Investor Education


Mutual fund schemes can fall under the following three categories based on maturity period of investment: I. Open-Ended - This scheme allows investors to buy or sell units at any point in time. This does not have a fixed maturity date. 1. Debt/ Income - In a debt/income scheme, a major part of the investible fund are channelized towards debentures, government securities, and other debt instruments. Although capital appreciation is low (compared to the equity mutual funds), this is a relatively low risk-low return investment avenue which is ideal for investors seeing a steady income. 2. Money Market/ Liquid - This is ideal for investors looking to utilize their surplus funds in short term instruments while awaiting better options. These schemes invest in short-term debt instruments and seek to provide reasonable returns for the investors. 3. Equity/ Growth - Equities are a popular mutual fund category amongst retail investors. Although it could be a high-risk investment in the short term, investors can expect capital appreciation in the long run. If you are at your prime earning stage and looking for long-term benefits, growth schemes could be an ideal investment. 3.i. Index Scheme - Index schemes is a widely popular concept in the west. These follow a passive investment strategy where your investments replicate the movements of benchmark indices like Nifty, Sensex, etc. 3.ii. Sectoral Scheme - Sectoral funds are invested in a specific sector like infrastructure, IT, pharmaceuticals, etc. or segments of the capital market like large caps, mid caps, etc. This scheme provides a relatively high risk-high return opportunity within the equity space. 3.iii. Tax Saving - As the name suggests, this scheme offers tax benefits to its investors. The funds are invested in equities thereby offering long-term growth opportunities. Tax saving mutual funds (called Equity Linked Savings Schemes) has a 3-year lock-in period. 4. Balanced - This scheme allows investors to enjoy growth and income at regular intervals. Funds are invested in both equities and fixed income securities; the proportion is pre-determined and disclosed in the scheme related offer document. These are ideal for the cautiously aggressive investors. II. Closed-Ended - In India, this type of scheme has a stipulated maturity period and investors can invest only during the initial launch period known as the NFO (New Fund Offer) period. 1. Capital Protection - The primary objective of this scheme is to safeguard the principal amount while trying to deliver reasonable returns. These invest in high-quality fixed income securities with marginal exposure to equities and mature along with the maturity period of the scheme. 2. Fixed Maturity Plans (FMPs) - FMPs, as the name suggests, are mutual fund schemes with a defined maturity period. These schemes normally comprise of debt instruments which mature in line with the maturity of the scheme, thereby earning through the interest component (also called coupons) of the securities in the portfolio. FMPs are normally passively managed, i.e. there is no active trading of debt instruments in the portfolio. The expenses which are charged to the scheme, are hence, generally lower than actively managed schemes. III. Interval - Operating as a combination of open and closed ended schemes, it allows investors to trade units at predefined intervals. Which scheme should I invest in? When it comes to selecting a scheme to invest in, one should look for customized advice. Your best bet are the schemes that provide the right combination of growth, stability and income, keeping your risk appetite in mind.

Advantages of Mutual Funds

Mutual funds allow investors to pool in their money for a diversified selection of securities, managed by a professional fund manager. It offers an array of innovative products like fund of funds, exchange-traded funds, Fixed Maturity Plans, Sectoral Funds and many more.

Whether the objective is financial gains or convenience, mutual funds offer many benefits to its investors.

Beat Inflation
Mutual Funds help investors generate better inflation-adjusted returns, without spending a lot of time and energy on it.While most people consider letting their savings 'grow' in a bank, they don't consider that inflation may be nibbling away its value. Suppose you have Rs. 100 as savings in your bank today. These can buy about 10 bottles of water. Your bank offers 5% interest per annul, so by next year you will have Rs. 105 in your bank.

However, inflation that year rose by 10%. Therefore, one bottle of water costs Rs. 11. By the end of the year, with Rs. 105, you will not be able to afford 10 bottles of water anymore. Mutual Funds provide an ideal investment option to place your savings for a long-term inflation adjusted growth, so that the purchasing power of your hard earned money does not plummet over the years.

