Law Commission submits norms on grant of anticipatory bail
Wednesday, December 26, 2007
Mere rejection of an anticipatory bail application is no ground to direct the applicants immediate arrest just as nothing bars arrest if there are reasonable grounds for it, the Law Commission of India has submitted.
The findings were handed over to Law and Justice Minister Hans Raj Bhardwaj by former Supreme Court Judge A R Lakshmanan, who now heads the Commission, a government statement said.
In Indian law, anticipatory bail is dealt with under Section 438 of the Code of Criminal Procedure, which was sought to be amended through the Code of Criminal Procedure (Amendment) Act, 2005.
But its enforcement was kept in abeyance and expert opinion requested after lawyers protested some of the proposed changes.
Anticipatory bail known often to have been resorted to by politicians and other influential persons who have a brush with the law means "big fees"-- running into lakhs of rupees-- for lawyers.
The statement said the Law Commission was asked to "suggest a modified version to make the provision workable with suitable safeguards to protect the rights and liberty of the citizens." The amended section requires the applicant's presence at the final hearing of the anticipatory bail application, if, on an application made to it by the Public Prosecutor, the Court considers such presence necessary in the interest of justice.
It also permits the applicant's arrest by police without warrant on the basis of accusations apprehended in the anticipatory bail application in cases where either the application is rejected or no interim order is passed thereon.
The statement said the Commission examined the scope and ambit of the existing as well as the amended section 438 in the light of various judicial pronouncements on the subject.
It held that the Proviso to sub-section (1) of Section 438, as amended, permitting the applicant's arrest by police without warrant on the basis of the accusation apprehended in the application, "is more of explanatory nature." It pointed out that "there shall be no bar to such arrest if there are otherwise reasonable grounds to make such arrest." Citing Supreme Court decisions in M C Abraham and another Vs State of Maharashtra (2003) 2 SCC 649, the Commission held that "the mere fact that an anticipatory bail application is rejected is no ground for directing the applicants immediate arrest." It went on that "there may be cases where an application may be rejected and yet the applicant is not put up for trial as, after investigation no material is found against him." It said that the "power of arrest has to be exercised with due caution and circumspection and not in any mechanical manner." Concluding that the Proviso of sub-section (1) of Section 438, as amended, was "not necessary", the Commission recommended its omission.
The Commission recommended deleting sub-section (1B) of Section 438 about the applicant's presence at the final hearing.
It held that when an applicant appears in the Court in compliance with the Courts order and is subjected to the Courts directions, he may be viewed as in the Courts custody and this may render the relief of anticipatory bail infructuous.
It also noted that the concurrent jurisdiction of the Court of Session and the High Court under Section 438 had generated much "avoidable" litigation.
The Code does not prescribe any specific order in which the two alternative concurrent forums are to be approached for the grant of anticipatory bail-- the choice having been left to the applicant.
It recommended streamlining procedure by providing that if an application under Section 438 is made by a person either to the High Court or the Court of Session, no further application by the same person shall be entertained by the other Court.
This be done, it said, by inserting an explanation to the effect that final order for direction under sub-section (1) of Section 438 will not be construed as an interlocutory order.
(UNI)
Saturday, April 19, 2008
CARD
CARD (Computer aided Administration of Registration Department) is a computer project name of Registration & Stamps Department. This prestigious e-governance project was launched in the year 1999.
It has crossed many barriers to serve the public availing the fruits of Information Technology.
In a bid to move further the Registration Department offering this service called "Prior Appointment".
This is envisaged to help the registry public to fix the time for the registration of documents from the Sub Registrar concerned.
The facility is expected to relieve the burden of waiting hours together in the Sub Registrars for the turn.
Appointments on Phone:Appointments can also be booked on Phone. Applicants can call 040-27670449 between 11:00 am 1.30 pm and 2.30 pm to 5pm to take the appointment
Note :Presently this facility is available only in Selected Sub Registrar Offices. View List
It has crossed many barriers to serve the public availing the fruits of Information Technology.
In a bid to move further the Registration Department offering this service called "Prior Appointment".
This is envisaged to help the registry public to fix the time for the registration of documents from the Sub Registrar concerned.
The facility is expected to relieve the burden of waiting hours together in the Sub Registrars for the turn.
Appointments on Phone:Appointments can also be booked on Phone. Applicants can call 040-27670449 between 11:00 am 1.30 pm and 2.30 pm to 5pm to take the appointment
Note :Presently this facility is available only in Selected Sub Registrar Offices. View List
Theory of Reflexivity
George Soros, who is popularly known as the man who broke the Bank of England and as the man who was responsible for a large number of stock market and currency market crashes (including the asian currency crisis) had operated by focusing heavily on the theory of reflexivity.
The theory of reflexivity is very interesting and helps investors and speculators in identifying phases of market disequilibrium and helps him/her profit from such phases of market disequilibrium.
