Investing in stock market notes for B.

Com(p)-IV sem
section –A
Prepared by:
Ms.Deepika,
Assistant Professor
Commerce Department

What Is a Mutual Fund?

 A mutual fund is a type of financial vehicle made up of a pool of
money collected from many investors to invest in securities like stocks,
bonds, money market instruments, and other assets. Mutual funds are
operated by professional money managers, who allocate the fund's assets
and attempt to produce capital gains or income for the fund's investors. A
mutual fund's portfolio is structured and maintained to match the
investment objectives stated in its prospectus.
 Mutual funds give small or individual investors access to professionally
managed portfolios of equities, bonds, and other securities. Each
shareholder, therefore, participates proportionally in the gains or losses of
the fund. Mutual funds invest in a vast number of securities, and
performance is usually tracked as the change in the total market cap of the
fund—derived by the aggregating performance of the underlying
investments.
 The average mutual fund holds hundreds of different securities, which
means mutual fund shareholders gain important diversification at a low
price. Consider an investor who buys only Google stock before the
company has a bad quarter. He stands to lose a great deal of value
because all of his dollars are tied to one company. On the other hand, a
different investor may buy shares of a mutual fund that happens to own
some Google stock. When Google has a bad quarter, she loses
significantly less because Google is just a small part of the fund's portfolio.

How Mutual Funds Work

A mutual fund is both an investment and an actual company. This dual nature
may seem strange, but it is no different from how a share of AAPL is a
representation of Apple Inc. When an investor buys Apple stock, he is buying
partial ownership of the company and its assets. Similarly, a mutual fund investor
is buying partial ownership of the mutual fund company and its assets. The
difference is that Apple is in the business of making innovative devices and
tablets, while a mutual fund company is in the business of making investments.

Investors typically earn a return from a mutual fund in three ways:

1. Income is earned from dividends on stocks and interest on bonds held in

the fund's portfolio. A fund pays out nearly all of the income it receives over
the year to fund owners in the form of a distributions. Funds often give
investors a choice either to receive a check for distributions or to reinvest
the earnings and get more shares.

2. 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.

3. 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 in the market.

Types of mutual funds

Mutual funds offer a wide variety of investment choices. You can choose them basis your risk
appetite, financial goals and time horizon. Here’s how -

Funds based on maturity period

Open ended funds

Open ended funds allow investors to subscribe or redeem units as per the prevailing Net Asset Value (NAV)
on a continuous basis. Basically, what you get with open ended funds is liquidity and flexibility of time.
Close ended funds
Listed on the stock exchange, these funds come with a fixed maturity date, like 3-6 years. Investors can opt to
subscribe to close ended funds at the time of initial launch.

Interval Funds
These funds are a hybrid of open and close ended funds. While they operate mainly as close ended funds,
these funds may trade on stock exchanges and are open for sale or redemption at predetermined intervals
at the prevailing NAV.

Funds based on investment objective

Equity/Growth Funds
If you are investing in equity growth funds, then you are largely putting your money in stocks. The main
objective of these funds is to achieve long-term capital growth. Equity funds invest at least 65% of their corpus
in equity and equity-related securities. These funds may invest in a wide range of industries/sectors or focus on
one or more sectors. These funds are suitable to invest in if you have a higher risk appetite and you have a long
term financial goals.

Debt/Income Funds
Following a simpler approach, debt/income funds usually invest 65% of the amount in fixed income securities
such as bonds, corporate debentures, government securities (gilts) and money market instruments. These funds
are likely to be less volatile than equity funds.

Balanced Funds
With an aim to provide stability of returns and capital appreciation, balanced mutual funds invest in both
equities and fixed income instruments. These funds generally tend to invest around 60% in equity and 40% in
debt instruments such as bonds and debentures.

Money Market/Liquid Funds

If you are looking for a fund that offers liquidity and capital preservation with moderate income, then this is a
suitable choice. Money market/liquid funds invest in safer short-term instruments such as Treasury Bills,
Certificates of Deposit and Commercial Paper for less than 91 days. These funds are ideal to invest in if you
are a corporate or an individual investor and wish to earn moderate returns on surplus funds.

Gilt Fund
Gilt mutual funds invest exclusively in government securities. The Gilt funds do not carry a credit risk - where
the issuer of the security can default. However, it comes with an interest rate risk i.e. risk due to the rise or fall
in interest rates.

