1. Equity Schemes

The investments of these schemes will predominantly be in the stock markets and endeavor will be to provide investors the opportunity to benefit from the higher returns which stock markets can provide. However they are also exposed to the volatility and attendant risks of stock markets and hence should be chosen only by such investors who have high risk taking capacities and are willing to think long term. Equity Funds include diversified Equity Funds, Sectoral Funds and Index Funds. Diversified Equity Funds invest in various stocks across different sectors while sectoral funds which are specialized Equity Funds restrict their investments only to shares of a particular sector and hence, are riskier than Diversified Equity Funds. Index Funds invest passively only in the stocks of a particular index and the performance of such funds move with the movements of the index.

2 Debt Schemes

Debt Funds invest only in debt instruments such as Corporate Bonds, Government Securities and Money Market instruments either completely avoiding any investments in the stock markets as in Income Funds or Gilt Funds or having a small exposure to equities as in Monthly Income Plans or Children’s Plan. Hence they are safer than equity funds. At the same time the expected returns from debt funds would be lower. Such investments are advisable for the risk-averse investor and as a part of the investment portfolio for other investors.

3 Balanced Schemes

Balanced Fund invests in a mix of equity and debt investments. Hence they are less risky than equity funds, but at the same time provide commensurately lower returns. They provide a good investment opportunity to investors who do not wish to be completely exposed to equity markets, but is looking for higher returns than those provided by debt funds.

4 Exchange Traded Scheme

The investment objective of the fund is to seek to provide returns that closely correspond to returns provided by price of gold through investment in physical Gold. However the performance of the scheme may differ from that of the underlying asset due to tracking error.

Mutual funds have become an important medium for investing money. Nowadays, bank rates have gone down and they are nowhere matching with the inflation rate. Therefore, the investors’ minds are changing from keeping their money into bank accounts to investing in mutual funds. There are other investing options like investing in stocks etc., but a common investor is not informed and competent enough to understand the intricacies of stock market. This is where mutual funds come to the rescue. As we discussed in chapter 1, a mutual fund is a group of investors operating through a fund manager to purchase a diverse portfolio of stocks or bonds. Mutual funds are highly cost efficient and very easy to invest in.

There are following types of mutual fund products available in India:

Closed-end funds: A closed-end mutual fund has a set number of shares issued to the public through an initial public offering.

Open-end funds: Open end funds are operated by a mutual fund house which raises money from shareholders and invests in a group of assets

Large cap funds: Large cap funds are those mutual funds, which seek capital appreciation by investing primarily in stocks of large blue chip companies

Mid-cap funds: Mid cap funds are those mutual funds, which invest in small / medium sized companies. As there is no standard definition classifying companies

Equity funds: Equity mutual funds are also known as stock mutual funds. Equity mutual funds invest pooled amounts of money in the stocks of public companies.

Balanced funds: Balanced fund is also known as hybrid fund. It is a type of mutual fund that buys a combination of common stock, preferred stock, bonds, and shortterm bonds

Growth funds: Growth funds are those mutual funds that aim to achieve capital appreciation by investing in growth stocks.

No load funds: Mutual funds can be classified into two types – Load mutual funds and No-Load mutual funds.

Exchange traded funds: Exchange Traded Funds (ETFs) represent a basket of securities that is traded on an exchange, similar to a stock. Hence, unlike conventional mutual funds

Value funds: Value funds are those mutual funds that tend to focus on safety rather than growth, and often choose investments providing dividends as well as capital appreciation.

Money market funds: A money market fund is a mutual fund that invests solely in money market instruments. Money market instruments are forms of debt that mature in less than one year and are very liquid.

International mutual funds: International mutual funds are those funds that invest in non-domestic securities markets throughout the world.

Regional mutual funds: Regional mutual fund is a mutual fund that confines itself to investments in securities from a specified geographical area, usually, the fund’s local region.

Sector funds: Sector mutual funds are those mutual funds that restrict their investments to a particular segment or sector of the economy.

Index funds: An index fund is a mutual fund or exchange-traded fund) that aims to replicate the movements of an index of a specific financial market.

Fund of funds: A fund of funds (FoF) is an investment fund that holds a portfolio of other investment funds rather than investing directly in shares, bonds or other securities.

Columns 1 & 2: 52-Week High and Low – These show the highest and lowest prices the mutual fund has experienced over the previous 52 weeks (one year). This typically does not include the previous day’s price.

Column 3: Fund Name – This column lists the name of the mutual fund. The company that manages the fund is written above in bold type.

