All About Mutual Funds
Content
MBA Education & Careers
Eco Fundas for you
All about Mutual Funds
PROMOD JOSEPH
MBA, VIRGINIA TECH.
Manager? Who is a Fund Manager?
An MF has a fund manager who is responsible for investing the pooled money into specific securities. The fund manager, with his team, tracks and researches different financial instruments and manages the fund. Even though one of the advantages is the services of professionals, the biggest advantage is the ‘diversification’.
I
nvestors whose ‘risk tolerance’ is low, dread the stock market because of the inherent fear that the market will crash and they will loose
their savings. The reasoning behind this is very straight forward: almost every boom in the market has been followed by a crash (‘correction’ as market analysts call it), when over-priced stocks in the market “correct” their value. In order to reduce the risk of losing one’s money, it is important to have a well diversified investment portfolio. Also, it so happens that, sometimes, the money one has is not enough to buy such a diversified portfolio. It is in this context that mutual funds (also called an AMC) come into picture.
Diversification? What is Diversification?
Diversification is the idea of spreading money across different types of investments. When one investment is down, another might be up. Diversifying the investment reduces the risk considerably. AMCs make investments in a variety of stocks and securities which reduces the risk by providing a diversified portfolio. The most basic level of diversification is to buy multiple stocks rather than just one stock. MFs are set up to buy many stocks. Beyond that, they can diversify even more by purchasing different kinds of stocks, bonds, gold, commodities, and so on. A person would have to invest a lot of time to buy all these investments and may not be able to buy because of financial constraints. But if a few MF units are purchased, then investments are automatically diversified in a predetermined category of investments. Here the investor is spared the time and effort of tracking investments,
What is an AMC?
An Asset Management Company (AMC) pools money from investors and invests it in a portfolio on behalf of the investors. The money pooled is the “mutual fund”, which is invested in various asset classes like equity, bonds, debentures, commercial paper, and government securities. In simple words, a mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective.
26 December 2008
MBA Education & Careers
ECO FUNDAS FOR YOU: ALL ABOUT MUTUAL FUNDS
Cardinal Rule of Investing The amount of money you make or lose depends on the amount of risk you take
collecting income, etc. Another advantage is that investments can be made in small amounts, that too as and when the investor has money to invest. Mutual funds are registered with SEBI and are highly regulated. In this way, investors are also assured about a trusted monitoring of their money. A Liquid Fund / Money Market Fund aims at providing easy liquidity, safety of capital, and some decent returns. An LF invests in highly liquid short term instruments like treasury bills and commercial papers. The period of investment could be as short as a day. A Gilt Fund ‘ensures’ safety of the principal amount and also a secured return. A GF is able to ‘ensure’ this as it invests exclusively in government securities which guarantee returns. A Balanced Fund invests both in equity shares and fixed-income-bearing instruments (debt) in some proportion. The idea is to provide the safety and steadiness of debt market while capitalising on the high returns earned from the equity markets. A Hedge Fund is a high risk fund that adopts highly speculative trading strategies.
ME &C
Types of Mutual Funds
An Equity Fund invests a major part in shares (equities). Since the returns are directly linked to the performance of the stock market, an EF carries a comparatively higher risk. A Diversified Fund invests in companies spread across sectors. If one sector does not do well, another sector would bail the fund out. A Sector Fund invests mainly in equity shares of companies in a particular business sector or industry (for example, IT). An Index Fund replicates the portfolio of a particular benchmark index like Sensex. The value of the IF varies in proportion to the benchmark index. A Tax Saver Fund offers tax benefits to investors under the Income Tax Act. A Debt / Income Fund invests in instruments like bonds, debentures, government securities, and commercial paper. The fund aims to provide a regular and steady income to the investor.
The author is Centre Director, T.I.M.E. Madurai.
December 2008 27
Eco Fundas for you
All about Mutual Funds
PROMOD JOSEPH
MBA, VIRGINIA TECH.
Manager? Who is a Fund Manager?
An MF has a fund manager who is responsible for investing the pooled money into specific securities. The fund manager, with his team, tracks and researches different financial instruments and manages the fund. Even though one of the advantages is the services of professionals, the biggest advantage is the ‘diversification’.
I
nvestors whose ‘risk tolerance’ is low, dread the stock market because of the inherent fear that the market will crash and they will loose
their savings. The reasoning behind this is very straight forward: almost every boom in the market has been followed by a crash (‘correction’ as market analysts call it), when over-priced stocks in the market “correct” their value. In order to reduce the risk of losing one’s money, it is important to have a well diversified investment portfolio. Also, it so happens that, sometimes, the money one has is not enough to buy such a diversified portfolio. It is in this context that mutual funds (also called an AMC) come into picture.
Diversification? What is Diversification?
Diversification is the idea of spreading money across different types of investments. When one investment is down, another might be up. Diversifying the investment reduces the risk considerably. AMCs make investments in a variety of stocks and securities which reduces the risk by providing a diversified portfolio. The most basic level of diversification is to buy multiple stocks rather than just one stock. MFs are set up to buy many stocks. Beyond that, they can diversify even more by purchasing different kinds of stocks, bonds, gold, commodities, and so on. A person would have to invest a lot of time to buy all these investments and may not be able to buy because of financial constraints. But if a few MF units are purchased, then investments are automatically diversified in a predetermined category of investments. Here the investor is spared the time and effort of tracking investments,
What is an AMC?
An Asset Management Company (AMC) pools money from investors and invests it in a portfolio on behalf of the investors. The money pooled is the “mutual fund”, which is invested in various asset classes like equity, bonds, debentures, commercial paper, and government securities. In simple words, a mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective.
26 December 2008
MBA Education & Careers
ECO FUNDAS FOR YOU: ALL ABOUT MUTUAL FUNDS
Cardinal Rule of Investing The amount of money you make or lose depends on the amount of risk you take
collecting income, etc. Another advantage is that investments can be made in small amounts, that too as and when the investor has money to invest. Mutual funds are registered with SEBI and are highly regulated. In this way, investors are also assured about a trusted monitoring of their money. A Liquid Fund / Money Market Fund aims at providing easy liquidity, safety of capital, and some decent returns. An LF invests in highly liquid short term instruments like treasury bills and commercial papers. The period of investment could be as short as a day. A Gilt Fund ‘ensures’ safety of the principal amount and also a secured return. A GF is able to ‘ensure’ this as it invests exclusively in government securities which guarantee returns. A Balanced Fund invests both in equity shares and fixed-income-bearing instruments (debt) in some proportion. The idea is to provide the safety and steadiness of debt market while capitalising on the high returns earned from the equity markets. A Hedge Fund is a high risk fund that adopts highly speculative trading strategies.
ME &C
Types of Mutual Funds
An Equity Fund invests a major part in shares (equities). Since the returns are directly linked to the performance of the stock market, an EF carries a comparatively higher risk. A Diversified Fund invests in companies spread across sectors. If one sector does not do well, another sector would bail the fund out. A Sector Fund invests mainly in equity shares of companies in a particular business sector or industry (for example, IT). An Index Fund replicates the portfolio of a particular benchmark index like Sensex. The value of the IF varies in proportion to the benchmark index. A Tax Saver Fund offers tax benefits to investors under the Income Tax Act. A Debt / Income Fund invests in instruments like bonds, debentures, government securities, and commercial paper. The fund aims to provide a regular and steady income to the investor.
The author is Centre Director, T.I.M.E. Madurai.
December 2008 27