The theory of reflexivity acts in sharp contrast to the Efficient Market Theory which states that the market is perfect and the stock prices will discount/factor-in all known and unknown (insider) information.
The theory of reflexivity states that any significant events / developments can disrupt the market equilibrium and the market becomes a victim of irrational exuburence.
When there is a bad news people start selling and hence prices tumble. Looking at the stock prices tumbling, people start selling more because of fear, stock prices fall further and the viscious circle continues. Similarly, when there is a good news stock prices increase. People become excited, buy more stock and the stock prices rise even further and thus the chain continues.
This is where a rational economic man / value investor would identify the opportunity. Though stock prices might temporarily behave irrationaly, research has proved that over the long term, stock prices reflect a company’s performance.
Hence it is important that an investor enters the market and takes positions when the market is in disequilibrium and waits patiently for the markets to return to their equilibrium state and then reverse the positions taken.
Possible causes of inequilibrium are favourable or unfavourable political development (SUN TV/RAJ TV scrips after the DMK-Marans family feud), corporate announcements (bonus, stock split, rights issue, new orders and so on). In such cases stock prices may move irrationally because of reflexivity.
Posted in Fundamental Analysis,
The theory of reflexivity is very interesting and helps investors and speculators in identifying phases of market disequilibrium and helps him/her profit from such phases of market disequilibrium.
The theory of reflexivity acts in sharp contrast to the Efficient Market Theory which states that the market is perfect and the stock prices will discount/factor-in all known and unknown (insider) information.
The theory of reflexivity states that any significant events / developments can disrupt the market equilibrium and the market becomes a victim of irrational exuburence.
When there is a bad news people start selling and hence prices tumble. Looking at the stock prices tumbling, people start selling more because of fear, stock prices fall further and the viscious circle continues. Similarly, when there is a good news stock prices increase. People become excited, buy more stock and the stock prices rise even further and thus the chain continues.
This is where a rational economic man / value investor would identify the opportunity. Though stock prices might temporarily behave irrationaly, research has proved that over the long term, stock prices reflect a company’s performance.
Hence it is important that an investor enters the market and takes positions when the market is in disequilibrium and waits patiently for the markets to return to their equilibrium state and then reverse the positions taken.
Possible causes of inequilibrium are favourable or unfavourable political development (SUN TV/RAJ TV scrips after the DMK-Marans family feud), corporate announcements (bonus, stock split, rights issue, new orders and so on). In such cases stock prices may move irrationally because of reflexivity.
Posted in Fundamental Analysis,
PAR-VALUE
From Wikipedia, the free encyclopedia
Par value, in finance and accounting, means stated value or face value. From this comes the expressions at par (at the par value), over par (over par value) and under par (under par value).
The term "par value" has several meanings depending on context and geography.
Contents
[hide]
* 1 Stock
* 2 Bonds
* 3 Currency
* 4 References
Stock
Par value is a nominal value of a security which is determined by an issuer company at a minimum price. Par value of an equity (a stock) is a somewhat archaic concept. The par value of a stock was the share price upon initial offering; the issuing company promised not to issue further shares below par value, so investors could be confident that no one else was receiving a more favorable issue price. This was far more important in unregulated equity markets than in the regulated markets that exist today.
Most common stocks issued today do not have par values; those that do (usually only in jurisdictions where par values are required by law) have extremely low par values (often the smallest unit of currency commonly used), for example a penny par value on a stock issued at USD$25/share. Most states do not allow a company to issue stock below par value.
No-par stocks have no par value printed on its certificates. Instead of par value, some U.S. states allow no-par stocks to have a stated value, set by the board of directors of the corporation, which serves the same purpose as par value in setting the minimum legal capital that the corporation must have after paying any dividends or buying back its stock.
Preferred stock par value remains relevant, and tends to reflect issue price. Dividends on preferred stocks are calculated as a percentage of par value.
Also, par value still matters for a callable common stock: the call price is usually either par value or a small fixed percentage over par value.
In the United States, it is legal for a corporation to issue "watered" shares below par value. However, the purchasers of "watered" shares incur an accounting liability to the corporation for the difference between the par value and the price they paid. Today, in many jurisdictions, par values are no longer required for common stocks.
Apart from the traditional definition of par value, a stock with a price of $100/share is sometimes informally said to be trading at par.
Bonds
In the U.S. bond markets, par value is when the price dollars is equal to the face value. A Treasury note is denominated in units of $1,000, but has its price quoted by common convention in terms of moving the decimal point to the left by one position. A Treasury note selling at par value would thus be quoted as 100:00, where the two digits to the right of the colon are priced in thirty-seconds (1/32) of a dollar (0.03125 dollars.) A par value price of 100:00 would thus equate to a price of a note or bond selling at face value of $1000 per Treasury note. A price of 75:31, on the other hand, would thus equate to a note or bond quoted at a price of (75 + 31/32) x 10, or $759.6875, selling at an obvious discount from its par value of 100:00 for a face value paid upon maturity of the note or bond of $1,000.
