Understanding Mutual Funds

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Understanding Mutual Funds
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• Godmind Mutual Fund Advisory services

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What is a Mutual Fund?
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A vehicle for investing in stocks and bonds
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• A vehicle for investing in stocks and bonds.
• Not an alternative investment option to stocks
  and bonds.
• It pools the money of several investors and
  invests this in stocks, bonds, money market
  instruments and other types of securities.
• owner of a mutual fund unit gets a proportional
  share of the funds gains, losses, income and
  expenses.

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Each mutual fund has a specific stated objective
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• Funds objective is laid out in the fund's
  prospectus, which is the legal document that
  contains information about the fund
• Its history, its officers and its performance.

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Some popular objectives of a mutual fund are -
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• Fund Objective What the fund
  will invest in
• Equity (Growth) - Only in
  stocks
• Debt (Income) - Only in
  fixed-income securities
• MoneyMarket - In
  short-term money market
• 
  instruments
• 
  (including government securities)
• Balanced - Partly
  in stocks and partly in
• 
  fixed- income securities,
• 
  ('balance' in returns and risk)

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Managed by an Asset Management Company (AMC)
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• The company that puts together a mutual fund is
  called an AMC .
• AMC may have several mutual fund schemes .
• AMC hires a professional money manager, who buys
  and sells securities in line with the fund's
  stated objective.

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All AMCs Regulated by SEBI, Funds governed by
Board of Directors
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• Mutual fund regulations require that the funds
  objectives are clearly spelt out in the
  prospectus.
• Every mutual fund has a board of directors that
  is supposed to represent the shareholders'
  interests, rather than the AMCs.

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The Basics of Mutual Funds.
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Net Asset Value or NAV
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• NAV is the total asset value (net of expenses)
  per unit of the fund and is calculated by the AMC
  at the end of every business day.

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How is NAV calculated?
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• The value of all the securities in the portfolio
  in calculated daily. From this, all expenses are
  deducted and the resultant value divided by the
  number of units in the fund is the funds NAV.

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Expense Ratio
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• AMCs charge an annual fee, or expense ratio that
  covers administrative expenses, salaries,
  advertising expenses, brokerage fee, etc.
• Fund's expense ratio is typically to the size of
  the funds under management and not to the returns
  earned.

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Load
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• Some AMCs have sales charges, or loads, on their
  funds (entry load and/or exit load) to compensate
  for distribution costs.
• Funds without a sales charge are called no-load
  funds.

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Open- and Close-Ended Funds
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• Open-ended Funds can enter and exit the fund
  scheme at its NAV.
• Close-Ended Funds Redemption can take place only
  after the period of the scheme is over.
  Close-ended funds are listed on the stock
  exchanges

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Important documents
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• Two key documents that highlight the fund's
  strategy and performance are 1) the prospectus
  (legal document) and the shareholder reports
  (normally quarterly).

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Benefits of Investing Through Mutual Funds
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Professional Money Management
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• Fund managers are responsible for implementing a
  consistent investment strategy .
• Fund managers monitor market and economic trends
  and analyze securities

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Diversification
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• Diversification is one of the best ways to reduce
  risk.
• Mutual funds offer investors an opportunity to
  diversify across assets.

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Liquidity
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• Investors can sell their mutual fund units on any
  business day.
• Receive the current market value on their
  investments within a short time period (normally
  three- to five-days).

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 Affordability
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• The minimum initial investment for a mutual fund
  is fairly low for most funds (as low as Rs500 for
  some schemes.

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 Convenience
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• Convenience of periodic purchase plans, automatic
  withdrawal plans and the automatic reinvestment
  of interest and dividends.
• Reports and statements .

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Flexibility and variety
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• Pick from conservative, blue-chip stock funds,
  Sectoral funds,
• Funds that aim to provide income with modest
  growth
• Those that take big risks in the search for
  returns.
• You can even buy balanced funds, or those that
  combine stocks and bonds in the same fund.

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Tax benefits on Investment in Mutual Funds
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• 100 Income Tax exemption on all Mutual Fund
  dividends .
• Deduction upto 1 lakh available u/s 80(c) under
  investment in ELSS funds as of FY2005-2006.

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INVEST EARLY INVEST REGULARLY
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Happy Investing