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MUTUAL FUNDS

Mutual Funds Definition refers to the meaning of Mutual Fund, which is a fund,

managed by an investment company with the financial objective of generating

high Rate of Returns. These asset management or investment management

companies collects money from the investors and invests those money in

different Stocks, Bonds and other financial securities in a diversified manner.

Before investing they carry out thorough research and detailed analysis on the

market conditions and market trends of stock and bond prices. These things help

the fund mangers to speculate properly in the right direction.

The investors who invest their money in the Mutual fund of any Investment

Management Company, receive an Equity Position in that particular mutual

fund. When after certain period of time, whether long term or short term, the

investors sell the Shares of the Mutual Fund, they receive the return according to

the markeconditions.

The investment companies receive profit by allocating people's money in

different stocks and bonds according to their Speculation about the Market Trend.

Other than some specific mutual funds which carry certain Maturity Term,

Investors can generally sell the shares of their mutual funds at any time they

want. But, the return will vary according to market value of the stocks and bonds

in which that particular mutual fund made investment. But, generally the share

holders of mutual fund sell their share when the prices are up and Capital Gain

is sure to happen.

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Scope of Mutual Funds

Scope of Mutual Funds has grown enormously over the years. In the first age of

mutual funds,when the investment management companies started to offer

mutual funds, choices were few. Even though people invested their money in

mutual funds as these funds offered them diversified investment option for the

first time. By investing in these funds they were able to diversify their investment

in common stocks, preferred stocks, bonds and other financial securities. At the

same time they also enjoyed the advantage of liquidity. With Mutual Funds, they

got the scope of easy access to their invested funds on requirement.

But, in todays world, Scope of Mutual Funds has become so wide, that people

sometimes take long time to decide the mutual fund type, they are going to invest

in. Several Investment Management Companies have emerged over the years

who offer various types of Mutual Funds, each type carrying unique

characteristics and different beneficial features.

To understand the broad scope of Mutual Funds we need to discuss the main

types of Mutual Funds that are normally offered by the Mutual Companies.

The wide choices in Mutual Funds go as the following:

Equity Funds or Stock Funds These types of Mutual Funds generally invest in

stocks which are publicly traded. Amount of risk, involved with these funds vary

according to different types of Equity Funds.

Types of Equity Funds are;

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1. Growth Funds-These funds invest in the stocks, which are under valued

compared to their worth. As these stock prices tends to rise in future and

carry good growth potential, Growth Funds go for these kind of stocks.

2. Value Funds-These funds go for long term investment and aims at

increase of value over the years.

3. International Equity Funds-These funds invest in the stocks of foreign

companies.

4. Global Equity Funds-These funds invest in stocks of both the domestic

market and the foreign markets.

5. Sector Funds or Specialty Funds-These funds invest in specific sectors

like Health care and in specific commodities like Gold.

6. Index Funds-These funds reflect the performance of stock market indexes.

Bond Funds These funds invest in government bonds and corporate

bonds. These Bond Funds offer a steady source of income and in many

times these incomes get the advantage of Tax Exemption.

Money Market Funds These funds invest in the money market. These funds

involve low level of risk and promises comparatively low rate of return.

History of Mutual Funds

History of Mutual Funds has evolved over the years and it is sure to appear as

something very interesting for all the investors of the world. In present world,

mutual funds have become a main form of investment because of its diversified

and liquid features. Not only in the developed world, but in the developing

countries also different types of mutual funds are gaining popularity very fast in a

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tremendous way. But, there was a time when the concept of Mutual Funds were

not present in the economy.

There is an ambiguity about the fact that when and where the Mutual Fund

Concept was introduced for the first time. According to some historians, the

mutual funds were first introduced in Netherlands in 1822. But according to

some other belief, the idea of Mutual Fund first came from a Dutch Merchant

ling back in 1774. In 1822, that idea was further developed. In 1822, the concept

ofInvestment Diversification was properly incorporated in the mutual funds. Infact, the Investment Diversification is the main attraction of mutual funds as the

small investors are also able to allocate their little Funds in a diversified way to

lowerRisks.