Only the market for Treasury securities still prices using thirty-seconds of a dollar. All other markets use decimal notation.
The practice of pricing in price per hundreds largely grew out of the practice of pricing British government bonds, which were (and still are today) denominated in units of 100 pounds Sterling. These notes, originally sold in physical form having gilt-edges and therefore known as "Gilts", are priced in similar form as US debt instruments, but are priced relative to their face value of 100 pounds Sterling. There is no subsequent shift of the decimal point applied in the pricing of such debt instruments as in the US. In the United Kingdom bond markets, par value is when the price per 100 Pounds Sterling note or bond is equal to the face value.
A par value of 100.00 for a note or bond means only that the note or bond is selling for the face value paid upon maturity of the note or bond. It can (and does) have different absolute values per Note or Bond depending on the conventions of the particular market and country in which such par value is quoted
Currency
The term "at par" is also used when two currencies are exchanged at equal value (for instance, in 1964, Trinidad and Tobago switched from British West Indies dollar to the new Trinidad and Tobago dollar, and that switch was "at par", meaning that the Central Bank of Trinidad and Tobago replaced each old dollar with a new).
Par value, in finance and accounting, means stated value or face value. From this comes the expressions at par (at the par value), over par (over par value) and under par (under par value).
The term "par value" has several meanings depending on context and geography.
Contents
[hide]
* 1 Stock
* 2 Bonds
* 3 Currency
* 4 References
Stock
Par value is a nominal value of a security which is determined by an issuer company at a minimum price. Par value of an equity (a stock) is a somewhat archaic concept. The par value of a stock was the share price upon initial offering; the issuing company promised not to issue further shares below par value, so investors could be confident that no one else was receiving a more favorable issue price. This was far more important in unregulated equity markets than in the regulated markets that exist today.
Most common stocks issued today do not have par values; those that do (usually only in jurisdictions where par values are required by law) have extremely low par values (often the smallest unit of currency commonly used), for example a penny par value on a stock issued at USD$25/share. Most states do not allow a company to issue stock below par value.
No-par stocks have no par value printed on its certificates. Instead of par value, some U.S. states allow no-par stocks to have a stated value, set by the board of directors of the corporation, which serves the same purpose as par value in setting the minimum legal capital that the corporation must have after paying any dividends or buying back its stock.
Preferred stock par value remains relevant, and tends to reflect issue price. Dividends on preferred stocks are calculated as a percentage of par value.
Also, par value still matters for a callable common stock: the call price is usually either par value or a small fixed percentage over par value.
In the United States, it is legal for a corporation to issue "watered" shares below par value. However, the purchasers of "watered" shares incur an accounting liability to the corporation for the difference between the par value and the price they paid. Today, in many jurisdictions, par values are no longer required for common stocks.
Apart from the traditional definition of par value, a stock with a price of $100/share is sometimes informally said to be trading at par.
Bonds
In the U.S. bond markets, par value is when the price dollars is equal to the face value. A Treasury note is denominated in units of $1,000, but has its price quoted by common convention in terms of moving the decimal point to the left by one position. A Treasury note selling at par value would thus be quoted as 100:00, where the two digits to the right of the colon are priced in thirty-seconds (1/32) of a dollar (0.03125 dollars.) A par value price of 100:00 would thus equate to a price of a note or bond selling at face value of $1000 per Treasury note. A price of 75:31, on the other hand, would thus equate to a note or bond quoted at a price of (75 + 31/32) x 10, or $759.6875, selling at an obvious discount from its par value of 100:00 for a face value paid upon maturity of the note or bond of $1,000.
Only the market for Treasury securities still prices using thirty-seconds of a dollar. All other markets use decimal notation.
The practice of pricing in price per hundreds largely grew out of the practice of pricing British government bonds, which were (and still are today) denominated in units of 100 pounds Sterling. These notes, originally sold in physical form having gilt-edges and therefore known as "Gilts", are priced in similar form as US debt instruments, but are priced relative to their face value of 100 pounds Sterling. There is no subsequent shift of the decimal point applied in the pricing of such debt instruments as in the US. In the United Kingdom bond markets, par value is when the price per 100 Pounds Sterling note or bond is equal to the face value.
A par value of 100.00 for a note or bond means only that the note or bond is selling for the face value paid upon maturity of the note or bond. It can (and does) have different absolute values per Note or Bond depending on the conventions of the particular market and country in which such par value is quoted
Currency
The term "at par" is also used when two currencies are exchanged at equal value (for instance, in 1964, Trinidad and Tobago switched from British West Indies dollar to the new Trinidad and Tobago dollar, and that switch was "at par", meaning that the Central Bank of Trinidad and Tobago replaced each old dollar with a new).
