservation of capital. These schemes invest in shortterm instruments like Treasury Bills,
inter-bank call money market, CPs andCDs. These funds are meant for short-term cash
management of corporate houses and are meant for an investment horizon of 1day to 3 months.
These schemes rank low on risk-return matrix and are considered to be the safest amongst all
categories of mutual funds.
3. Balanced funds:
As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.
DECISIVE FACTORS REGARDING INVESTMENT IN MUTUAL FUNDS:
In financial markets, "expectations" of the investors play a vital role. They influence the price of the securities; the volume traded and determines quite a lot of things in actual practice. These expectations' of the investors are influenced by their "perception" and humans generally relate perception to action.
SAFETY: The investors look for safety first in MF products, followed by good returns,Tax Benefits, liquidity and capital appreciation. The survey further reveals that the scheme selection decision is made by respondents on their own, and the other sources influencing their selection decision are News papers and Magazines, Brokers and Agents, Television, Friends suggestions.
PAST MARKET TRENDS
Sometimes history repeats itself; sometimes markets learn from their mistakes. You need to understand how various asset classes have performed in the past before planning your finances.
EXPECTED RETURNS
The expected rate of returns is a crucial factor as it will guide your choice of investment. Based on your expectations, you can decide whether you want to invest heavily into equities or debt or balance your portfolio.
DEGREES OF RISK
All funds carry some level of risk. You may lose some or all of the money you invest - your principal - because the securities held by a fund go up and down in value. Dividend or interest payments may also fluctuate as market conditions change.
Before you invest, be sure to read a fund's prospectus and shareholder reports to learn about its investment strategy and the potential risks. Funds with higher rates of return may take risks that are beyond your comfort level and are inconsistent with your financial goals.
INVESTIBLE SURPLUS
How much money are you able to keep aside for investments? The investible surplus plays a vital role in selecting from various asset classes as the minimum investment amounts differ and so do the risks and returns.
INVESTMENT NEED
How much money do you need at the time of maturity? This helps you determine the amount of money you need to invest every month or year to reach the magic figure.
FEES AND EXPENSES
As with any business, running a mutual fund involves costs - including shareholder transaction costs, investment advisory fees, and marketing and distribution expenses. Funds pass along these costs to investors by imposing fees and expenses. It is important that you understand these charges because they lower your returns.
Some funds impose "shareholder fees" directly on investors whenever they buy or sell shares. In addition, every fund has regular, recurring, fund-wide "operating expenses." Funds typically pay their operating expenses out of fund assets - which means that investors indirectly pay these costs.
TAX EFFICIENCY
Tax efficiency of an investment option considered for selection can be critical for the long-term success of a portfolio. As per the Income tax rules, there are two types of funds i.e. debt funds and equity funds. Those funds that have exposure of 65 per cent or more to equities are considered as equity funds and all others are considered as debt funds. As regards equity and equity-oriented funds, tax efficiency comes into play when one has to rebalance the portfolio or redeem holdings within one year of making investment. For debt funds, tax efficiency has a much bigger role to play in the selection process. This is because one has to consider short-term capital gains rate, dividend distribution tax as well as long term capital gains for gaik wadecting the right option i.e. dividend or growth.
MUTUAL FUNDS HAVE LOW MINIMUMS
Many mutual fund companies allow investors to get started in a mutual fund with as little as $1,000. Schwab's mutual fund family has a minimum of $100 for many of their mutual funds
SYSTEMATIC INVESTING AND WITHDRAWALS WITH MUTUAL FUNDS
It is simple to invest regularly in a mutual fund. Many mutual fund companies allow investors to invest as little as $50 per month directly into a mutual fund. Money can be pulled directly from a bank account and invested directly in the mutual fund. On the other hand, money can be regularly withdrawn from a mutual fund and be deposited into a bank account. There are generally no fees for this service.
MUTUAL FUNDS HAVE AUDITED TRACK RECORDS
A mutual fund company must maintain performance track records for each mutual fund and have them audited for accuracy, which ensures that investors can trust the mutual fund's stated returns.
MUTUAL FUNDS OFFER TRANSPARENCY
Mutual fund holdings are publicly available (with some delays in reporting), which ensures that investors are getting what they pay for.
MUTUAL FUNDS COME IN MANY VARIETIES
A mutual fund comes in many types and styles. There are stock funds, bond funds, sector funds, target-date mutual funds, money market mutual funds and balanced funds. Mutual funds allow you to invest in the market whether you believe in active portfolio management (actively managed funds) or you prefer to buy a segment of the market with no interference from a manager (passive funds and index mutual funds). The availability of different types of mutual funds allows you to build a diversified portfolio at low cost and without much difficulty
OTHER FACTORS SURROUNDING THE MUTUAL FUNDS:
Besides the above following are the other factors that must be considered when choosing the fund for investment:
Fund's volatility: In most instances funds with high returns tend to be more volatile. E.g. funds with mid-cap exposure and sector funds tend to be more volatile, but also offer higher returns. Also some fund managers tend to churn the portfolio in order to give higher returns, thus making it very volatile.
Fund management expenses: Higher the expenses lower the returns.
Performance of the fund vis-à-vis its competitors and the benchmark index should be checked
The investment objective: If an investor has a short-term investment goal like going on a holiday, then he/she is better off investing in debt funds instead of equities, which tend to very volatile over a short-term. Investors shouldn't simply look at the returns when deciding the choice of fund.
CONCLUSIONS
With the structural liberalization policies no doubt Indian economy is likely to return to a
high grow path in few years. Hence mutual fund organisations are needed to upgrade their
skills and technology.
With regard to the Mutual Fund investor we are of the view that the investor needs to
adopt two crucial skills for successful investing i.e. a sense of timing and investment
discipline both need to be adopted at the same time.
The Mutual fund industry is growing at a tremendous pace. A large number of plans have come up from different financial resources. With the Stock markets soaring the investors are attracted towards these schemes.
A mutual fund investment allows you a good amount of leverage since the risks are minimized. There are a lot of factors you might need to take into consideration, if you want to make some good amount of money.
Despite the fact that there are limitations while investing in mutual Funds, they are still and would continue to be the unique financial tools, in any country. One has to appreciate the fact that every aspect of life has its periods of highs and lows. Mutual Funds have not failed in any country where they work within a regulatory framework. Their future is bright.
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
There are so many factors regarding investment in mutual funds like safety, risk return etc.
Mutual funds are more advanced in countries with better developed and more stable
capital markets
