Showing posts with label MutualFunds. Show all posts

Akshaya Tritiya - Gold, Gold ETFs or Gold Funds?

by Rajesh Narayanan · 6 Comments

Akshaya Tritiya, by Indian tradition, is considered an auspicious day for buying gold. Nowadays, there are quite a few options for investors who want to invest in gold, other than physical gold. Prominent among them are Gold ETFs,Gold Funds and Gold coins from banks. Let us take a look some of the advantages and disadvantages of these products.

Akshaya Tritiya


Physical Gold or Gold coins: 

Buying and selling physical gold adds substantial costs to your purchases, since jewelers always charges a making cost of 7 to 21 per cent over and above the price of gold. Also, when you want to sell it back to the same jeweler, you would be offered lesser price than the market price, which is a big disadvantage in investing in physical gold.Also storing your physical gold in lockers can cost you about Rs.1000-5000, depending on the institutions which offer you lockers and there are always risks associated with such placements.

As far as Gold coins are concerned, they are similiar to physical gold, involving costs of about 4-5% of the price of the gold.You can either buy these coins from the jeweller or from leading banks. You have to note that,you cannot sell the coins back to the banks as most of them don't offer such facility.

Gold ETFs:

Exchange Trader Funds or ETFs: If you have missed earlier article about Gold ETFs, you can read it here at Gold ETFs. In short, ETFs are cheaper, liquid and easily bought and sold through any stock broker with a Dmat account. Check out the list of Gold ETFs avaialble.

Gold funds: 

Gold funds ( Fund of funds) are similar to ETFs, but more simpler. They don't require Dmat accounts like ETFs and there could be some charges like entry and exit loads. These charges are less than 1%, which is the same you have to pay your stock broker when purchasing ETFs, so not much of a difference. The advantage with gold funds is that they can be bought with any amount as low as Rs.500 or 1000 depending upon the mutual fund. Also, SIP option is available, in which one can invest fixed amount every month. Check out about the features and various Gold Funds.

Conclusion:

Considering the pros and cons of all the investing options available, Gold Funds are better and ideal for retail investors and the next better option could be Gold Etfs. Now the bigger question is whether one can invest in gold at these prices ? Investors need to understand, gold as an asset class has given positive returns for the past 10 consecutive years. The prices cannot go up continously and they can correct and correct substantially. Also investing in gold should be limited to 10-15% of one's portfolio and Gold alone should not be one's core portfolio.

 Invest wisely !

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What are Inverse Mutual Funds?

by Rajesh Narayanan · 0 Comments

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We all know mutual funds, but what are inverse mutual funds all about?

They are a special type of funds in which the value goes up when the stock market comes down. They are nothing but "short funds" or funds having short positions of the index or stocks. By investing in this fund investors/traders can take advantage of fall in the markets.

The main objective of the inverse mutual fund is to provide investors with an alternative during market-decline and in the case where they cannot short sell the index. This type of fund is generally linked to the market index such as the S&P 500 or any other benchmark index. The value of such funds change similar to the traditional funds, on a daily basis, say if the index declines by 1 percent in a day, the fund value increases by 1 percent for that day.

In what other ways these funds differ from the traditional funds?

While a traditional mutual fund purchases shares of index or stocks, which is income generating in the form dividends, the inverse mutual funds do not purchase the stocks themselves. Instead, they may short sell the index or stocks or even buy put options on the index or the stocks. Hence, these funds make money only if the particular index or stock falls.

How does these funds benefit retail investors or traders?

Many investors,rather traders, can make use of this type of fund as a hedge against market conditions.Hedging is method that can be used to protect your investments in case of a market fall. During market corrections, investors/traders could buy some shares of an inverse fund in order to protect their long positions in other funds or stocks. This way, even if the market does go down, they will be able to recoup some of their losses on their long positions with the inverse fund.

Disadvantages:

Unlike the traditional funds, there are no dividends in these type of funds. The costs involves are also high since frequent churning of positions required on a day to day basis. They also involve high risks and needs constant monitoring of the fund value and the market direction.