Expert Managers
Backed by a dedicated research team, investors are provided with the services of an experienced fund manager who handles the financial decisions based on the performance and prospects available in the market to achieve the objectives of the mutual fund scheme.

Mutual funds are an ideal investment option when you are looking at convenience and time saving opportunity. With low investment amount alternatives, the ability to buy or sell them on any business day and a multitude of choices based on an individual's goal and investment need, investors are free to pursue their course of life while their investments earn for them.

Low Cost
Probably the biggest advantage for any investor is the low cost of investment that mutual funds offer, as compared to investing directly in capital markets. Most stock options require significant capital, which may not be possible for young investors who are just starting out.

Mutual funds, on the other hand, are relatively less expensive. The benefit of scale in brokerage and fees translates to lower costs for investors. One can start with as low as Rs. 500 and get the advantage of long term equity investment.

Going by the adage, 'Do not put all your eggs in one basket', mutual funds help mitigate risks to a large extent by distributing your investment across a diverse range of assets. Mutual funds offer a great investment opportunity to investors who have a limited investment capital.

Investors have the advantage of getting their money back promptly, in case of open-ended schemes based on the Net Asset Value (NAV) at that time. In case your investment is close-ended, it can be traded in the stock exchange, as offered by some schemes.

Higher Return Potential
Based on medium or long-term investment, mutual funds have the potential to generate a higher return, as you can invest on a diverse range of sectors and industries.

Safety & Transparency
Fund managers provide regular information about the current value of the investment, along with their strategy and outlook, to give a clear picture of how your investments are doing.
Moreover, since every mutual fund is regulated by SEBI, you can be assured that your investments are managed in a disciplined and regulated manner and are in safe hands.
Every form of investment involves risk. However, skillful management, selection of fundamentally sound securities and diversification can help reduce the risk, while increasing the chances of higher returns over time.

Like any purchase decision, your selection of a mutual fund scheme should be based on your expectations and the funds' ability to fulfill these goals. It is important to be clear about your investment objective before you enter into a buying decision. If you are planning to build a mutual fund portfolio, the first step is to examine your current situation. Ask yourself questions like:

1. Why am I investing in a mutual fund?

2. What kind of returns do I expect?

3. What portion of my net worth would I like to set aside for investments?

4. What do I intend to use the gains for? How many years do I have?

5. What is my investment objective?
a. Capital Appreciation
b. Capital Preservation
c. Achieving sustainable long term growth
d. Combination of Income and Capital growth

6. What kind of risk am I willing to take in the long run?

Be Clear About Your Investment Objectives
Investment objectives can be broadly classified into:
1. Generating an additional source of income

2. Financing future needs
a. Buying a home
b. Building a retirement corpus
c. Child's education and marriage
d. Legacy Planning

3. Increasing savings/ Inducing savings

4. Reducing tax liability

5. Protecting your savings from inflation

Evaluate Your Risk Appetite
To fulfill any investment objective, investors should first evaluate their risk appetite. While some investors are satisfied by investing in a low-risk : low-return scheme, others are willing to endure short-term loss for long-term potential gains.
A risk profile offers you suggestions about the investment options that best suit your needs and lifestyle.

Factors That Determine Your Risk Appetite
1. Current Scenario - Your age, financial dependents, assets and liabilities, sources of income, level of engagement (active or passive investor) and investable capital

2. Past Experience - Knowledge about investment products, inclination to learn, nature and composition of the last held portfolio and its performance

3. Future Outlook - Time horizon available to fulfill the investment objectives, liquidity requirements in the near future, importance of tax savings vis-a-vis return on investment

4. Investment Attitude - Willingness towards risk taking, ability to withstand short-term notional losses in return for long-term high returns

Based on your responses, an experienced MF ad-visor can determine your risk appetite and classify you as a conservative, assertive or an aggressive investor.