Sunday, April 6, 2008
Mutual Fund--FAQs
1. What is a Mutual Fund?
A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI) that pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. In other words, a mutual fund allows an investor to indirectly take a position in a basket of assets.
2. Which was the First Mutual Fund to be set up in India?
Unit Trust of India is the first Mutual Fund set up under a separate act, UTI Act in 1963, and started its operations in 1964 with the issue of units under the scheme US-64.
3. Who is the Regulatory Body for Mutual Funds?
Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds mentioned above. All the mutual funds must get registered with SEBI. The only exception is the UTI, since it is a corporation formed under a separate Act of Parliament.
4. What are the broad guidelines issued for a MF?
SEBI is the regulatory authority of MFs. SEBI has the following broad guidelines pertaining to mutual funds :
(1) MFs should be formed as a Trust under Indian Trust Act and should be operated by Asset Management Companies (AMCs).
(2) MFs need to set up a Board of Trustees and Trustee Companies. They should also have their Board of Directors.
(3) The net worth of the AMCs should be at least Rs.5 crore.
(4) AMCs and Trustees of a MF should be two separate and distinct legal entities.
(5) The AMC or any of its companies cannot act as managers for any other fund.
(6) AMCs have to get the approval of SEBI for its Articles and Memorandum of Association.
(7) All MF schemes should be registered with SEBI.
(8) MFs should distribute minimum of 90% of their profits among the investors.
(9) There are other guidelines also that govern investment strategy, disclosure norms and advertising code for mutual funds.
5. How do mutual funds diversify their risks?
According to basis financial theory, which states that an investor can reduce his total risk by holding a portfolio of assets instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially reduced.
6. Can mutual funds assumed to be risk-free investments?
Ans: No. Mutual fund investments are not totally risk free. In fact, investing in mutual funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds the controllable risks are substantially reduced.
7. What are the types risks involved in investing in mutual funds?
A very important risk involved in mutual fund investments is the market risk. When the market is in doldrums, most of the equity funds will also experience a downturn. However, the company specific risks are largely eliminated due to professional fund management.
8. What are the different types of funds offered by fund house?
Currently there exist balanced funds, Income fund, Growth funds, Sector funds etc. To get more details about the different funds and their features please visit our mutual fund glossary.
9. What are the different types of plans that mutual fund offers?
That depends on the strategy of the concerned scheme. But generally there are 3 broad
categories. A dividend plan entails a regular payment of dividend to the investors. A
reinvestment plan is a plan where these dividends are reinvested in the scheme itself. A growth plan is one where no dividends are declared and the investor only gains through capital appreciation in the NAV of the fund.
10. What are open-ended and closed-ended mutual funds?
In an open-ended mutual fund there are no limits on the total size of the corpus. Investors are permitted to enter and exit the open-ended mutual fund at any point of time at a price that is linked to the net asset value (NAV). In case of closed-ended funds, the total size of the corpus is limited by the size of the initial offer.
11. What is the investor’s exit route in case of a closed-ended fund?
According to Sebi regulations, all closed-ended funds have to be necessarily listed on a recognized stock exchange. Thus the secondary market provides an exit route in case of closed-ended funds.
12. Why should one choose to invest in a mutual fund?
For retail investor who does not have the time and expertise to analyze and invest in stocks and bonds, mutual funds offer a viable investment alternative. This is because:
(1) Mutual Funds provide the benefit of cheap access to expensive stocks
(2) Mutual funds diversify the risk of the investor by investing in a basket of assets
(3) A team of professional fund managers manages them with in-depth research inputs from investment analysts.
(4) Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information which individual investors cannot access.
13. How investors invest in Mutual Funds?
One can invest by approaching a registered broker of Mutual funds or the respective offices of the Mutual funds in that particular town/city. An application form has to be filled up giving all the particulars along with the cheque or Demand Draft for the amount to be invested.
14. What are the parameters on which a Mutual Fund scheme should be evaluated?
Performance indicators like total returns given by the fund on different schemes, the returns on competing funds, the objective of the fund and the promoter’s image are some of the key factors to be considered while taking an investment decision regarding mutual funds.
15. What is a Systematic Investment Plan and how does it operate?
A systematic investment plan is one where an investor contributes a fixed amount every month and at the prevailing NAV the units are credited to his account. Today many funds are offering this facility.
16. What are the benefits of s Systematic Investment Plan?
A systematic investment plan (SIP) offers 2 major benefits to an investor:
(1) It avoids lump sum investment at one point of time
(2) In a scenario of falling prices, it reduces your overall cost of acquisition by a process of rupee-cost averaging. This means that (3) at lower prices you end up getting more units for the same investment.
