Mutual Funds
Mutual funds are money-managing institutions set up to professionally
invest the money pooled in from the public. These schemes are managed
by Asset Management Companies (AMC), which are sponsored by different
financial institutions or companies.
Each unit of these schemes reflects the share of investor in the respective
fund and its appreciation is judged by the Net Asset Value (NAV) of the
scheme. The NAV is directly linked to the bullish and bearish trends of
the markets as the pooled money is invested either inequity shares or
in debentures or treasury bills. Indian Mutual Funds unveils this multi-dimensional
avenue, with its intricacies, in a fashionable manner as mutual funds
up-hold ample scope of generating decent returns by some thoughtful investment.
Background of the Art
Mutual fund units and shares are purchased through a broker or directly
from the mutual fund. The mutual fund and purchaser decide for themselves
whether they wish to deal through brokers or deal directly without a broker.
In this description, the term "portions" will be used to refer
to all shares or units in a mutual fund, as those terms are defined by established
practice with. For the purposes of the invention, whether a mutual fund
is structured to distribute shares or units is irrelevant since the method
is applied to each type of holding in the same way.
One means of providing brokers with compensation involves a mutual fund
selling scheme known as "front end loaded" where the broker
is given a commission based on a percentage of the total price of portions
purchased. For example, if a purchaser wishes to purchase 100 portions
of $10 value each, the up-front purchase price paid is $1050 of which
$1000 is invested in the mutual fund and $50 commission or 5% service
fee goes to the broker.
Another compensation scheme is known as "back end loaded" or
"deferred sales charge". Deferred sales operate in a manner
which effectively hides the compensation to the mutual fund broker from
the purchaser. Following the same example, the up-front price paid by
the purchaser for the same purchase (100 portions at $10 each) is $1000.
However, the broker is paid a service fee of $50 or 5% immediately by
the mutual fund. To pay the broker, the mutual fund must borrow the $50
and mutual funds initially operate at a deficit for this reason until
they become well established. Of course there are various provisions to
penalize purchasers if they wish to sell their portions before a period
after the initial sale to recoup the broker service fee, mutual fund management
expenses and discourage migration of capital. For example, a penalty of
6% may be charged for sales of mutual fund portions in the first year
after purchase, 5% the second year, 4% the third year and so on. The purchaser
does not readily perceive the cost of the broker service fees but due
to the severely reduced liquidity of their mutual fund investment and
monetary penalties, this cost is incurred never-the-less.
Rules for investing in mutual funds
Be a long-term investor
You should have a long term horizon. Short-term trading will make brokers
rich and not investors and the income tax department will also be happy.
Mutual funds are diversified and therefore, their gains and losses are likely
to be lower than what it would be in case you are investing in an individual
security. However, major fluctuations are highly uncommon in mutual funds.
So what make sense is to leave your capital in a mutual fund for a long
time and let it compound. So the key point is Buy and Hold. It also requires
to you do a reality check on yourselves so that you can define your goals
and priorities before entering the market.
Start Early
When
you invest in the market is more important than the market timing. Always
enter the market with long term thinking. Do proper researches before
investing set your priorities and goals, ascertain your risk profile.
Also very importantly you should keep yourself abreast with the daily
market news. One should not do impulsive purchase allowing emotions overpowering
the sense of reason.
Know yourself and then What You
Are Buying
The first step towards achieving your goals would be to know yourself,
your risk appetite and accordingly make the investments. Once you have
discovered yourself, explore the market and find out the kind of funds
available in the market. Firstly, get a hang on the style and strategy
followed by a fund by reading the available material. This will help in
diversifying the portfolio and also in assessing potential risks. In general,
large-cap value funds are less risky than small-cap growth funds.
Be A Disciplined Investor
Once you've chosen some funds, you may stick with them. It is not necessary
that one should always go with the tide. Even the unpopular groups tend
to outperform in subsequent years. Investing a regular amount of money
at regular intervals may add a good value to your portfolio. Make a systematic
investment plan which in all probability likely to offer reasonable returns.
Know How Much You Pay
There is one famous saying that Money saved is money earned. So it's always
better to pay less than it is to pay more. Expenses are very important
with your larger-cap, lower-risk funds, and less critical with small-cap
funds and other higher-risk categories. You can afford to be lenient with
the expense of a small-cap or a sector equity fund. Actually, the strength
of the mutual fund lies in its simplicity. Don't follow the bandwagon.
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