Conclusion:

Firstly, investors should only purchase an Inverse Mutual Fund if they completely understand the risks associated with shorting and the returns associated with it. These funds can work as a hedge only and investors will not benefit from investing a large amount of money into it, since stock markets have performed well in the long-term. This can be used as short-term strategy only and not as a long-term one. Hence, Inverse Mutual Funds are complicated instruments than traditional mutual funds and it should only be used by sophisticated investors and traders.

There are many such funds in developed markets and there aren't any such funds in emerging markets like India. Hope some fund house would take some cue from this and launch an inverse fund soon.

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Which is better - Gold ETFs or Gold Funds ?

by Rajesh Narayanan · 2 Comments

masterandstudent-goldfunds
The buzz word in the investing world is now - GOLD. Nowadays, there are many ways to invest in gold, other than buying physical gold and they are Gold ETFs and Gold Funds. There is a lot of confusion among retail investors about understanding and investing these products and we are quite sure this article would clarify things better.

To make things clear, both Gold ETFs and Gold Funds are mutual fund products — only the mode of purchase differs. The Gold Funds are fund of funds, which invest in their own fund house ETFs, for e.g., HDFC Gold Fund invests in HDFC Gold ETF.

Similar funds have been launched by Reliance mutual fund, Quantum mutual fund and Kotak mutual fund. Investors can get details of these funds from their respective websites.

Gold ETFs:
  • ETFs are exchange traded funds launched by leading mutual funds which are traded in stock exchanges like Nse and Bse.
  • You need a Dmat account and a trading account with your stock broker, to buy and sell these ETFs.
  • Charges involved are brokerage charges and Dmat charges.
  • They can be bought and sold over the exchange through a broker on a daily basis during trading hours. Gold ETFs provide an opportunity to benefit from changes in price movements of gold as the prices of gold ETF reflect the value of the underlying gold on real time basis.
  • SIP is not possible, since it involves manual purchase by the investor every month.

Gold Funds:
  • Gold Funds are fund of funds launched by mutual funds, which can be bought and sold through mutual fund agents or through online websites offered by the fund houses.
  • You don't need a Dmat account or trading account.
  • Charges involved - no entry load, but exit load of about 1 - 2%, if sold before one year from the date of purchase.
  • Can be bought and sold on any working day, but the NAV of the fund at which the fund sells the units is based on the closing NAV calculated based on price of the gold on the previous day.
  • SIP can be done, which is a good positive thing, since investing a fixed sum of money every month ensures you better average cost of purchase.
To sum it up, investing in Gold Funds are for those investors who want to invest in a simple and systematic method, involving lower costs. Whereas ETFs are for those active investors and traders, involving high costs and continuous monitoring of buying and selling.

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Goldman Sachs Mutual Fund - GS Gold Bees, GS Nifty Bees updates

by Rajesh Narayanan · 1 Comment

Goldman Sachs is a leading global investment banking, securities and investment management firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals.

With effect from 14th July 2011, Benchmark Asset Management Company Private Limited (BAMC) and Benchmark Trustee Company Private Limited (BTC) are a part of the Goldman Sachs group. Subsequent to this acquisition, all the schemes of Benchmark Mutual Fund will be renamed. Benchmark Mutual Fund has 13 schemes in operation currently.

The popular ETFs of Benchmark Fund - Gold Bees and Nifty Bees would be renamed as GS Gold Bees and GS Nifty Bees. Hence investors need not worry too much since change in the name of the schemes will not result in any change in the basic characteristics and fundamental attributes of the schemes.

The name changes of other schemes are available here. Also during trading hours one can get the live/real time NAV of Gold Bees and Nifty Bees here.

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Why Mutual Funds are better than stocks?

by Rajesh Narayanan · 2 Comments

masterandstudent-mutualfunds
When it comes to investing in stock markets, an investor is exposed to two kinds of risks - systematic risk and unsystematic risk. Systematic risk is due to macroeconomic movements and it affects the whole market, while unsystematic risks are company specific risks.

When we buy a stock of a single company we are exposed to both systematic risks (market risk) and unsystematic risks( company risk. But when we buy a diversified mutual fund or a portfolio we are exposed only to systematic risks and there is no unsystematic risks due to proper diversification by the mutual funds.