17. What is the difference between mutual funds and portfolio management schemes?
While the concept remains the same of collecting money from investors, pooling them and investing the funds, the target investors are different. In the case of portfolio management the target investors are high networth investors while in case of mutual funds the target investors are the retail investors.
18. Is investor eligible for rebate on income tax by investing in a MF?
Yes, in case of certain specific Equity Linked Saving Schemes, tax benefits are available under Section 88 of the Income Tax Act. In such cases the fund prospectuses explicitly states that it is a tax saving fund. In such cases 20% of your contribution will qualify for rebate under Section 88 of the Income Tax Act.
19. Do investments in mutual funds offer tax benefit on capital gains?
Yes. If the capital gains earned by you during a financial year are invested in specified mutual funds then such capital gains are exempt from capital gains tax under Section 54EA and Section 54EB of the Income Tax Act.
20. Do mutual fund investments attract wealth tax?
No. Under the Wealth Tax Act, all financial assets, including mutual fund units are
exempt totally from Wealth Tax.
21. If I gift mutual fund units, does it attract gift tax?
No. With effect from 1st October 1998, units of a mutual fund gifted by unitholders are no longer chargeable to Gift Tax.
22. Is dividend earned from mutual funds exempt from income tax?
Yes. Income from mutual funds in the form of dividends is entirely exempt from income tax provided the fund in question is a equity/growth fund where more than 50% of the portfolio is invested in equities.
23. What are my major rights as a unit holder in a mutual fund?
Some important rights are mentioned below:
(1) Unit holders have a proportionate right in the beneficial ownership of the assets of the scheme and to the dividend declared.
(2) They are entitled to receive dividend warrants within 42 days of the date of declaration of the dividend.
(3) They are entitled to receive redemption cheques within 10 working days from the date of redemption.
(4) 75% of the unit holders with the prior approval of SEBI can terminate AMC of the fund.
(5) 75% of the unit holders can pass a resolution to wind-up the scheme.
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Basics of mutual funds
The article mentioned below, is for the investors who have not yet started investing in mutual funds, but willing to explore the opportunity and also for those who want to clear their basics for what is mutual fund and how best it can serve as an investment tool.
Getting Started
Before we move to explain what is mutual fund, it’s very important to know the area in which mutual funds works, the basic understanding of stocks and bonds.
Stocks
Stocks represent shares of ownership in a public company. Examples of public companies include Reliance, ONGC and Infosys. Stocks are considered to be the most common owned investment traded on the market.
Bonds
Bonds are basically the money which you lend to the government or a company, and in return you can receive interest on your invested amount, which is back over predetermined amounts of time. Bonds are considered to be the most common lending investment traded on the market.
There are many other types of investments other than stocks and bonds (including annuities, real estate, and precious metals), but the majority of mutual funds invest in stocks and/or bonds.
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Working of Mutual Fund
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Regulatory Authorities
To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds. It notified regulations in 1993 (fully revised in 1996) and issues guidelines from time to time. MF either promoted by public or by private sector entities including one promoted by foreign entities is governed by these Regulations.
SEBI approved Asset Management Company (AMC) manages the funds by making investments in various types of securities. Custodian, registered with SEBI, holds the securities of various schemes of the fund in its custody.
According to SEBI Regulations, two thirds of the directors of Trustee Company or board of trustees must be independent.
The Association of Mutual Funds in India (AMFI) reassures the investors in units of mutual funds that the mutual funds function within the strict regulatory framework. Its objective is to increase public awareness of the mutual fund industry.
AMFI also is engaged in upgrading professional standards and in promoting best industry practices in diverse areas such as valuation, disclosure, transparency etc.
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What is a Mutual Fund?
A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund.
Mutual funds are considered as one of the best available investments as compare to others they are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns.
Diversification
Diversification is nothing but spreading out your money across available or different types of investments. By choosing to diversify respective investment holdings reduces risk tremendously up to certain extent.
The most basic level of diversification is to buy multiple stocks rather than just one stock. Mutual funds are set up to buy many stocks. Beyond that, you can diversify even more by purchasing different kinds of stocks, then adding bonds, then international, and so on. It could take you weeks to buy all these investments, but if you purchased a few mutual funds you could be done in a few hours because mutual funds automatically diversify in a predetermined category of investments (i.e. - growth companies, emerging or mid size companies, low-grade corporate bonds, etc).
Types of Mutual Funds Schemes in India
Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned below.
Overview of existing schemes existed in mutual fund category: BY STRUCTURE
1. Open - Ended Schemes:
An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.
2. Close - Ended Schemes:
A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor.
3. Interval Schemes:
Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.