After 1822 in Netherlands, the Mutual Funds Concept came in Switzerland in

1849 and thereafter in Scotland in the 1880s. After being popular in Great Britainand France, Mutual fund concept traveled to U.S.A in the 1890s. In 1920s and

1930s, the Mutual Fund popularity reached a new high. There was record

investment done in mutual funds. But, before 1920s,the mutual funds were not

like the modern day mutual funds.

The modern day mutual funds came into existence in 1924, in Boston.

Massachusetts Investors Trust introduced the Modern Mutual Funds and the

funds were available from 1928. At present this Massachusetts Investors Trust is

known as MFS Investment Management Company. After the glorious year of

1928, Mutual fund ideas expanded to different levels and different regulations

came for well functioning of the funds.

Still today, the funds are evolving and improving in order to offer people much

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wider choices and better advantages for fulfillment of their various investment

needs and financial objectives.

Growth of Mutual Funds

Growth of Mutual Funds has been gradual and it took really long years to

evolve the modern day mutual funds. Mutual Funds emerged for the first time in

Netherlands in the 18th century. Then it got introduced to Switzerland, then

Scotland and then to United States in the 19th century.

The very idea of mutual funds came from the urge to deliver a form of

Diversified Investment Solution. Over the years the idea developed and people

received more and more choices ofDiversified Investment Portfolio through

the mutual funds.

When in 1924, Massachusetts Investors Trust first introduced mutual funds in

U.S, they found it difficult to gain the trust of the investors. It was very natural

that the people took time to adapt to a new investment idea. There emerged some

confusions regarding the Taxation of Investment Income from mutual funds as

there was no Regulation or legislation.

Laws started to came in existence from 1940s. The the result was not immediate.

The Mutual Fund Concept achieved warm reception only in the middle of 1950s.

By the end of fifties and in first half of 1960s mutual fund investment triggered

up tremendously.

Monetary Funds benefited a lot from the mutual funds. Earlier investors was

used to invest directly in the stock market and many times suffered from loss due

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to wrong Speculation. But, with the mutual funds which were handled by

efficient Fund Managers, Investment Risks was lowered by a great extent. The

diversified investment structure of mutual funds also diversified risk and this

contributed tremendously in the Growth of Mutual Funds.

Over the years not only the new types of mutual funds emerged, the way, in

which mutual funds were sold also changed. But, the Growth of Mutual Funds

has not stopped. It is continuing to evolve to a better future, where investors will

get newer opportunities.

Mutual Funds Investment

Mutual Funds Investment has became a subject of great importance in the

present context, especially when all the investors are keen to diversify their

investment to maintain a balance between Investment Return and Investment

Risk. Mutual Funds Investment not only provides the customers with their much

desired diversified investment portfolio, but also offers the benefit of high

liquidity. Investors are free to sell their mutual fund shares any time to get the

back the amount that was invested in the mutual funds. It is another issue that any

time sell of mutual fund shares may result in poor rate of return.

For gaining the Diversified Investment Solution and the liquidity advantage,

any person needs to invest in Mutual Funds. But, before investing their hard

earned money one needs to carry out sincere research on the performance of

those mutual funds, he is considering to invest in.

The things that one needs to consider before deciding on any particular mutual

fund are the following:

Performance of the Fund and the Rate of Returns

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It is perhaps needless to say that one requires to be well informed about the Fund

Performance before investing. Excellent Performance not only means high Rate

of Return, it also needs the consistency. The funds which have been proved of

being able to generate satisfactory rate of return consistently over a period can be

considered for investing.

Investment Psychology of the Mutual Fund

Before taking final investment decision one needs to to know about the

Investment Psychology of the mutual fund. The investment psychology of the

fund has to match with the Financial Objective of the customer. A track record

of excellent performance and high rate of returns cannot be the only yard stick

to judge whether that fund is suitable for the particular investor or not.

Risk Adjustment

It is also very important to check that how the funds adjusted with risk over the

years.

Fund Management

Management of funds is the ultimate thing and it in many ways depend on the

efficiency of the Fund Mangers who actually allocates asset by making

Speculation based on the market research and market analysis.

Mutual Fund Fees

Investors should be well prepared about the fees and charges associated with

Mutual Funds. There are Loaded Funds and No Load Funds. Loaded Funds are

those mutual funds which involve Sales Charges and other fees and No Load

Funds are those which carries no charges.

