Mutual funds

Mutual Funds

Mutual Fund:

A mutual fund is a pool of money, collected from investors, and is invested according to certain investment objectives.

Characteristics of Mutual Fund

Ownership of the MF is in the hands of the investors

MF managed by investment professionals

The value of portfolio is updated every day

Advantage of MF to investors:

Portfolio diversification

Professional management

Reduction in risk

Reduction of transaction casts

Liquidity

Convenience and flexibility

Net Asset Value:

The value of one unit of investment is called as the Net Asset Value.

Open-Ended Fund:

 Open ended funds means investors can buy and sell units of fund, at NAV related prices at any time, directly from the fund this is called open ended fund. For Ex: unit 64

Close- Ended Funds:

 Close ended funds means it is open for sale to investors for a specific period, after which further sales are closed. Any further transaction for buying the units or repurchasing them, happen, in the secondary markets.

Dividend Option:

 Investors, who choose a dividend on their investments, will receive dividends from the MF, as when such dividends are declared.

Growth Option:

Investors who do not require periodic income distributions can be choose the growth option.

Equity Funds:

Equity Funds are those that invest pre-dominantly in equity shares of company.

Types of Equity Funds:

Simple Equity Funds

Primary Market Funds

Sect oral Funds

Index Funds

Sect oral Funds:

 Sect oral funds choose to invest in one or more chosen sectors of the equity markets.

Index Funds:

 The fund manager takes a view on companies that are expected to perform well, and invests in these companies

Debt Funds:

The debt funds are those that are pre-dominantly invest in debt securities.

Liquid Funds:

The debt funds invest only in instruments with maturities less than one year.

Gilt Funds:

Gilt funds invest only in securities that are issued by the GOVT. and therefore do not carry any credit risk.

Balanced Funds:

 Funds that invest both in debt and equity markets are called balanced funds.

Sponsor:

 Sponsor is the promoter of the MF and appoints trustees, custodians and the AMC with prior approval of SEBI.

Trustee:

 Trustee is responsible to the investors in the MF and appoints the AMC for managing the investment portfolio.

AMC:

The AMC describes Asset Management Company; it is the business face of the MF, as it manages all the affairs of the MF.

R & T Agents:

The R & T agents are responsible for the investor servicing functions, as they maintain the records of investors in MF.

Custodians:

 Custodians are responsible for the securities held in the mutual fund’s portfolio.

Scheme takes over:

If an existing MF scheme is taken over by the AMC, it is called as scheme take over.

Meaning of Load:

 Load is the factor that is applied to the NAV of a scheme to arrive at the price.

Market Capitalization:

 Market capitalization means number of shares issued multiplied with market price per share.

Price Earning Ratio:

The ratio between the share price and the post tax earnings of company is called as price earning ratio.

Dividend Yield: The dividend paid out by the company, is usually a percentage of the face value of a share.

Market Risk:

It refers to the risk which the investor is exposed to as a result of adverse movements in the interest rates. It also referred to as the interest rate risk.

Re-Investment Risk:

It the risk which an investor has to face as a result of a fall in the interest rates at the time or reinvesting the interest income flows from the fixed income security.

Call Risk:

 Call risk is associated with bonds have an embedded call option in them. This option hives the issuer the right to call back the bonds prior to maturity.

Credit Risk:

 Credit risk refers to the probability that a borrower could default on a commitment to repay debt or band loans.

Inflation Risk:

 Inflation risk refers the changes in the purchasing power of the cash flows resulting from the fixed income security.

Liquid Risk:

 It is also called market risk; it refers to the ease with which bonds culd be traded in the market.