Let us take a look at some of the major advantages of mutual fund over stocks :

A mutual fund gives diversification :

If you have only 1,000 to 5,000 to invest, the money will not buy many shares of a single stock, and it will certainly not buy many different stocks. By putting your money in only two or three stocks, you are exposed to the possibility that one of them will plummet in price, wiping out much of your invested capital.

Instead, when you put your 1,000 or 5,000 in a mutual fund, your money buys into a portfolio that may comprise of 50 or 100 different stocks. If one or two stocks in the portfolio get hit hard, your losses will be much more limited because many of the other stocks will probably be going up at the same time.

A professional skilled manager chooses stocks for you :

Managers of stock mutual funds have instant access to information about every stock around the world at the push of a few computer keys. They work in companies where teams of research analysts who study corporate annual reports and these analysts visit company executives and factories to evaluate the firms’ prospects first hand. But individual investors have limited access to such information, like these fund managers.

The only disadvantage in investing in a mutual funds is that you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected.

Anyway. buying a mutual fund can substantially reduce our long-term market risk and result in a higher net return if they are used for longer term horizons and they take all the worries which are associated with managing stocks and provide proper diversification. In general that mutual funds are always better than individual stocks, since they involve lower risks, less money and but safe returns, as we have seen in HDFC Top 200 .

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Reliance Index Fund - Nifty Plan NFO

by Rajesh Narayanan · 2 Comments

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Reliance Mutual Fund launches its Nifty ETF namely Reliance Index Fund - Nifty Plan. We already have Nifty Bees  & other ETFs from leading fund houses and Reliance Mutual Fund is the latest fund to join the bandwagon. As with any other Index Fund, the objective of this fund is to replicate the composition of the Nifty, with a view to generate returns that are commensurate with the performance of the Nifty.

Minimum Investment is Rs.5000 and both Growth & Dividend options are available. The entry load is nil and the scheme will be open till 23 Sep 2010. SIP facility is available with a minimum investment of Rs.500.

Why should one invest in Index Fund?

Index Funds are the simplest of the mutual fund products to understand. S&P CNX Nifty is a true representative of Indian Economy, since the constituents are blue chip companies which are the most liquid and widely owned companies. This scheme provides an opportunity to participate in India's growth story by investing in a well diversified portfolio of 50 stocks.

But investors need to understand that, like any other mutual fund, the performance of the scheme depends on the performance of the Nifty. Hence it would be better to invest through a Systematic Investment Plan (SIP) in the Growth Option.This is an open-ended fund and not exactly an ETF. Index Investing is slowly catching up with investors' attraction and it won't be a surprise if see more such funds.

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IDBI Nifty Junior Index Fund NFO

by Rajesh Narayanan · 1 Comment

niftyjuniorindex
IDBI Mutual Fund has launched Nifty Junior Index Fund NFO, an open ended equity scheme tracking the CNX Nifty Junior Index. The investment objective of the scheme is to invest only in and all the stocks comprising the CNX Nifty Junior Index in the same weights of these stocks as in the Index, to replicate the performance of the Returns of CNX Nifty Junior Index.

Scheme Details:

Terms of Issue: Offer for units of Rs.10 per unit during the NFO and the minimum subscription amount is Rs.5000.
Load structure: Entry load: Nil; Exit load of 1% for Redemption on or before 1 year from the date of allotment.
Plans on offer: Growth Plan and Dividend Plan with option for dividend payout and re-investment.
SIP facility is available.
The offer is open from Sep 3 - Sep 15 2010.

So, what is this Nifty Junior Index Fund is all about?

The next list of liquid securities after CNX Nifty is the CNX Nifty Junior and it consists of 100 stocks selected based on liquidity. Also we don't have that many schemes tracking Nifty Junior apart from ICICI Prudential Nifty Junior Index Fund, which was launched just a few months ago.

We have Nifty Bees and many other ETFs and these kind of ETFs are yet to catch up the Indian investors in a big way. Hence, this scheme is for investors who want to invest in the next big index fund and with that an opportunity for them to buy the next heavyweight stocks of tomorrow.

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Reliance Small Cap Fund NFO

by Rajesh Narayanan · 1 Comment

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Reliance Mutual Fund has come out with a New Fund Offering - Reliance Small Cap Fund with a objective of getting long-term capital appreciation out of predominantly investing in small cap companies. The scheme has been benchmarked against BSE Small Cap Index.