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Opportunities of Mutual Funds

Opportunities of Mutual Funds are tremendous specially when investment is

concerned. For any individual who intends to allocate his assets into proper forms

of investment and want to diversify his Investment Portfolio as well as the risks,

Mutual Funds can be proved as the biggest opportunity.

Investors gets a lot of advantages with the Mutual Fund Investment. Firstly, they

are not required to carry on intensive research and detailed analysis on Stock

Market and Bond Market. This work is done by the Fund Mangers of the

Investment Management Company on behalf of the investors. In fact, the

professional Fund Managers who handle the mutual funds of any particular

company, are able to speculate the market trend more correctly than any common

individual. Good Speculation about the trends of stock prices and bond prices

leads to right allocation of funds in the right stocks and bonds resulting in good

Rate of Returns.

Investors also get the advantage of high Liquidity of the mutual funds. This

means the investors can enjoy easy access to the funds invested in the mutual

funds whenever they require the money. When the investors invest in any mutual

fund, they are given some equity position in that fund. The investors can any time

sell their mutual fund shares to get back the money invested in mutual funds. The

only thing is that the Rate of Return that they will get may not be favorable as the

return depends on the present market condition.

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The greatest opportunity that the mutual funds offer is the opportunity of

diversifying their investments. Investment Diversification actually diversifies

the Risk associated with investment. This is because, if at a time, if prices of

some stocks are declining, deceasing the Value of Investment, prices of some

other stocks and bonds may tend to rise and in this way the loss of the mutual

fund is offset by the strength of the stocks whose prices are rising. As all the

mutual funds diversify their investments in various common stocks, preferred

stocks and different bonds, the risk to be borne by the investors are well

diversified and in other terms lowered.

Challenges Facing Mutual Funds

There are many Challenges Facing Mutual Funds which is of prime concern to

the people who have an investment spree.

People find mutual fund investment so much interesting because they think they

can gain high rate of return by diversifying their investment and risk. But, in

reality this scope of high rate of returns is just one side of the coin. On the other

side, there is the harsh reality of highly Fluctuating Rate of Returns. Though

there are other disadvantages also, this concern of fluctuating returns is most

possibly the greatest challenge faced by the mutual fund.

The Issue of Fluctuating Returns

In spite of being a diversified investment solution, mutual funds investment in no

way guarantees any return. If the market prices of major shares and bonds fall,

then the value of mutual fund shares are sure to go down, no matter how

diversified the mutual fund portfolio be. It can be said that mutual fund

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investment is somewhat lower risky than Direct Investment in stocks. But, every

time a person invests in mutual fund, he unavoidably carries the risk of losing

money.

The Other Challenges

Diworsification or Over Diversification- In order to diversify the

investment, many times the mutual fund companies get involved in Over

Diversification. The risk of holding a single financial security is removed by

diversification. But, in case of over diversification, investors diversify so much

that many time they end up with investing in funds that are highly related and

thus the benefit of risk diversification is ruled out.

Taxes-Every year, most of the mutual funds sell substantial amount of

their holdings. If they earn profit by this sell, then the investors receive the

Profit Income. For most of the mutual funds,the investors are bound to pay

taxes on these incomes, even if they reinvest the income.

Costs- Most of the mutual funds charge Shareholder Fees and Fund

Operating Fees from the investors. In the year, in which mutual fund fails to

make profit and the investors get no return, these fees only blow up the losses.

Mutual Funds Vs Individual Stocks

Mutual Funds Vs Individual Stocks has always been a debatable issue. While

some like to play safe with mutual fund investment, some others prefer

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investment in individual stocks.

When any investor invests in any mutual fund all that he is required to do is pay

the Shareholder Fees and Fund Operating Fees. The whole work of managing

funds, starting from Market Research and analysis of stock and bond price and

recent market trends up to final Allocation of Funds or assets in various stocks

and bonds is completely done by the Professional Fund Managers employed by

the Investment Management Company. In this case, the fund management

remains in the hands of the fund managers of the mutual fund company. But, in

case ofDirect Investment in individual stocks, the total control remains in the

hands of the individual investors.

But, most of the people agree about the fact, that mutual funds hold some

important benefits over and above Individual Stocks. So, to get the actual

depiction ofMutual Funds Vs Individual Stocks,we will discuss the advantages

put forwarded by Mutual Funds.