The risk return trade-off indicates that if investor is willing to take higher risk then correspondingly he can expect higher returns and vise versa if he pertains to lower risk instruments, which would be satisfied by lower returns. For example, if an investors opt for bank FD, which provide moderate return with minimal risk. But as he moves ahead to invest in capital protected funds and the profit-bonds that give out more return which is slightly higher as compared to the bank deposits but the risk involved also increases in the same proportion.
Thus investors choose mutual funds as their primary means of investing, as Mutual funds provide professional management, diversification, convenience and liquidity. That doesn’t mean mutual fund investments risk free. This is because the money that is pooled in are not invested only in debts funds which are less riskier but are also invested in the stock markets which involves a higher risk but can expect higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives market which is considered very volatile.
Overview of existing schemes existed in mutual fund category: BY NATURE
1. Equity fund:
These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund manager’s outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows:
* Diversified Equity Funds
* Mid-Cap Funds
* Sector Specific Funds
* Tax Savings Funds (ELSS)
Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.
2. Debt funds:
The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:
*
Gilt Funds: Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government.
*
Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities.
*
MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.
*
Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.
*
Liquid Funds: Also known as Money Market Schemes, These funds provides easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.
3. Balanced funds:
As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.
Further the mutual funds can be broadly classified on the basis of investment parameter viz,
Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and invest accordingly.
By investment objective:
*
Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.
*
Income Schemes:Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.
*
Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).
*
Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.
Other schemes
* Tax Saving Schemes:
Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.
* Index Schemes:
Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index.
* Sector Specific Schemes:
These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time.
Types of returns
There are three ways, where the total returns provided by mutual funds can be enjoyed by investors:
* Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it receives over the year to fund owners in the form of a distribution.
* If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.
*
If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit. Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.
Pros & cons of investing in mutual funds:
For investments in mutual fund, one must keep in mind about the Pros and cons of investments in mutual fund.
Advantages of Investing Mutual Funds:
1. Professional Management - The basic advantage of funds is that, they are professional managed, by well qualified professional. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investments.
2. Diversification - Purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others.
3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors.
4. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when they want.
5. Simplicity - Investments in mutual fund is considered to be easy, compare to other available instruments in the market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basis.
Disadvantages of Investing Mutual Funds:
1. Professional Management- Some funds doesn’t perform in neither the market, as their management is not dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or not the so-called professionals are any better than mutual fund or investor him self, for picking up stocks.
2. Costs – The biggest source of AMC income, is generally from the entry & exit load which they charge from an investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.
3. Dilution - Because funds have small holdings across different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.
4. Taxes - when making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.
A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI) that pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. In other words, a mutual fund allows an investor to indirectly take a position in a basket of assets.
2. Which was the First Mutual Fund to be set up in India?
Unit Trust of India is the first Mutual Fund set up under a separate act, UTI Act in 1963, and started its operations in 1964 with the issue of units under the scheme US-64.
3. Who is the Regulatory Body for Mutual Funds?
Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds mentioned above. All the mutual funds must get registered with SEBI. The only exception is the UTI, since it is a corporation formed under a separate Act of Parliament.
4. What are the broad guidelines issued for a MF?
SEBI is the regulatory authority of MFs. SEBI has the following broad guidelines pertaining to mutual funds :
(1) MFs should be formed as a Trust under Indian Trust Act and should be operated by Asset Management Companies (AMCs).
(2) MFs need to set up a Board of Trustees and Trustee Companies. They should also have their Board of Directors.
(3) The net worth of the AMCs should be at least Rs.5 crore.
(4) AMCs and Trustees of a MF should be two separate and distinct legal entities.
(5) The AMC or any of its companies cannot act as managers for any other fund.
(6) AMCs have to get the approval of SEBI for its Articles and Memorandum of Association.
(7) All MF schemes should be registered with SEBI.
(8) MFs should distribute minimum of 90% of their profits among the investors.
(9) There are other guidelines also that govern investment strategy, disclosure norms and advertising code for mutual funds.
5. How do mutual funds diversify their risks?
According to basis financial theory, which states that an investor can reduce his total risk by holding a portfolio of assets instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially reduced.
6. Can mutual funds assumed to be risk-free investments?
Ans: No. Mutual fund investments are not totally risk free. In fact, investing in mutual funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds the controllable risks are substantially reduced.
7. What are the types risks involved in investing in mutual funds?
A very important risk involved in mutual fund investments is the market risk. When the market is in doldrums, most of the equity funds will also experience a downturn. However, the company specific risks are largely eliminated due to professional fund management.
8. What are the different types of funds offered by fund house?
Currently there exist balanced funds, Income fund, Growth funds, Sector funds etc. To get more details about the different funds and their features please visit our mutual fund glossary.
9. What are the different types of plans that mutual fund offers?
That depends on the strategy of the concerned scheme. But generally there are 3 broad
categories. A dividend plan entails a regular payment of dividend to the investors. A
reinvestment plan is a plan where these dividends are reinvested in the scheme itself. A growth plan is one where no dividends are declared and the investor only gains through capital appreciation in the NAV of the fund.