The minimum investment is Rs.5000 and SIP facility is available with a minimum amount of Rs.1000.While the entry load is nil, exit load of 2% would charged if redeemed within 12 months of the investment. The scheme has both dividend and growth options available. The issue is currently open and it closes on 9 September 2010.

So, to invest or no to?

The fund is a very aggressive small cap oriented fund which intends to invest in small sized companies. It is a high risk - high return oriented fund characterized by volatility which is expected to be smoothened out by staying invested over a longer term horizon.Although small-cap stocks are often perceived as risky relative to their large-cap counterparts, they have other characteristics that may provide an opportunity for portfolio diversification and return enhancement.

Reliance Mutual Fund does not have a mid or a small cap fund, but the fund house has a satisfactory track record in its existing equity funds, like Reliance Savings Fund. Hence, investments in Reliance Small Cap Fund can be considered by the investor with a higher risk appetite and who is willing to hold with a long term prospective only.

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Top SIP Mutual Funds

by Rajesh Narayanan · 3 Comments

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Mutual funds are excellent means to participate in equity markets and we have seen some of the mutual fund schemes like HDFC Top 200 which have given exceptional returns over 3-5 year periods. Similarly, let us look some of the Top Systematic Investment Plans in Equity Funds which have given consistent returns over the past few years.

Why invest through SIP?

Systematic Investment Plan (SIP) a good plan offered by mutual funds to help you save systematically and regularly.  SIP makes you to take part in the equity markets without trying to second-guess its movements and  one need not worry too much about ups and downs of the markets.

So how the investments through SIP have performed?

Check out the table below, which shows the 1,3 and 5 year SIP returns of HDFC Equity, Reliance Growth, HDFC Top 200 and Reliance Regular Savings . The 3 year returns are 22-28% per annum and 5 year returns are 20-21% p.a as on date.


As you see above, the returns are exceptionally good, if invested with a 3 to 5 year time frame. SIP makes you disciplined in your savings and to get the most out of it,  invest with a long term view. Also the advantages of investing in mutual funds are many like,  no-entry-load, SIP amount as low as Rs.500 ( even Rs.100 in some of the funds) and auto-debit from bank accounts.

Hence apart from your one-time or single investments in mutual funds, SIP investments should be integral part your investment planning. When it comes to investing, long term results are rewarding and disciplined investing rewards you more !

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Reliance Regular Savings Fund

by Rajesh Narayanan · 1 Comment

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Reliance Regular Savings Fund is one of the many schemes from Reliance Mutual Fund, which have performed well since the last few years. The scheme is benchmarked against BSE 100, whose 5 year return is 18% whereas the fund's % year return is about 25%, which clearly exhibits its outpeformance.

Snapshot of the fund:

Reliance Regular Savings Fund is an open-ended fund whose primary objective is to seek capital appreciation and consistent returns by actively investing in equity and equity related securities. The entry load is nil and exit load is 1% if redeemed withing one year. The minimum investment is Rs.500 and SIP is available. The fund size is about 3000 cr, which is pretty much okay like any other  major schemes.

Performance:

This scheme was launched in 2005, and currently the NAV of the Growth scheme of this fund stands at Rs.30.The 5 year return is 24% p.a which is spectacular by any means. The 1 year and 3 year returns stand at 31% and 21% respectively, which speaks of it consistent performance over longer period.

Why invest in mutual funds?

As we have seen with HDFC Top 200 Fund, returns from mutual funds are consistent. For an average investor, it is a difficult task to decide which stock to buy, how much to buy and when to sell.Investing in mutual funds offer diversification to reduce risk substantially.

Though one can invest in stocks directly, after considerable research, it is not a bad idea to invest some amount in mutual funds.

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HDFC Top 200 Fund

by Rajesh Narayanan · 4 Comments

hdfctop200
Once couldn't find better time to write about this top performing fund than now, as its Net Asset Value (NAV) hits all-time high . Yes ! HDFC Top 200 Fund which has outperformed most of the funds in its category, reaches NAV of Rs.200. Though the fund has dividend option and you would have got regular dividends, we are analyzing the performance of the Growth option.