Diversification

The greatest advantage the mutual funds hold over individual stocks is the

characteristic ofDiversification. The core concept of mutual funds is to Diversify

Investment in order to lower the risk of investing. As the mutual funds allocate

their funds into stocks of different companies and in different bonds, the risk is

diversified. If at a time, market price of some particular stocks fall, the loss of themutual fund may be offset by the rise in price of some other stocks held by that

particular mutual fund. But, individual stocks do not hold this advantage of

diversification. If the prices of the stocks go down in the market, the investor is

sure to lose money.

Professional Management and Efficiency

As mutual funds are managed by the professional fund managers who are

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specialized in their field, they carry out the research and analysis work much more

efficiently and naturally speculate more correctly about the market trends of stock

prices and bond prices. In the other case, Individual Stock investment is done

directly by the investors who are in most cases common men who don't have much

knowledge about the stock and bond markets.

Other than this as the mutual funds get a lot of money from people to invest in,

they can reap the benefit ofEconomies of Scale with the large sum of invested

money.

Average Annual Return

Average Annual Return refers to the return of a mutual fund which is measured

as an average after deducting the mutual fund's operating Expense Ratio. These

expenses do not contain the Sales Charges of the mutual fund. In many cases of

Mutual Fund Investment, the investors are required to pay Transaction

Brokerage Commissions for theirInvestment Portfolio. But, these commissions

are not counted for at the time calculating the Average Annual Return.

This Average Annual Return is actually a figure which is represented in

percentage and is used to reveal a particular mutual fund's historical return.

Generally, Average Annual Return of a mutual fund shows the average returns

of the fund over last three years or five years or ten years. A fund can also

calculate the Average Annual Return on the basis of its returns for the whole

life of the fund.

It is a clear fact that Average Annual Return is not a compounded rate of return.

Annual Returns of a fixed number of years is added and divided by the number of

years, to get the figure ofAverage Annual Return and when the returns are

considered, the Expense Ratios are subtracted to get the net value of returns.

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This Average Annual Return calculation is necessary to get a clear idea about

the Reinvested Dividend. Capital Gain Distribution is also related with

Average Annual Return.

The figure ofAverage Annual Return, is not only important for the mutual

Fund Managers and the investment company but also for the individual and

institutional investors. The investors can get an idea about the performance of a

particular mutual fund in the long term, by studying the Average Annual Returnfigures of the mutual fund over different periods. It can be mentioned here that

though the Average Annual Return figure is really important, the investors

should also check out the annual returns of the mutual fund that they are

considering to invest in. This is because, an impressive Average Annual Return

does not necessarily imply consistency of good annual returns.

Automatic Investment Plan

Automatic investment plan is an investment mechanism through which

investors will be able to invest a small amount of money at regular intervals. It

can alternatively called as systematic investment plan. Normally funds are

automatically invested in a retirement or mutual fund account. This is done byway of deduction from the savings orchecking account. Automatic investment

plan also enables the investors to transfer a set of their amount electronically to

another account at an assigned number of occurrences. Automatic investment

plan can be regarded as an effective systematic mechanism as because these

investments are of manageable size and investors will be able to save their money

as well.

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Some examples ofautomatic investment plan

Examples ofautomatic investment plan can be mutual fund contribution, stock,

automatic withdrawal plan etc.

Some effective guidelines as recommended by economists

It is recommended that the investors should invest at a regular interval and this

will protect their accounts from any sort of market fluctuations. Investors shouldpurchase maximum shares when they observe that the prices are going low and

they should purchase the minimum shares if it goes high. But the best way is to

purchase shares when investors think them most capable.

Investors should analyze a lot before going for any investment and should opt for

those, which have a uniform track record and benchmarks. This way investors

will be able to instill a method of practice to save their investments.

The truth

It has been observed that inflation increases the prices of commodities and reduce

the value of money. That is why investors should choose the best investment type

to avoid the effect of inflation. In the long run the average price per unit can be

lesser than the average market price of the fund and this will enable the investors

to buy a higher amount of units at an average market price. This will improve

the volatility.

Automatic Reinvestment Plan

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Automatic reinvestment plan is a mechanism normally used by mutual funds

that enable investors to buy additional shares using theirdividends or

distribution out of theircapital gains. Automatic reinvestment plan also enable

the one to electronically transfer his amount from one account to another. It can

alternatively be defined as an agreement through which dividends from mutual

fund orcapital gains are utilized to buy additional fund shares.