MutualFund Types Based on Risk Profile
Your risk appetite is an important factor while choosing the mutual funds scheme/s that fits your goals of growth, stability and timeframe.
1. A conservative investor's primary objective is to preserve the capital and receive regular income. They have a low tolerance for risk and hence a major chunk of their investment should be allocated to debt or money market mutual funds like income schemes, FMPs, etc.

2. A moderately aggressive investor is the one who is willing to take controlled risk for moderate returns. Such investors are generally recommended a mix of balanced, income, and index schemes so that they can benefit from a balanced portfolio.

3. Aggressive investors consider risk as an opportunity and leverage their experience and knowledge to take intelligent financial decisions. The major share of their investment, therefore, goes to growth and equity schemes.

For most investment schemes, risk and returns are directly proportional. It is important to create the right balance between the two based on your objectives and risk appetite.

Past performance of a mutual fund may not be a guarantee of future results but if you know how to analyze performance--if you know what to look for and what to avoid--you can make better investment decisions.

How good is the fund manager?
When purchasing a mutual fund, you are hiring a management team to pick securities for you. That's why you should pay extra close attention to the people contributing to the research process. Look for managers practicing a consistent, repeatable process.

Evaluating historical performance - In analyzing historical performance the investor needs to see what have been the past returns or historic returns, i.e., what were the returns in the last 1-5 years and how consistent were the returns. Through this investor can also analyze the risks of investing in that fund by finding the deviations and volatility in returns. But the investor should understand that even though the past returns show that the fund was performing well, it in no way means that it will continue to have a good run in future as mentioned in mutual fund prospectus.

Benchmarking- Investors can also compare the performance of the mutual funds with broad market index to see how much extra return they have generated in comparison with the index. Investors should be very careful in choosing the benchmark and the benchmark should be representative of the style the mutual fund is following otherwise it could lead to wrong conclusions.

Sharpe ratio- Sharpe ratio is calculated by subtracting the risk free rate from the returns of the mutual fund and then dividing it by the standard deviation of the returns of the mutual fund. This will give you excess returns per unit of risk taken. This measurement is very useful because although one fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance has been.

Expenses- Though the funds return u can't control but one thing which you can control is your expense. You should find out the expense ratio which is expressed as percentage of net assets. For example if you have 3000 invested and the expense ratio is 1% than 30 is deducted from your account every year as expense. You should also take a note of the loads on mutual fund though now entry loads are abolished but higher the loads the lesser are your returns. Loads are charges attached to purchase and sales of mutual funds and are termed as front end loads and back end loads. The lesser the loads and expense ratio the better it is for you assuming the same level of returns.

What is the fund strategy and how well is it executed?
There's a big difference between having an investment strategy that could add value and one that actually does. In order for a fund to do well over a long time horizon, we firmly believe that some combination of its strategy, process, execution, people and fees have to give it a lasting edge over rivals. Look for managers who can stick with their approach and have conviction in their research, rather than those who abandon their strategy when the market disagrees or those who show a lack of confidence in their process.

Analyzing Mutual Funds

When it comes to investing, risk and reward are inextricably entwined. You've probably heard the phrase "no pain, no gain" - those words come close to summing up the relationship between risk and reward. Don't let anyone tell you otherwise: All investments involve some degree of risk. If you intend to purchases securities - such as stocks, bonds, or mutual funds - it's important that you understand before you invest that you could lose some or all of your money.

The reward for taking on risk is the potential for a greater investment return. If you have a financial goal with a long time horizon, you are likely to make more money by carefully investing in asset categories with greater risk, like stocks or bonds, rather than restricting your investments to assets with less risk, like cash equivalents. On the other hand, investing solely in cash investments may be appropriate for short-term financial goals.

A Systematic Investment Plan helps you invest a fixed amount regularly at a specified frequency say, monthly or quarterly. SIP is a simple method of investing used across the world.

