05:27 PM
Saturday ,
26 May 2018
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MUTUAL FUND CONCEPTS
Mutual Funds pool the savings of different investors together, invest them into specific securities (usually stocks or bonds) with a predetermined investment objective (mentioned in the offer document). Investors are issued ‘units’. Thus, for an investor, investments in Mutual Funds imply buying shares (or portions) of the MF and becoming shareholders of the fund.
A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unitholders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.
SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme.
Mutual funds have many benefits. They offer an easy and inexpensive way for an individual to get returns from stocks and bonds without: incurring the risks involved in buying them directly; needing the capital to buy quality stocks; or having the expert knowledge to make the right buy/sell decisions.
The drawbacks with mutual funds are that you have no control on the investments of the fund; and, more importantly, the downside of diversification is that a fund can hold so many stocks that a tremendously great performance by a stock will make very little difference to a fund's overall performance.
Mutual funds invest the money collected from the investors in securities markets. Net Asset Value is the market value of the securities held by the scheme. We arrive at the NAV after netting off liabilities from the asset value and dividing by the total number of units outstanding. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis. The performance of a particular scheme of a mutual fund is denoted by Net Asset Value. This NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly - depending on the type of scheme.
No, you may not actually get that much when you redeem your units. That is because of the charges levied by some mutual funds. Though NAV is a good enough figure to tell you what the price of each unit is, it is not an exact one. Funds charge fee for managing your money called the annual expense fee. Some funds also charge a fee when you buy or sell units called the entry and exit load.
As a class of assets, equities are subject to greater fluctuations. Hence, the NAVs of these schemes will also fluctuate frequently. Hence, equity schemes are more volatile, but offer better returns.
Asset, of course, is the investments of a mutual fund. And value is the market value of investments. What exactly is market value? Let’s say a fund has invested its money in stocks. Then, the price of those stocks on the stock market multiplied by the number of stocks owned gives you the value of all the investments made by that mutual fund. This value can change either when the market valuation changes or if people are joining or leaving the scheme.
There are two ways of earning a return from a mutual fund - through dividend or through capital appreciation. Dividend is earned when the corpus of the MF grows (by way of investing the funds of the unitholders in various investment avenues) and the MF distributes this surplus among the unitholders in the form of Dividend. On the other hand, the surplus can remain in the fund, taking the net asset value (NAV) or the price of the unit, higher. Investors can now sell their units and realise a gain (by way of capital appreciation) or can hold on for future appreciation.
Look for one thing in the fine print: the scheme's expenses. One such expense is the bomb of a salary paid to the investment experts who manage the fund. Apart from management fee there is also the money the fund spends on advertising and marketing a scheme. There is a host of operating expenses from buying stationery to maintaining the fund house's staff. Should it matter to you if the fund house purchases a new computer?
It does. In whatever way the fund spends the money, the net expenses are all billed in one way or the other to the unitholder. The expenses of a scheme do not include brokerage commissions.
Schemes with smaller assets to manage and particularly those that are not part of a large fund house will generally have higher expenses relative to schemes with larger assets. Fresh schemes generally take some time to overcome their expense burden.
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