Working principle

Individual can mechanically deposit his amount into his checking account

through this automatic reinvestment plan mechanism. In this systematic plan,

the fund manager reinvest the amount earned by the investor into his mutual

fund account. Investors can get the added advantage by adopting this

mechanism, as this will enable him to acquire more shares and at the same time

they can avoid excess taxes. In automatic reinvestment plan mechanism, the

capital gains produced by the fund can be utilized to mechanically buy more

fund shares rather than dispensing these to the investors in form of cash.

Advantage from investors point of view

This automatic reinvestment plan enables the investors to acquire more

investment gains, as after some period of time, the extra value produced by this

automatic reinvestment can produce a significant amount.

Advantage from company's point of view

This automatic reinvestment plan can make a smaller company to a larger one,

as through this mechanism, any capital and dividends made from the initial

investments can enable the company to buy more shares in the fund and it is a

continuing process.

Advice by experts

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Investors should at first look at the prospectus and go through that section where

there are matters about automatic reinvestment plan. Secondly, they should

confirm the matter that their mutual fund is utilizing this automatic

reinvestment facility. They can consult with the fund manager for further

clarification. Investors should also discuss with the fund manager about tax

liabilities etc.

Assets Under Management

Assets under management orAUM is a type offinancial service which is used

to estimate and approximate the money involved in an investment. Most of the

financial services establishments utilize this technique to measure their success

rate. Financial establishments normally use this assets under management

service to judge their the amount of money they are managing through

investment management, money management and mutual funds. Financial

companies compare their success rate with otherfinancial establishments and

while doing this they use assets under management instead of revenue.

Factors behind asset under management

The prime factors responsible behind this policy ofassets under management

are foreign exchange movements, structural effects of the company, market

performance gains / losses, Net New Assets (NNA) etc. Out of these factors, the

most effective one is NNA or Net New Asset. NNA is the amount of money

come from any new investment by a client. Investors prefer to use this NNA for

its user effectiveness. Investors sometime prefer to calculate the NNA growth,

which is a demonstration showing the relationship of NNA with the previous

AUM balance. NNA growth is alternatively defined as organic growth.

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Normally the analyst use this assets under management philosophy to ascertain

investment ratings.

Market performance gains or losses are determined by measuring the

performance level in accordance with the improvement or declination of stock in

a market.

Alternative definition of asset under management

Asset under management can alternatively be defined as the overall value of the

assets as ascertained by the manager ofhedge fund, mutual fund or any

portfolio manager. In general it can be said that assets under management is

the market value of assets which are managed by any financial establishment on

behalf of investors.

Assets under management can be interpreted differently by some financial

establishments. They sometimes use mutual funds or bank deposits while

measuring the value of the assets. Some other organizations use this philosophy

ofassets under management, when their clients assigns this responsibilities to

them.

Asset Management Fund

The Asset Management Fund orAMF Fund is actually a mutual fund, in which

shares are sold without any commission. Asset management fund primarily

deals with client's investment. This fund is specifically made for clients to

provide some special privileges like access to an array of products. These special

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facilities are not for average investors. Normally the financial establishments

invest on behalf of its clients.

Alternative definition of Asset management fund

The asset management fund can alternatively defined as an account at any

financial establishment which comprise of some facilities like credit cards,

debit cards, loans, checking etc. The asset management fund also enable the

clients to automatically transfer their amounts that goes beyond a certain level

into a higer interest earning account.

Asset management fund is alternatived called as central asset account or an

asset management account.

Striking features

Some of the prominent features ofAsset management fund are:

Asset management fund expenses are normally confined to high deserving

individuals, business firms, governments, orfinancial negotiator. The expenses

are based on products like fixed income, equity, real estate, agriculture etc.

Somebody, when deposits his money into his account is normally put into a

money market fund. This money market fund usually offers more return in

comparison to other regularmoney market account like checking and savings

accounts.

One of an extra benefits of this asset management fund is that any person can

process his banking service and at the same time he can invest at the same

establishment without opting for a separate bank or brokerage account of

different establishments.

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Most of the asset management funds provide both the investment services and

risk management service with high-quality client service facilities.

