What is a Mutual
Fund?
Savings has become
an integral part of life today. It not anymore advantageous of having
your money locked up in a fixed deposit for years, which is not going
to fetch an average individual of not more than 6% annually. The percentages
offered for a fixed deposit is also declining as years pass by, and
this is not doing the investor any good.
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What do you do with the hard earned money then? This is a million dollar
question which has varied answers. Banks and other financial institutions
have come up with a big answer to this question in the form of Mutual
Funds. Mutual Fund is something which pools the investment of various
investors and invests the same in different securities. The losses and
gains that result from Mutual Funds are being accrued to the investors
only.
The investors have the options of investing in various money market
instruments like bonds, debentures and government securities. There
are high-risk portfolios and low-risk portfolios. The mantra is more
the risk, more the gains, however if you want to play safe you have
other options. Institutions like Merryl Lynch, HDFC mutual Funds, Standard
Chartered Mutual Funds etc. offer these kinds of services. These companies
often engage themselves in various market studies and researches and
offer precious advice to the investors depending upon the types of investment
they want to make.
These financial institutions invest the money which the investors invest
in various other sources which include securities too to fetch those
returns on their investment. A customer is given various choices and
sent market updates regularly to let them know about the market value
of the securities they have invested in. Today mutual funds play an
important role in increasing the savings of the investors. They are
clearly given equal preference rather than the money to lie down in
the bank as a fixed deposit for a period without giving them higher
returns.
What is NAV?
NAV called as the
Net Asset Value of the fund is the cumulative market value of the investments
or assets of the fund net of its liabilities. NAV per unit is the 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. Net Asset
Value is computed as follows:
NAV= Market value
of the fund’s assets+Receivables+Accrued Income–Liabilities-Accrued
Expenses
Benefits of Investing in Mutual Funds:
1. Professionally
qualified and experienced personnels manage Mutual Funds. Generally,
investors, by themselves, may have reasonable forecasting capability,
but to assess a financial instrument a professional analytical approach
is very much required in addition to access to research and information
about market prices and fluctuations in prices, time and methodology
to make sound investment decisions and keep monitoring them.
2. Since Mutual
Funds make investments in a number of securities, the resultant diversification
reduces risk. They provide the small investors with an opportunity to
invest in a larger basket of stocks.
3. The investor
is spared the time and effort of tracking investments, collecting income,
etc. from various issuers, etc. The investment professionals take care
of all these activities and update the investors from time to time.
4. It is not necessary
that investments should be in large amounts. It is also possible to
make small time investments, as and when the investor has surplus funds
to invest, he can work on his portfolio.
5. Mutual Funds
are registered with SEBI. SEBI monitors the activities of Mutual Funds
and clearly lays down the guidelines as to how it should operate, thereby
reducing the risk element.
6. As Investments
in open-ended funds is liquid, they can be redeemed at anytime unlike
direct investments in stocks and bonds.
Are there any risks
involved in investing in Mutual Funds?
Mutual Funds do
not provide assured returns. Returns from Mutual Funds are linked to
their performance. Investor’s portfolio generally consists of shares,
debentures and deposits. All these investments involve an element of
risk. The unit value of every investment varies depending upon the performance
of the company and companies may default in payment of interest/principal
on their debentures/bonds/deposits in case it does not do well that
quarter or for that financial year. Besides this, the government may
come up with new regulations, which may affect a particular industry
or class of industries which might comprise your investments. All these
factors influence the performance of Mutual Funds.
How to
get started
Choice of any scheme would depend to a large extent on the investor
preferences. Equity Funds would be the most suitable for an investor
who is willing to take a fair amount of risk as investments in Equity
Funds would earn them the maximum returns. Debt funds, otherwise called
as debentures are suited for those investors who prefer regular income
and safety. Medium and long term investors can invest in Gilt funds
as they involve minimum risk and their capital is safe and secure.
Balanced funds are ideal for medium- to long-term investors willing
to take moderate risks. Corporate, Institutional investors and business
houses generally invest their funds for a very short period. Liquid
funds are the best investment for these investors as they can convert
their securities into liquid cash immediately as and when they require.
For those investors who are seeking Tax benefits, Tax Saving Funds are
ideal for these people.
While selecting a portfolio, one important aspect that should be taken
into consideration is the duration of the investment. Based on your
time horizon and risk factors you can select a particular portfolio.
Apart from all this, factors like objective of the funds and returns
on investments given by these funds on different schemes should also
be taken into consideration while selecting a particular portfolio.
The performances of Mutual funds are not only influenced by the performance
of the stock market, it is also influenced by the economy as well. Inflation
and deflation factors play an important role in affecting the market
prices and thus having an impact on the investments. Equity Funds are
influenced to a large extent by the stock market. Apart from the economic
factors the stock market also to a large extent depends upon the performance
of the companies which in turn affect the prices of the stock. The interest
rates and the credit quality influence the Bond Funds. As interest rates
fall, bond prices rise, and vice versa. On the other hand, bond funds
with higher credit ratings are less influenced by changes in the economy.
It’s a proven fact that it's smarter to own a variety of stocks
and bonds than to invest on the success of a few companies. But diversifying
is not as easy as investing in a portfolio of individual stocks and
bonds can prove to be expensive. You have to be updated with the investment
market and should know as to what to invest in and when to invest in
those securities to earn profits on your investments. It requires a
lot of experience and concentration.
Mutual funds have one big advantage: When an investor invests money
into a fund, it's pooled with money from other investors to create much
greater buying power than he would have invested. This can be used to
invest in stocks of high value and greater returns.
Since a portfolio can consist of hundred different securities, its success
is not dependent on how one or two holdings perform. The return on other
investments can nullify the underperformance of a few holding thus making
the investment still a very profitable one.
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