A Portfolio is a combination of different class of assets mixed and correlated for the purpose of achieving an investor's goal(s).
Items that are considered a part of your portfolio can include any asset you own-from shares, debentures, bonds, mutual fund units to items such as gold, art and even real estate etc. However, for most investors a portfolio has come to signify an investment in financial instruments like shares, debentures, fixed deposits, mutual fund units.
Showing posts with label Mutual Fund. Show all posts
Showing posts with label Mutual Fund. Show all posts
When an investor goes for an actively managed mutual fund, investors leaves the decision of investing to the professional fund manager. The fund manager is the decision maker as to which company or instrument to invest in. Sometimes such decisions may be right, rewarding the investor handsomely. However, possibilities are that the decisions might go wrong or may not be right all the time which can lead to considerable losses for the investor.
There are mutual funds that propose Index funds whose objective is to compensate the return given by a select market index. Such funds follow a passive investment style. They do not analyze companies, markets, economic factors and then narrow down on stocks to invest in.
As an alternative they prefer to invest in a portfolio of stocks that imitate a market index, such as the CNX Nifty 50 index. The returns fetched by the index are the returns given by the fund. No attempt is made to try and beat the index. Research results has shown that most fund managers are unable to continually beat the market index year after year. Also it is impossible to identify which fund will beat the market index.
Therefore, there is an aspect of going wrong in selecting a fund to invest in. This has lead to a huge interest in passively managed funds such as Index Funds where the choice of investments is not left to the judgment of the fund manager. Index Funds hold a diversified basket of securities which represents the index while at the same time since there is not much active turnover of the portfolio the cost of managing the fund also remains low. This gives a dual advantage to the investor of having a diversified portfolio while at the same time having low expenses in fund.
Net Asset Value (NAV)represents the cumulative market value of the assets of the fund net of its liabilities. NAV per unit is simply the total net value of assets divided by the number of units outstanding.
Buying and selling into funds is done on the basis of NAV-related prices. The NAV of a mutual fund are required to be published in newspapers. The NAV of an open end scheme should be disclosed on a daily basis and the NAV of a close end scheme should be disclosed at least on a weekly basis.
These funds are open initially for entry during the Initial Public Offering (IPO) and thereafter closed for entry as well as exit. These funds have a fixed date of redemption. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but the discount narrows as maturity nears.
These funds are open for subscription only once and can be redeemed only on the fixed date of redemption. The units of these funds are listed on stock exchanges (with certain exceptions), are tradable and the subscribers to the fund would be able to exit from the fund at any time through the secondary market.
These funds do not have a fixed date of redemption. Generally they are open for subscription and redemption throughout the year. Their prices are linked to the daily net asset value (NAV). From the investors' perspective, they are much more liquid than closed-ended funds.
Read Full post!Balanced Funds funds invest both in equity shares and fixed-income-bearing instruments (debt) in some proportion. They provide a steady return and reduce the volatility of the fund while providing some upside for capital appreciation. They are ideal for medium to long-term investors who are willing to take moderate risks.
Read Full post!Gilt Funds funds invest in Central and State Government securities. Since they are Government backed bonds they give a secured return and also ensure safety of the principal amount. They are best suited for the medium to long-term investors who are averse to risk.
Read Full post!These funds invest in highly liquid money market instruments. The period of investment could be as short as a day. They provide easy liquidity. They have merged as an alternative for savings and short term fixed deposit accounts with comparatively higher returns. These funds are ideal for corporates, institutional investors and business houses that invest their funds for very short periods.
Read Full post!Debt/Income Funds funds invest predominantly in high-rated fixed-income-bearing instruments like bonds, debentures, government securities, commercial paper and other money market instruments. They are best suited for the medium to long-term investors who are averse to risk and seek capital preservation. They provide a regular income to the investor.
Read Full post!These funds offer tax benefits to investors under the Income Tax Act. Opportunities provided under this scheme are in the form of tax rebates under the Income Tax act.