The interesting point to note here is that, the NAV of this fund was Rs.170 when the Sensex hit all-time high of 21,000 in 2008 and now the NAV is Rs.200. Which means even if you had invested in this fund at the peak of 21,000, you are still making good 18% returns above that, while the Sensex is still at 18,000.

Snapshot of the fund:
HDFC Top 200 is an open-ended fund which predominantly invests in BSE 200 stocks, with a higher exposure to Midcap stocks. The entry load is 0% and exit load of 1% if redeemed withing 1 year, after which no exit load. Though the fund size is quite large of about 8000cr, one needn't worry too much its management.

Performance:
The fund has given stupendous returns of 24% per annum since inception and its past 3 year and 5 year returns stand at 16% p.a. and 27% p.a. respectively. The 10-year SIP return is at 32% p.a and one couldn't ask for better performance.

Disciplined Systematic Investment in this fund has certainly generated spectacular returns, which are one of the best for a passive investor. Hence even if you haven't invested in this fund yet, you can invest through a SIP method for long term. It is one of the best funds to be in, for long term.

Watch out for review of this fund and  more such funds in this category.

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Kotak Nifty ETF

by Rajesh Narayanan · 4 Comments

Kotak Mutual Fund is launching a new open-ended scheme Kotak Nifty ETF. The scheme is like any another Nifty ETF, floating in the market. The investment objective of the fund is to provide returns that closely correspond to the total returns of the S&P CNX Nifty.

The Indicative allocation is 90 to 100% in the stocks comprising S&P CNX Nifty and 0 to 10% in Debt and Money market instruments. The units of the scheme will be listed on NSE and Investors can buy or sell units on the stock exchange.


The minimum investment amount during new fund offer is Rs.10,000 and in multiples of further purchases can be made once the units are listed on the exchange.The nav of the units is closely related to value stocks that form a part nifty.

We already have similar schemes like Nifty Bees and couple of other similar schemes listed. You can read more about at What is Nifty Bees and the Update.

What should investors do?


ETF being a passive investment carries lesser risk as compared to active fund management. The portfolio follows the index and therefore the returns depend on the performance of the index. Hence investors can invest in this scheme and also in a systematic manner once the units are listed on the NSE.

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NSE Mutual Fund Service System MFSS

by Rajesh Narayanan · 2 Comments

Buying Mutual Funds Online has been made easy. The National Stock Exchange -NSE is set to launch a Mutual Fund Service System - MFSS on November 30. Recently, SEBI had earlier permitted brokers to use stock exchange terminals to buy or sell Mutual Fund products. This move is aimed at increasing the reach of Mutual Fund products.

The new system allows brokers to buy and sell mutual funds through the exchange. Transactions are to be settled on a T+1 basis. Currently NSDL will be the sole Depository, for settlement of the system.

What does this mean for the investors?

This would essentially mean that investors can buy Mutual Fund units through their brokers. They can buy Mutual Fund units in their existing trading account, just like buying shares. It is going to bring about more convenience for the investors who need not have to go to a separate distributor now.

Investments in mutual funds have been made easy for the investors, with just a click or through a phone call. But there are couple of points to ponder about.
1. Investments made through distributors or direct online purchases don't have an entry load. But, in this case you are expected to pay the brokers the usual commissions of about 1%, which is definitely on the higher side.
2. Though it is made easier for retail investors, the Mutual Fund investments may end-up turning investors into traders, as it is been happening in equity markets.

Anyway this is another paradigm shift for the mutual fund industry and for the investors from the way they have been investing till now.

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MSCI Index ETF from Reliance Mutual Fund

by Rajesh Narayanan · 2 Comments

India's largest Mutual Fund, Reliance Mutual Fund is launching Morgan Stanley Capital India (MSCI) index ETF, following the launch of Hang Sang ETF by benchmark couple of weeks before. Reliance MSCI India ETF will be the first of its breed to track the performance of the MSCI India index. Interestingly MSCI India has outperformed Nifty since March lows,the MSCI India index has given returns of 95% while Nifty has gone up only 79% over the same period.

The MSCI India Index consists of 60 Indian companies, 10 more than the Nifty with Reliance Industries having the largest weightage of 13% followed by Infosys with a weightage of over 10%. The MSCI India Index has stocks other than Nifty which include AV Birla Nuvo, Glenmark Pharma, United Phos, United spirits.This is yet another interesting product , which would attract investors looking for Diversified Equity Fund.