10. What are open-ended and closed-ended mutual funds?
In an open-ended mutual fund there are no limits on the total size of the corpus. Investors are permitted to enter and exit the open-ended mutual fund at any point of time at a price that is linked to the net asset value (NAV). In case of closed-ended funds, the total size of the corpus is limited by the size of the initial offer.
11. What is the investor’s exit route in case of a closed-ended fund?
According to Sebi regulations, all closed-ended funds have to be necessarily listed on a recognized stock exchange. Thus the secondary market provides an exit route in case of closed-ended funds.
12. Why should one choose to invest in a mutual fund?
For retail investor who does not have the time and expertise to analyze and invest in stocks and bonds, mutual funds offer a viable investment alternative. This is because:
(1) Mutual Funds provide the benefit of cheap access to expensive stocks
(2) Mutual funds diversify the risk of the investor by investing in a basket of assets
(3) A team of professional fund managers manages them with in-depth research inputs from investment analysts.
(4) Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information which individual investors cannot access.
13. How investors invest in Mutual Funds?
One can invest by approaching a registered broker of Mutual funds or the respective offices of the Mutual funds in that particular town/city. An application form has to be filled up giving all the particulars along with the cheque or Demand Draft for the amount to be invested.
14. What are the parameters on which a Mutual Fund scheme should be evaluated?
Performance indicators like total returns given by the fund on different schemes, the returns on competing funds, the objective of the fund and the promoter’s image are some of the key factors to be considered while taking an investment decision regarding mutual funds.
15. What is a Systematic Investment Plan and how does it operate?
A systematic investment plan is one where an investor contributes a fixed amount every month and at the prevailing NAV the units are credited to his account. Today many funds are offering this facility.
16. What are the benefits of s Systematic Investment Plan?
A systematic investment plan (SIP) offers 2 major benefits to an investor:
(1) It avoids lump sum investment at one point of time
(2) In a scenario of falling prices, it reduces your overall cost of acquisition by a process of rupee-cost averaging. This means that (3) at lower prices you end up getting more units for the same investment.
17. What is the difference between mutual funds and portfolio management schemes?
While the concept remains the same of collecting money from investors, pooling them and investing the funds, the target investors are different. In the case of portfolio management the target investors are high networth investors while in case of mutual funds the target investors are the retail investors.
18. Is investor eligible for rebate on income tax by investing in a MF?
Yes, in case of certain specific Equity Linked Saving Schemes, tax benefits are available under Section 88 of the Income Tax Act. In such cases the fund prospectuses explicitly states that it is a tax saving fund. In such cases 20% of your contribution will qualify for rebate under Section 88 of the Income Tax Act.
19. Do investments in mutual funds offer tax benefit on capital gains?
Yes. If the capital gains earned by you during a financial year are invested in specified mutual funds then such capital gains are exempt from capital gains tax under Section 54EA and Section 54EB of the Income Tax Act.
20. Do mutual fund investments attract wealth tax?
No. Under the Wealth Tax Act, all financial assets, including mutual fund units are
exempt totally from Wealth Tax.
21. If I gift mutual fund units, does it attract gift tax?
No. With effect from 1st October 1998, units of a mutual fund gifted by unitholders are no longer chargeable to Gift Tax.
22. Is dividend earned from mutual funds exempt from income tax?
Yes. Income from mutual funds in the form of dividends is entirely exempt from income tax provided the fund in question is a equity/growth fund where more than 50% of the portfolio is invested in equities.
23. What are my major rights as a unit holder in a mutual fund?
Some important rights are mentioned below:
(1) Unit holders have a proportionate right in the beneficial ownership of the assets of the scheme and to the dividend declared.
(2) They are entitled to receive dividend warrants within 42 days of the date of declaration of the dividend.
(3) They are entitled to receive redemption cheques within 10 working days from the date of redemption.
(4) 75% of the unit holders with the prior approval of SEBI can terminate AMC of the fund.
(5) 75% of the unit holders can pass a resolution to wind-up the scheme.
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Basics of mutual funds
The article mentioned below, is for the investors who have not yet started investing in mutual funds, but willing to explore the opportunity and also for those who want to clear their basics for what is mutual fund and how best it can serve as an investment tool.
Getting Started
Before we move to explain what is mutual fund, it’s very important to know the area in which mutual funds works, the basic understanding of stocks and bonds.
Stocks
Stocks represent shares of ownership in a public company. Examples of public companies include Reliance, ONGC and Infosys. Stocks are considered to be the most common owned investment traded on the market.
Bonds
Bonds are basically the money which you lend to the government or a company, and in return you can receive interest on your invested amount, which is back over predetermined amounts of time. Bonds are considered to be the most common lending investment traded on the market.