Read Full post!These funds invest in the same pattern as popular market indices like S&P CNX Nifty or CNX Midcap 200. The money collected from the investors is invested only in the stocks, which represent the index.
For example: a Nifty index fund will invest only in the Nifty 50 stocks. The objective of such funds is not to beat the market but to give a return equivalent to the market returns.
These funds invest primarily in equity shares of companies in a particular business sector or industry. These funds are targeted at investors who are bullish or fancy the prospects of a particular sector.
Read Full post!These funds invest in companies spread across sectors. These funds are generally meant for risk-averse investors who want a diversified portfolio across sectors.
Read Full post!Funds that invest in equity shares are called equity funds. They carry the principal objective of capital appreciation of the investment over the medium to long-term. They are best suited for investors who are seeking capital appreciation. There are different types of equity funds such as Diversified funds, Sector specific funds and Index based funds.
Read Full post!A Mutual Fund (MF) is a body corporate registered with SEBI (Securities Exchange Board of India) that pools money from individuals/corporate investors and invests the same in a array of different financial instruments or securities such as equity shares, Government securities, Bonds, debentures etc.
MF can thus be considered as financial intermediaries in the investment business that collect funds from the public and invest on behalf of the investors. MFs issue units to the investors. The appreciation of the portfolio or securities in which the mutual fund has invested the money leads to an appreciation in the value of the units held by investors.
The investment objectives outlined by a MF in its prospectus are compulsory on the MF scheme. The investment objectives specify the class of securities a MF can invest in. MF invest in various asset classes like equity, bonds, debentures, commercial paper and government securities. The schemes offered by MF vary from fund to fund. Some are pure equity schemes, others are a mix of equity and bonds. Investors are also given the option of getting dividends, which are declared periodically by the MF, or to participate only in the capital appreciation of the scheme.
Benefits of Investing in MFs are
• Small investments
• Professional Fund Management
• Spreading Risk
• Transparency
• Choice
• Regulations
Mutual Fund Plans:
• Growth Plan and Dividend Plan: A growth plan is a plan under a scheme in which the returns from investments are plowed back for investment. The investor thus only realizes capital appreciation on the amount invested. Under the dividend plan, income is distributed on periodic basis. This plan is ideal to those investors, who are in need of regular income.
• Dividend Reinvestment Plan: Dividend plans carry an additional option for reinvestment of income distribution. This is referred to as the dividend reinvestment plan. Under this plan, dividends declared by a fund are reinvested in the scheme on behalf of the investor, thus increasing the number of units held by the investors.
Mutual funds are classified in the following manner:
A. On the basis of Objective
• Equity Funds/ Growth Funds : Funds that invest in equity shares are called equity funds. They carry the principal objective of capital appreciation of the investment over the medium to long-term. They are best suited for investors who are seeking capital appreciation. There are different types of equity funds such as Diversified funds, Sector specific funds and Index based funds.
• Diversified funds: These funds invest in companies spread across sectors. These funds are generally meant for risk-averse investors who want a diversified portfolio across sectors.
• Sector funds: These funds invest primarily in equity shares of companies in a particular business sector or industry. These funds are targeted at investors who are bullish or fancy the prospects of a particular sector.
• Index funds: These funds invest in the same pattern as popular market indices like S&P CNX Nifty or CNX Midcap 200. The money collected from the investors is invested only in the stocks, which represent the index. For e.g. a Nifty index fund will invest only in the Nifty 50 stocks. The objective of such funds is not to beat the market but to give a return equivalent to the market returns.
• Tax Saving Funds: These funds offer tax benefits to investors under the Income Tax Act. Opportunities provided under this scheme are in the form of tax rebates under the Income Tax act.
• Debt/Income Funds: These funds invest predominantly in high-rated fixed-income-bearing instruments like bonds, debentures, government securities, commercial paper and other money market instruments. They are best suited for the medium to long-term investors who are averse to risk and seek capital preservation. They provide a regular income to the investor.