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Franklin Build India Fund NFO

by Rajesh Narayanan · 1 Comment

Yet another infra fund ! Franklin Templeton has launched a NFO - Franklin Build India Fund . This open ended scheme is launched to seek capital appreciation by investing in companies engaged in infrastructure and infrastructure-related activities.

Scheme Details :
Minimum Investment Rs.5000 and incremental investment of Re.1.
SIP facility is available and NRIs allowed to invest.
The offer is currently open and it closes on Aug 8 2009.
Franklin Templeton is one of the top performing fund houses and infrastructure sector is one of the priority sectors to invest in. So investors can consider investing a small amount with a long term view.

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DSP BlackRock World Energy Fund

by Rajesh Narayanan · 2 Comments

DSP BlackRock Global Funds have a launched a NFO. This open ended scheme is launched with a primary objective to gain capital appreciation by investing in the units of BlackRock Global Funds – World Energy Fund and BlackRock Global Funds – New Energy Fund.

This is a fund of funds schemes, which means they invest in the units of other similar overseas mutual fund schemes. They also intend to invest in money market securities and/or money market/liquid schemes of DSP BlackRock Mutual Fund.

Details of the scheme:
Minimum Investment is Rs. 5000 and increment of Rs.1000. SIP facility is allowed and NRIs are allowed to invest. The issue is open till 31 July 2009.

Investors can look out for other opportunities.

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Religare Business Leaders Fund NFO

by Rajesh Narayanan · 1 Comment

Religare Mutual Fund has launched a New Fund Offer (NFO) - Religare Business Leaders Fund. This is an equity diversified fund. The objective of this open ended fund is to invest in equity related instruments (including equity derivatives) of companies which are leaders in their respective industry or segment.

Details of the scheme:
Minimum investment - Rs.5000 and in multiples of Rs.500.
Both dividend and growth option available.
The issue is currently open and the offer closes on 31 July 2009.
SIP method is available. NRI investment is allowed.
Investors could invest in an existing scheme, than taking the NFO route.

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Reliance Infrastructure Fund

by Rajesh Narayanan · 7 Comments

The largest mutual fund in India, Reliance Mutual Fund, has launched the Reliance Infrastructure Fund. The scheme launched with intention to gain long-term capital appreciation by investing in infra companies and companies related the infrastructure sector.

Its list of sectors include construction, power and power equipments, metals and minerals,ports and other related areas in the segment. The fund intends to have 35 per cent of its assets in cash and fixed income investment.

Details of the Fund:
Type: Open-End Equity Fund
NFO Opens: May 25, 2009
NFO Closes: June 23, 2009
Minimum Application Amount: Retail Plan: Rs. 5,000/-

Minimum SIP Investment: Rs. 100/- per month
Plans: Retail Plans with Growth, Bonus and Dividend (Payout & Reinvestment) options.
Benchmark: BSE 100
Load Structure:
Entry Load: 2.25 per cent;
Exit Load: 1 per cent if investment is redeemed within 1 year.

Should an investor invest or not ?
Yes, but not now. Though the infra story is here to stay, investors could wait and buy later, when the fund is available on an ongoing basis. Investors can use the SIP method for investing in this fund, on declines.

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Different schemes under Mutual Funds

by Rajesh Narayanan · 2 Comments

When it comes to Mutual Funds there are different schemes or funds available for an investor to choose between. One can choose a particular type of fund based on his investing needs and risk profile. The schemes can be classified as :

Growth Funds : They promise pure capital appreciation with equity shares. They buy shares in companies with high potential for growth (some of which might not pay dividends). The Net Asset Value - NAV of such a fund will tend to be erratic, since these so-called growth shares experience high price volatility. They also make quick profits by investing in small cap shares and by investing in initial public. However, growth strategies may differ from one fund to another. Not all growth funds operate similarly.

Income Funds : They aim to provide safety of principal and regular (monthly, quarterly or semi annually) income by investing in bonds, corporate debentures and other fixed income instruments. The Asset Management Company(AMC) in this case will also be guided by ratings given to the issuer of debt by credit rating agencies. Wherever a debt instrument is not rated, specific approval of the board of the AMC is required. Since most of corporate debt is illiquid, the fund tries to provide liquidity by investing in debt of varying maturity.

