Human beings from their very inception want to earn and save something for unwanted situations. In the earlier stage, he puts his earnings under the soil to keep it safe from being stolen. Later banking system was developed and subsequently different kind of instruments for investment is being used.
Nowadays, investments in share market instruments are much preferred by big as well as small investors. Everyone wants to earn extraordinary returns from share market booms. And Mutual Funds are one of such ways through investments in share markets are being carried out by small and marginal investors. A Mutual fund is an investment company that issues shares to the public. The money it receives from shareholders is pooled and invested in a wide range of stocks, bonds, or other money market instruments to meet specific investment objectives. The various instruments included in a fund's portfolio are handled by professional money managers in line with the stated investment policy of the fund.
The essential purpose behind the Mutual Fund is to secure two important benefits for small and retail investors, viz.
(i) minimization of risk through diversification, and
(ii) professional management of invested funds.
The risk associated with investment can be minimized by spreading the investment over a dozen, or even hundreds of companies, which seems to be impossible for small investors. Thus, diversification of investment reduces risk.
Professional money management is required to become successful in the game of investment. Most of small investors can not devote the time and resources required for managing their investments. This is easily carried out by fund managers, thus producing better results.
Mutual funds in India are structured as follows:
Each mutual fund has a Board of Trustees, an Asset Management Company (AMC or the manager) and unit holders. In India, we also have a promoter or sponsor who takes the initiative of starting a mutual fund but has no active role after the fund has been launched. The sponsor remains only a shareholder of the AMC.
As per the Securities and Exchange Board of India (SEBI) guidelines, the effective control of the AMC is not with the sponsor but with the Board of Trustees. SEBI guidelines provide the framework within which mutual funds in India have to operate. Maximum limits have been prescribed for management fees and other chargeable expense; SEBI also regulates many other aspects of mutual funds' operations and policies.
Major types of mutual funds are:
(1) Equity Schemes: investing primarily in equities with several plans such as growth plan, dividend plan, and dividend reinvestment plan; (2) Bond Schemes: invest in government and corporate bonds of minimum and long duration, thus arising their income from interest. (3) Balanced Schemes: invest in both equity and bonds based upon the specified policies and investment objectives; (4) Money Market Schemes: a relatively recent phenomenon in India, such funds invest in very short term money market instruments at lesser risks.
Once a mutual fund scheme has been floated, the buying and selling prices of its shares, known as units, from day to day are related to the Net Asset Value (NAV) of the units. A mutual fund is required to calculate the NAV once a day based on the closing market prices by valuing all assets and liabilities at their current values.
NAV per unit = (Market Value of Assets - Portfolio Liabilities)/No. of shares outstanding
SIP: an emerging trend
A systematic investment plan (SIP) commits the investor to invest a specified amount every month (or every quarter) in the units of a fund's equity scheme. The number of units bought each month for the investor under the plan will depend on the ruling price: fewer units are bought when the price is high, and more units are bought when the price is low. This is a built-in advantage of SIPs. It averages out investor's buying price over the entire period of holding. The SIP resolves a dilemma often facing investors due to ups and downs in the market price. The investors find it difficult when to invest in the equity scheme.
The investors should not take it for granted that SIP is always advantageous. The price level at the starting point is particularly important. The price level at the end of the period chosen is also critical. The rigidity of most SIP schemes can be both inconvenient and disadvantageous to investors. The investors should avoid a situation of forced redemption of accumulated units at unduly low price by building some flexibility in the choice of redemption date.
Hence, an investor should choose from among the mutual funds those which have a record of consistently good performance and possess characteristics (e.g. industry composition of investments) which will help to achieve good long-term performance of investments.
Happy Investing
