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Business Club, I I TK

Tutorial: MUTUA L FUN DS

Mutual Funds Basics

So now you know that you have two basically two options to invest in - Stocks andthe bonds. Considering the labyrinth of your busy professional and personal life, youdon't have energy and know how to maintain a portfolio of your investments whereyou keep track of companies and bonds you invest in. You would certainly like tohave some professionals to manage your money, keep a track of how companies areperforming and change your portfolio as and when required based on economiccircumstances . Enters Mutual Funds . It is basically a team of highly professionalmanagers who take decisions with regard to your investments even withoutintimating you. You receive return on your investment on regular basis. Obviouslythey charge you for offering their professional know how, in return your money ismanaged by professional brains.

Advantages of Mutual Funds:

Diversification of your portfolio is the key to safe and successful investments.Suppose you invest in health, technology and tourism sector. If health sector goesbankrupt, the intensity of losses would be compensated by the good performance of other two sectors you have invested in. Imagine if you had made entire investmentsin health sector! Now with diversification comes complexity and it becomes difficultto keep a track of performance of so many companies. Mutual Funds offer you anadvantage of diversification. Your investments are made in hundreds of companiesfrom varied sectors and various bonds, with managers to keep a track and alter yourportfolio as and when necessary. Just imagine yourself investing your money inhundred companies? An impossible feat to achieve.

All automotives run on fuel, and so do the mutual find managers. For managing yourinvestments, you are charged a fee but considering the advantages, it is acceptable.Also you pay for the administrative expenses (such as maintaining a staff, officeexpenses, postage expenses etc) which these fund managers incur. Indirectly youalso pay for the advertising and promotion of the mutual funds as resources forthese are drawn form the fee you pay.

TYP ES OF MUTUAL FUNDS:

1. Equity Funds : Most of your investments are made in equities. As such more

risky, but high gains.2. Bond Funds : Most of your investments made in bonds and securities. Safebut lesser gains.

3. Mixed Funds : generally a balanced is maintained between the above two.Say 40 % spent in equities and 60 % in bonds. If interest rates go high, thepercentage investments in bonds goes down and vice versa.( WHY ?). Wehave already discussed this effect earlier while studying bonds.

4. Global Funds : Investments are made in bonds and equities all over theworld. A very good option to make investments abroad which otherwise is

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difficult and expensive to manage. Another advantage is if an economy of acountry sink, your loss would be compensated with benefits from investmentsin other prospering economies ( This is obviously based on the premise thatwe do not have a global economic depression)

5. Regional Funds : Investments made in particular region or country.6. Specialty Funds : When your investments are made in a particular sector or

industry, say technology or health. High gains but relatively high risk.

Fee is charged in the form of loads.

1. Front end load : These are the most simple type of load: you pay the feewhen you purchase the fund. If you invest $1,000 in a mutual fund with a 5%front-end load, $50 will pay for the sales charge, and $950 will be invested inthe fund.

2. Back-end loads (also known as deferred sales charges) - These are a bitmore complicated. In such a fund you pay the a back-end load if you sell afund within a certain time frame. A typical example is a 6% back-end loadthat decreases to 0% in the seventh year. The load is 6% if you sell in the

first year, 5% in the second year, etc. If you don't sell the mutual fund untilthe seventh year, you don't have to pay the back-end load at all.3. No Laod Funds : You are not charged any fee or load.

It is a common conception that higher loads means better professional advice.However studies have proves that wrong. In fact when you subtract your load fromthe gains, the output you effectively receive turn out to be poor than a no load fund.

SOME TERMS :

1. Expense Ratio : Percentage of assets used to run the administrative andother expenses of the mutual funds. If your are investing Rs1,000 in mutualfunds with expense ratio 1%, you will be actually investing Rs99/- and payingthe remaining Re1 to the fund management.

2. NAV - Nest asset Value :In the context of mutual funds, the total value of thefund's portfolio less liabilities. The NAV is usually calculated on a daily basis.

That is all as per the bsics of mutual funds are concerned. You can continue yourpursuit on mutual funds on the following link.

Group Activity : At this stage we recommend you to pick up mutual funds of certaincompany and study its terms and conditions. This will help you to gain an insight intothe practical issues associated with Mutual Funds.

A detailed documentation on basics of Mutual Funds is available onhttp://www.investopedia.com/university/mutualfunds/

A list of Mutual Funds available in India : Mutual Funds in India

Brief history of Mutual Funds in India available here

A detailed documentation of operation and regulation of mutual funds in India isavailable on http://www.amfiindia.com/

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