Money Market Fund : Also known as Liquid Plans, these funds are a play on volatility in interest rates. Most of their investment is in fixed-income instruments with maturity period of less than a year. Since they accept money even for a few days, they are best used to park short-term money, which otherwise earns a lower return in a savings bank account.

Gilt Fund : They generate returns commensurate with zero credit risk, by investing securities created and issued by the central and/or the state government securities and/or other instruments permitted by the Reserve Bank of India. Since they ensure zero risk, instant liquidity, tax-free income, their return is lower than an income fund.

Balanced Fund : The idea is to get the best of both worlds: equity shares and debt. Investing in equities is supposed to bring home capital appreciation, while that in fixed income is to impart stability and assure income for distribution. The proportion of the two asset classes depends on the fund managers' preference for risk against return. But because investments are highly diversified, investors reduce market risk. Normally about 50 to 65 per cent of a balanced fund’s funds are invested in equity shares.

Sector Fund : The goal is once again pure capital appreciation, but the strategy is to buy into shares of only one industry. And not diversify like a growth fund. Such funds forgo the principle of asset allocation for high returns. That's why they are also the riskiest.

Tax Plan : Also known as Equity Linked Saving Schemes, they operate like any other growth fund (and that's why are as risky). However, an investor in these schemes gets an income-tax rebate of 20 per cent (for a maximum of Rs. 1 lakh) under section 80C.

Essentially, it is an incentive for the investor (who is otherwise investing in fixed-income instruments like the Public Provident Fund, National Savings Scheme, life insurance policies etc under the same section can also include tax saving mutual funds under the Income Tax laws) to participate in capital appreciation that can be delivered by investing in equity shares. That's also why these schemes also come with a three-year lock-in period. Also while other tax planning schemes guarantee returns, an ELSS offers no such assurance.

Index Fund : Their goal is to match the performance of the markets. They do not involve stock picking by so called professional fund managers. An index fund essentially buys into the stock market in a way determined by some market index (BSE Sensex or S&P CNX Nifty) and does almost no further trading. Index funds are optimally diversified portfolios and only carry along with it the due to economy-wide factors.

But remember that the term 'growth' is often used in a very generic sense to denote every equity mutual fund. Also 'growth' in fixed income funds, comes from reinvesting dividends. That's why in such fixed income funds, investors have an option: they can choose either growth through reinvestment of dividends, or regular income by ticking on the income option. If you understand the types of funds, you should have a decent grasp on how funds invest their (our!) money.

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Advantages of Investing in Mutual Funds

by Rajesh Narayanan · 1 Comment

There are lot of benefits in investing in mutual funds than investing in individual stocks.

Professional Management
For an average investor, it is a difficult task to decide what securities to buy, how much to buy and when to sell. By buying a mutual fund, you acquire a professional fund manager who manages your money. This is the person who decides what to buy for you, when to buy it and when to sell. The fund manager takes these decisions after doing adequate research on the economy, industries and companies, before buying stocks or bonds. Most mutual fund companies charge a small fee for providing this service which is called the management fee.

Affordable
Almost everyone can buy mutual funds. Even for a sum of Rs 1,000 an investor can invest in a mutual fund.

Diversification
According to finance theory, when your investments are spread across several securities, your risk reduces substantially. A mutual fund is able to diversify more easily than an average investor across several companies, which an ordinary investor may not be able to do. With an investment of Rs 5000, you can buy stocks in some of the top Indian companies through a mutual fund, which may not be possible to do as an individual investor.

Liquidity
Unlike several other forms of savings like the public provident fund or National Savings Scheme, you can withdraw your money from a mutual fund on immediate basis.

Tax Benefits
Mutual funds have historically been more efficient from the tax point of view. A debt fund pays a dividend distribution tax of 12.5 per cent before distributing dividend to an individual investor or an HUF, whereas it is 20 per cent for all other entities. There is no dividend tax on dividends from an equity fund for individual investor.

Though one can invest in individual stocks directly, it is not a bad idea to invest some amount in mutual funds too.

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