Column 4: Fund Specifics – Different letters and symbols have various meanings. For example, “N” means no load, “F” is front end load, and “B” means the fund has both front and back-end fees. For other symbols see the legend in the newspaper in which you found the table.

Column 5: Dollar Change -This states the dollar change in the price of the mutual fund from the previous day’s trading.

Column 6: % Change – This states the percentage change in the price of the mutual fund from the previous day’s trading.

Column 7: Week High – This is the highest price the fund traded at during the past week.

Column 8: Week Low – This is the lowest price the fund traded at during the past week.

Column 9: Close – The last price at which the fund was traded is shown in this column.

Column 10: Week’s Dollar Change – This represents the dollar change in the price of the mutual fund from the previous week.

Column 11: Week’s % Change – This shows the percentage change in the price of the mutual fund from the previous week.

Buying and Selling

You can buy some mutual funds (no-load) by contacting the fund companies directly. Other funds are sold through brokers, banks, financial planners, or insurance agents. If you buy through a third party there is a good chance they’ll hit you with a sales charge.

That being said, more and more funds can be purchased through no-transaction fee programs that offer funds of many companies. Sometimes referred to as a “fund supermarket,” this service lets you consolidate your holdings and record keeping, and it still allows you to buy funds without sales charges from many different companies.

Selling a fund is as easy as purchasing one. All mutual funds will redeem (buy back) your shares on any business day. In the United States, companies must send you the payment within seven days.

The Value of the Fund

Net asset value (NAV), which is a fund’s assets minus liabilities, is the value of a mutual fund. NAV per share is the value of one share in the mutual fund, and it is the number that is quoted in newspapers. You can basically just think of NAV per share as the price of a mutual fund. It fluctuates everyday as fund holdings and shares outstanding change.
When you buy shares, you pay the current NAV per share plus any sales front-end load. When you sell your shares, the fund will pay you NAV less any back-end load.

Costs are the biggest problem with mutual funds. These costs eat into your return, and they are the main reason why the majority of funds end up with sub-par performance.

What’s even more disturbing is the way the fund industry hides costs through a layer of financial complexity and jargon. Some critics of the industry say that mutual fund companies get away with the fees they charge only because the average investor does not understand what he/she is paying for.

Fees can be broken down into two categories:
1. Ongoing yearly fees to keep you invested in the fund.
2. Transaction fees paid when you buy or sell shares in a fund

Professional Management – Many investors debate whether or not the socalled professionals are any better than you at picking stocks. Management is by no means infallible, and, even if the fund loses money, the manager still takes his/her cut.

Costs – Mutual funds don’t exist solely to make your life easier – all funds are in it for a profit. The mutual fund industry is masterful at burying costs under layers of jargon. These costs are so complicated that in this tutorial we have devoted an entire section to the subject.

Dilution – It’s possible to have too much diversification. Because funds have small holdings in so many 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.

Taxes – When making decisions about your money, fund managers don’t consider your personal tax situation. For example, when a fund manager sells a security, a capital-gains 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.

After a bond is issued, it may be traded. If a bond is traded before it matures, it may be worth more or less than the price paid for it. The price at which a bond trades can be affected by several types of risk.

Interest Rate Risk

When interest rates fall, a bond’s value usually rises. When interest rates rise, a bond’s value usually falls. The longer a bond’s maturity, the more its price tends to fluctuate as market interest rates change. However, while longer-term bonds tend to fluctuate in value more than shorter-term bonds, they also tend to have higher yields to compensate for this risk.

Unlike a bond, a bond mutual fund does not have a fixed maturity. It does, however, have an average portfolio maturity—the average of all the maturity dates of the bonds in the fund’s portfolio. In general, the longer a fund’s average portfolio maturity, the more sensitive the fund’s share price will be to changes in interest rates and the more the fund’s shares will fluctuate in value.

Credit Risk

Credit risk refers to the “creditworthiness” of the bond issuer and its expected ability to pay interest and to repay its debt. If a bond issuer is unable to repay principal or interest on time, the bond is said to be in default. A decline in an issuer’s credit rating, or creditworthiness, can cause a bond’s price to decline. Bond funds holding the bond could then experience a decline in their net asset value.

Prepayment Risk

Prepayment risk is the possibility that a bond owner will receive his or her principal investment back from the issuer prior to the bond’s maturity date. This can happen when interest rates fall, giving the issuer an opportunity to borrow money at a lower interest rate than the one currently being paid. (For example, a homeowner who refinances a home mortgage to take advantage of decreasing interest rates has prepaid the mortgage.) As a consequence, the bond’s owner will not receive any more interest payments from the investment. This also forces any reinvestment to be made in a market where prevailing interest rates are lower than when the initial investment was made. If a bond fund held a bond that has been prepaid, the fund may have to reinvest the money in a bond that will have a lower yield.