There are many other types of investments other than stocks and bonds (including annuities, real estate, and precious metals), but the majority of mutual funds invest in stocks and/or bonds.
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Working of Mutual Fund
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Regulatory Authorities
To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds. It notified regulations in 1993 (fully revised in 1996) and issues guidelines from time to time. MF either promoted by public or by private sector entities including one promoted by foreign entities is governed by these Regulations.
SEBI approved Asset Management Company (AMC) manages the funds by making investments in various types of securities. Custodian, registered with SEBI, holds the securities of various schemes of the fund in its custody.
According to SEBI Regulations, two thirds of the directors of Trustee Company or board of trustees must be independent.
The Association of Mutual Funds in India (AMFI) reassures the investors in units of mutual funds that the mutual funds function within the strict regulatory framework. Its objective is to increase public awareness of the mutual fund industry.
AMFI also is engaged in upgrading professional standards and in promoting best industry practices in diverse areas such as valuation, disclosure, transparency etc.
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What is a Mutual Fund?
A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund.
Mutual funds are considered as one of the best available investments as compare to others they are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns.
Diversification
Diversification is nothing but spreading out your money across available or different types of investments. By choosing to diversify respective investment holdings reduces risk tremendously up to certain extent.
The most basic level of diversification is to buy multiple stocks rather than just one stock. Mutual funds are set up to buy many stocks. Beyond that, you can diversify even more by purchasing different kinds of stocks, then adding bonds, then international, and so on. It could take you weeks to buy all these investments, but if you purchased a few mutual funds you could be done in a few hours because mutual funds automatically diversify in a predetermined category of investments (i.e. - growth companies, emerging or mid size companies, low-grade corporate bonds, etc).
Types of Mutual Funds Schemes in India
Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned below.
Overview of existing schemes existed in mutual fund category: BY STRUCTURE
1. Open - Ended Schemes:
An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.
2. Close - Ended Schemes:
A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor.
3. Interval Schemes:
Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.
The risk return trade-off indicates that if investor is willing to take higher risk then correspondingly he can expect higher returns and vise versa if he pertains to lower risk instruments, which would be satisfied by lower returns. For example, if an investors opt for bank FD, which provide moderate return with minimal risk. But as he moves ahead to invest in capital protected funds and the profit-bonds that give out more return which is slightly higher as compared to the bank deposits but the risk involved also increases in the same proportion.
Thus investors choose mutual funds as their primary means of investing, as Mutual funds provide professional management, diversification, convenience and liquidity. That doesn’t mean mutual fund investments risk free. This is because the money that is pooled in are not invested only in debts funds which are less riskier but are also invested in the stock markets which involves a higher risk but can expect higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives market which is considered very volatile.
Overview of existing schemes existed in mutual fund category: BY NATURE
1. Equity fund:
These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund manager’s outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows:
* Diversified Equity Funds
* Mid-Cap Funds
* Sector Specific Funds
* Tax Savings Funds (ELSS)
Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.
2. Debt funds:
The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:
*
Gilt Funds: Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government.
*
Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities.
*
MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.
*
Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.
*
Liquid Funds: Also known as Money Market Schemes, These funds provides easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.
3. Balanced funds:
As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.
Further the mutual funds can be broadly classified on the basis of investment parameter viz,
Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and invest accordingly.
By investment objective:
*
Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.
*
Income Schemes:Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.
*
Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).
*
Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.
Other schemes
* Tax Saving Schemes:
Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.
* Index Schemes:
Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index.
* Sector Specific Schemes:
These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time.
Types of returns
There are three ways, where the total returns provided by mutual funds can be enjoyed by investors:
* Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it receives over the year to fund owners in the form of a distribution.
* If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.
*
If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit. Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.
Pros & cons of investing in mutual funds:
For investments in mutual fund, one must keep in mind about the Pros and cons of investments in mutual fund.
Advantages of Investing Mutual Funds:
1. Professional Management - The basic advantage of funds is that, they are professional managed, by well qualified professional. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investments.
2. Diversification - Purchasing units in a mutual fund instead of buying individual stocks or bonds, the investors risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others.
3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors.
4. Liquidity - Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when they want.
5. Simplicity - Investments in mutual fund is considered to be easy, compare to other available instruments in the market, and the minimum investment is small. Most AMC also have automatic purchase plans whereby as little as Rs. 2000, where SIP start with just Rs.50 per month basis.
Disadvantages of Investing Mutual Funds:
1. Professional Management- Some funds doesn’t perform in neither the market, as their management is not dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or not the so-called professionals are any better than mutual fund or investor him self, for picking up stocks.
2. Costs – The biggest source of AMC income, is generally from the entry & exit load which they charge from an investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.
3. Dilution - Because funds have small holdings across different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.
4. Taxes - when making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.
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