Some of the leading asset management companies like ABN AMRO asset

management (India), AMF etc. provide the investors numerous investing options

like hedge funds, mutual funds, pension plans etc. through which clients can meet

their demands.

Asset Size

Asset size can be defined as the overall market value of the securities in a

portfolio of mutual fund. This asset size is normally used to explain the size of

the fund. In practice, the bigger asset size does not necessarily mean a better asset

or good quality assets. There are so many factors responsible to make an asset as

the better asset. Some the the prime factors behind a quality asset are good

management policy, compatibility, and the manner of investment.

Some features of asset size

The above philosophy does not always match, as sometimes the bigger asset may

be treated as the better asset. In case of assets like index, bonds, or some money

market funds, the expenses are normally distributed over more investments and

are very liquid in nature. That is why these assets may sometimes be treated as

the better assets. The indexes actually are the statistical measurement of change

in the securities market. Every indexes have their own set of methodology and

are normally expressed by a change from a base value.

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Types of Asset Classes

Asset classes are of the following types:

Shares: A share, also called equity, is a stake or a unit of ownership that an

investor can buy in a company. Usually, the returns yielded by shares are much

higher than that of other asset classes. Investment in shares is quite flexible as

they can be traded easily. However, the investment in shares is risky due to price

fluctuations. Investing in shares is suitable for long-term investors who are

willing to take risks.

Property: Investing in immovable property in the form of a residential or

commercial building or land is suitable for long term investors. Investing can

take place by purchasing the property directly or by investing in a property trust

fund. Property investment is not usually flexible as it requires sufficient time to

buy or sell property.

Cash: This type of asset class includes everyday bank transactions and short-term

investments in the money market. Cash investments reduce the overall risk in an

investment portfolio as investors can easily access their capital. However, the rate

of return in cash investments is the lowest. There is very limited scope for capital

growth.

Fixed interest assets: These assets yield fixed rates of return until the expiry of

the maturity period. Examples are bonds and certificate of deposits (CDs). The

level of risk associated with fixed interest assets is low. So, the rate of return of

these assets is usually lower than that of shares and real estate. An added benefit

is that fixed interest investments can be converted to cash whenever required.

This asset class is usually preferred by those who have low risk appetite.

Asset Allocation

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The various investment vehicles available to an investor offer a distinct risk-

reward trade off. Asset allocation is in an investment strategy that seeks to create

a balanced portfolio in which an investor holds different types of assets to

actively manage risk and reward profiles.

Investments can broadly be divided into three asset classes, namely stocks, fixed

income and cash. Of these, stocks are the most volatile, offer the highest returns

and have the highest risk profile. Fixed income assets, such as bonds and

certificates of deposit (COD), are less volatile, but offer more modest returns.

Cash assets are the safest and represent the lowest risk profile.

Measuring Asset Allocation

Asset allocation depends on the income, risk appetite and circumstances of the

investor. While a conservative investor would prefer a high ratio of fixed income

investments in the portfolio, an aggressive investor would prefer to allocate more

funds into stocks. The various factors that can influence asset allocation are:

Time Horizon: This refers to the duration for which you can keep funds in

your investment account. An investor who can spare capital for a long term can

opt for riskier, long-term investments, whereas those who might need cash in

the near term can seek investments from which funds can be withdrawn

without incurring losses.

Risk Tolerance: This factor takes into account an investors ability to take

risks. A conservative or risk averse investor would favor investments in which

his/her capital is preserved, whereas an aggressive investor can risk losing his

investment to generate higher profits.

Rebalancing: This factor involves resetting the proportion of asset class to

the original ratio at regular intervals in case market fluctuations alter the initial

distribution of money.

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Importance of Asset Allocation

Each asset class represents a distinct level of risk and returns, and behaves

differently with time. By spreading investments over different asset classes, aninvestor can protect the capital invested against significant losses in case the

trends in a specific class move unfavorably. Diversification is a risk management

technique that aims at distributing investments over various options.

Diversification can be achieved by:

Spreading investments over asset classes, such as stocks, mutual funds,

bonds and cash.

Spreading investments in one asset class over various options. For

instance, investments in stocks can be spread over various sectors, such as

software, telecommunications, pharmaceuticals and automobiles.

Spreading investments across geographies, such as investing in stocks

from different states and purchasing global bonds.