• Liquid Funds/Money Market Funds: These funds invest in highly liquid money market instruments. The period of investment could be as short as a day. They provide easy liquidity. They have merged as an alternative for savings and short term fixed deposit accounts with comparatively higher returns. These funds are ideal for corporates, institutional investors and business houses that invest their funds for very short periods.
• Gilt Funds: These funds invest in Central and State Government securities. Since they are Government backed bonds they give a secured return and also ensure safety of the principal amount. They are best suited for the medium to long-term investors who are averse to risk.
• Balanced Funds: These funds invest both in equity shares and fixed-income-bearing instruments (debt) in some proportion. They provide a steady return and reduce the volatility of the fund while providing some upside for capital appreciation. They are ideal for medium to long-term investors who are willing to take moderate risks.
B. On the basis of Flexibility
• Open-ended Funds: These funds do not have a fixed date of redemption. Generally they are open for subscription and redemption throughout the year. Their prices are linked to the daily net asset value (NAV). From the investors' perspective, they are much more liquid than closed-ended funds.
• Close-ended Funds: These funds are open initially for entry during the Initial Public Offering (IPO) and thereafter closed for entry as well as exit. These funds have a fixed date of redemption. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but the discount narrows as maturity nears. These funds are open for subscription only once and can be redeemed only on the fixed date of redemption. The units of these funds are listed on stock exchanges (with certain exceptions), are tradable and the subscribers to the fund would be able to exit from the fund at any time through the secondary market.
There are various risks involved investing in mutual fund, those risks are:
1. Market risk
If the overall stock or bond markets fall on account of overall economic factors, the value of stock or bond holdings in the fund's portfolio can drop, thereby impacting the fund performance.
2. Non-market risk
Bad news about an individual company can pull down its stock price, which can negatively affect fund holdings. This risk can be reduced by having a diversified portfolio that consists of a wide variety of
stocks drawn from different industries.
3. Interest rate risk
Bond prices and interest rates move in opposite directions. When interest rates rise, bond prices fall and this decline in underlying securities affects the fund negatively.
4. Credit risk
Bonds are debt obligations. So when the funds invest in corporate bonds, they run the risk of the corporate defaulting on their interest and principal payment obligations and when that risk crystallizes, it leads to a fall in the value of the bond causing the NAV of the fund to take a beating.
A Load is a charge imposed, which the mutual fund may collect on entry and/or exit from a fund. A load is charged to cover the up-front cost incurred by the mutual fund for selling the fund. It also wraps one time processing costs. Some funds do not charge any entry or exit load. These funds are referred to as ‘No Load Fund’. Funds by and large charge an entry load ranging between 1.00% and 2.00%. Exit loads vary between 0.25% and 2.00%.
Read Full post!Diversification is one of the widely used risk management technique that combines a wide variety of investments within a portfolio. It is basically designed to minimize the impact of any one security on overall portfolio performance. Diversification is probably the best way to reduce the risk in a portfolio.
A good investment portfolio is a blend of a wide range of asset class. Different securities play differently at any point in time, so with a blend of asset types, entire portfolio does not experience the impact of a decline of any one security. When a stocks in portfolio goes down, you may perhaps still have the stability of the bonds in well built portfolio. All sorts of academic studies and formulas demonstrate importance of diversification, but it is actually just the simple custom of not putting all your eggs in one basket. Spreading your investments across various types of assets and markets, will reduce the risk of the portfolio getting affected by the unfavorable returns of any single asset class.
A depository is like a bank where securities like shares, debentures, bonds, government securities, units etc. in electronic form.
• Hold securities in an account
• Transfers securities between accounts on the instruction of the account holder.
• Facilitates transfers of ownership without having to handle securities.
• Facilitates safekeeping of shares.
The National Securities Depository Limited (NSDL) & Central Securities Depository Limited (CDSL) are two depositories in India.
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