The benefits of SIP are:

Regular Investing
 o Identify your financial goals like buying a house, your first car, marriage, education.
 o Set aside and invest a fixed sum of money regularly to meet these financial goals.
 o Become a disciplined investor – maintain regularity. Maintain discipline in your asset allocation
 o SIP helps avoid the temptation of jumping from one asset class to another during certain market conditions.

Rupee Cost Averaging
 o By investing a fixed sum at fixed intervals we can buy fewer units when the price is higher and more units when the price is lower. This is called Rupee Cost Averaging.
 o SIP takes care that your average price works out to be lower than the price you would have paid at the market peak. It takes care that you invest across market cycles. Your average price works out to be lower than investing at the market peak. It helps you avoid the temptation of timing your investments “Market Timing” is best left to professionals.

Albert Einstein is believed to have endorsed the concept of compound interest as “the eighth wonder” and “the most powerful force in the universe”.

Would you rather have `10,000 per day for 30 days or a paisa that doubled in value every day for 30 days? Today, we know to choose the doubling paisa, because at the end of 30 days, we'd have about `5 million versus the `300,000 we'd have if we chose `10,000 per day.

So compound interest is rightly called the eighth wonder of the world, because it seems to possess magical powers, like turning a paisa into `5 million. The great part about compound interest is that it applies to money, and it helps us to achieve our financial goals, such as becoming a millionaire, retiring comfortably, or being financially independent.

Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash.

An investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon.

The three main asset classes - equities, fixed-income, and cash and equivalents - have different levels of risk and return, so each will behave differently over time.

The process of determining which mix of assets to hold in your portfolio is a very personal one. The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk.

Time Horizon - Your time horizon is the expected number of months, years, or decades you will be investing to achieve a particular financial goal. An investor with a longer time horizon may feel more comfortable taking on a riskier, or more volatile, investment because he or she can wait out slow economic cycles and the inevitable ups and downs of our markets. By contrast, an investor saving up for a teenager's college education would likely take on less risk because he or she has a shorter time horizon.

Risk Tolerance - Risk tolerance is your ability and willingness to lose some or all of your original investment in exchange for greater potential returns. An aggressive investor, or one with a high-risk tolerance, is more likely to risk losing money in order to get better results. A conservative investor, or one with a low-risk tolerance, tends to favor investments that will preserve his or her original investment. In the words of the famous saying, conservative investors keep a "bird in the hand," while aggressive investors seek "two in the bush."

Exchange Traded Funds are essentially Index Funds that are listed and traded on exchanges like stocks. Until the development of ETFs, this was not possible before. Globally, ETFs have opened a whole new panorama of investment opportunities to Retail as well as Institutional Money Managers. They enable investors to gain broad exposure to entire stock markets in different Countries and specific sectors with relative ease, on a real-time basis and at a lower cost than many other forms of investing. An ETF is a basket of stocks that reflects the composition of an Index, like S&P CNX Nifty or BSE Sensex. The ETFs trading value is based on the net asset value of the underlying stocks that it represents. Think of it as a Mutual Fund that you can buy and sell in real-time at a price that change throughout the day.

Many professional and retail investors view investments in gold as a hedge against risks in the financial system. Two major recessions have occurred in just the last decade: first, the bursting of the new economy bubble and later the mortgage scandal followed by a global financial and later an economic crisis. The still ongoing financial and economic crisis and the government responses have led to a strong increase in government debt in most developed countries like the US and the UK. For that reason, the economic and financial crisis has over the last several months developed into a sovereign debt crisis.

Recognizing this, many investors now try to protect their wealth or parts of it by investing in assets which are less dependent on the stability of the financial system. Gold is one asset class, which is perceived as a store of value in the long term.

Recognizing this, many investors now try to protect their wealth or parts of it by investing in assets which are less dependent on the stability of the financial system. Gold is one asset class, which is perceived as a store of value in the long term.

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