Bond funds invest primarily in securities known as bonds. A bond is a type of security that resembles a loan. When a bond is purchased, money is lent to the company, municipality, or government agency that issued the bond. In exchange for the use of this money, the issuer promises to repay the amount loaned (the principal; also known as the face value of the bond) on a specifi c maturity date. In addition, the issuer typically promises to make periodic interest payments over the life of the loan.

A bond fund share represents ownership in a pool of bonds and other securities comprising the fund’s portfolio. Although there have been past exceptions, bond funds tend to be less volatile than stock funds and often produce regular income. For these reasons, investors often use bond funds to diversify, provide a stream of income, or invest for intermediate-term goals. Like stock funds, bond funds have risks and can make or lose money.

Stock funds invest primarily in stocks. A share of stock represents a unit of ownership in a company. If a company is successful, shareholders can profi t in two ways: the stock may increase in value, or the company can pass its profi ts to shareholders in the form of dividends. If a company fails, a shareholder can lose the entire value of his or her shares; however, a shareholder is not liable for the debts of the company.

When you buy shares of a stock mutual fund, you essentially become a part owner of each of the securities in your fund’s portfolio. Stock investments have historically been a great source for increasing individual wealth, even though the stocks of the most successful companies may experience periodic declines in value. Over time, stocks historically have performed better than other investments in securities, such as bonds and money market instruments. Of course, there is no guarantee that this historical trend will be true in the future. That’s why stock funds are best used as long-term investments.

Mutual funds make saving and investing simple, accessible, and affordable. The advantages of mutual funds include professional management, diversification, variety, liquidity, affordability, convenience, and ease of record-keeping—as well as strict government regulation and full disclosure.

Funds Management

Even under the best of market conditions, it takes an astute, experienced investor to choose investments correctly, and a further commitment of time to continually monitor those investments.

With mutual funds, experienced professionals manage a portfolio of securities for the customer full-time, and decide which securities to buy and sell based on extensive research. A fund is usually managed by an individual or a team choosing investments that best match the fund’s objectives. As economic conditions change, the managers often adjust the mix of the fund’s investments to ensure it continues to meet the fund’s objectives.

Diversification

Successful investors know that diversifying their investments can help reduce the adverse impact of a single investment. Mutual funds introduce diversification to your investment portfolio automatically by holding a wide variety of securities. Moreover, since you pool your assets with those of other investors, a mutual fund allows the investor to obtain a more diversified portfolio than you would probably be able to comfortably manage on your own — and at a fraction of the cost. In short, funds allow you the opportunity to invest in many markets and sectors.

That’s the key benefit of diversification.

Variety

Within the broad categories of stock, bond, and money market funds, you can choose among a variety of investment approaches. Today, there are about 8,200 mutual funds available in the U.S., with goals and styles to fi t most objectives and circumstances.

Low Cost

Mutual funds usually hold dozens or even hundreds of securities like stocks and bonds. The primary way you pay for this service is through a fee that is based on the total value of your account. Because the fund industry consists of hundreds of competing firms and thousands of funds, the actual level of fees can vary. But for most investors, mutual funds provide professional management and diversification at a fraction of the cost of making such investments independently.

Liquidity

Liquidity is the ability to readily access your money in an investment. Mutual fund shares are liquid investments that can be sold on any business day. Mutual funds are required by law to buy, or redeem, shares each business day. The price per share at which you can redeem shares is known as the fund’s net asset value (NAV). NAV is the current market value of all the fund’s assets, minus liabilities, divided by the total number of outstanding shares.

Convenience

You can purchase or sell fund shares directly from a fund or through a broker, financial planner, bank or insurance agent, by mail, over the telephone, and increasingly by personal computer. You can also arrange for automatic reinvestment or periodic distribution of the dividends and capital gains paid by the fund. Funds may offer a wide variety of other services, including monthly or quarterly account statements, tax information, and 24-hour phone and computer access to fund and account information.

Protection

Not only are mutual funds subject to compliance with their self-imposed restrictions and limitations, they are also highly regulated by the government. As part of this government regulation, all funds must meet certain operating standards, observe strict antifraud rules, and disclose complete information to current and potential investors. These laws are strictly enforced and designed to protect investors from fraud and abuse. But these laws obviously cannot help you pick the fund that is right for you or prevent a fund from losing money.