Other Funds
 Tax saving funds

The Income Tax Act offers tax deduction under specific provisions of the Income Tax Act, 1961. Designed to
generate capital growth, ELSS mutual funds invest primarily in equities and largely suit investors with a higher
risk appetite for capital appreciation. Spread over medium to long-term, tax saving funds comes with a lock-in
period of 3 years.

Index Funds
Index funds are attached to a particular index such as the BSE SENSEX or the S&P CNX NIFTY. Their
performance is linked to the results of that index. Here, the portfolio comprises stocks that represent an index
and the weightage assigned to each stock is in line with the identified index. Hence, the returns will be more or
less similar to those generated by the Index.

Sector-specific Funds
Sector-specific funds invest in the securities of a specific sector or industry such as FMCG, Pharmaceuticals,
IT, etc. The returns on these funds are directed by the performance of the respective sector/industries.
Sector funds allow an investor to diversify funds across multiple companies within an industry. These funds
tend to be riskier as the performance is directly linked to that of the overall sector.

7 Convincing Reasons Why You Should

Invest In Mutual Funds Now
For old investors and those who are starting out, mutual funds are a
wonderful and convenient way to invest your money. Simply put, a
mutual fund is a collection of stocks (equities) and/or bonds (debt).

Here’s are 7 reasons (in no particular order) that you should consider
buying mutual funds:

1. Diversification. When you buy a Mutual Fund, you buy a collection

of what that Mutual Fund has invested. Diversification means the Mutual
Fund has spread out your money over different companies and/or
different types of assets. Your money is invested in a mixture of products
with high and low risk to both helps it grow and also protects it.
For example: Large Cap funds diversify by investing in equity shares of
different companies which have large market capitalization and are very
well established. A hybrid fund diversifies by investing in a mix of stocks
and bonds.
2. Low Minimum Investment. You can get started with investing in
most Mutual Funds with as little as Rs 100.
3. Professional Management. Mutual fund managers and analysts
wake up each morning with one goal – to research, analyze and study
current and potential holdings for their mutual fund. And your investment
advisor studies and evaluates mutual fund managers to pick the best
funds to help you meet your goals.
4. Lower costs. Buying stocks and bonds costs you more (set up of a
DEMAT account/ transaction fee etc). Because they manage large
amounts of money on behalf of lakhs of individual investors, mutual
funds are able to take advantage to reduce transaction costs.
5. Systematic Investment Plans (SIPs). SIPs make it simple to invest
regularly in a mutual fund with as little as Rs 100 a month. Once you
register your bank mandate with an online platform, just set up a SIP
with any amount you are comfortable with on any date of the month in a
Mutual Fund of your choice. The money is automatically debited a day or
two before that day every month and invested in that scheme so your
investment habit gets regularized.
6. Transparency. The investments that a Mutual Fund makes are
publicly available every month, so if needed, you can see what your fund
manager is doing.
7. Liquidity. Because your money is spread across so many stocks
and bonds, you can sell your mutual funds at any time to meet your
financial needs. The money hits your bank account within 2 working
days. There are Mutual Funds that do this even faster called Instant
Redemption Funds. Your money comes back into your bank account
within 60 seconds of selling an Instant Redemption Fund.
What Is Net Asset Value – NAV?
 The net asset value (NAV) represents the net value of an entity and is
calculated as the total value of the entity’s assets minus the total value of
its liabilities. Most commonly used in the context of a Mutual fund or exchange
traded funds, the NAV represents the per share/unit price of the fund on a
specific date or time.
 Net asset value is commonly used to identify potential investment
opportunities within mutual funds, ETFs or indexes. One could also use net
asset value to view the holdings in their own portfolio. To invest in any of
the aforementioned assets, an investment account would be needed.
NAV and Mutual Funds
 A fund works by collecting money from a large number of investors. It then
uses the collected capital to invest in a variety of stocks and other financial
securities that fit the investment objective of the fund. Each investor gets a
specified number of shares in proportion to their invested amount, and they
are free to sell (redeem the value of) their fund shares at a later date and
pocket the profit/loss. Since regular buying and selling of fund shares start
after the launch of the fund, a mechanism is required to price the shares of
the fund. This pricing mechanism is based on NAV.
 Unlike a stock whose price changes with every passing second, mutual
funds don’t trade in real-time. Instead, mutual funds are priced based on
the end of the day methodology based on their assets and liabilities
 The assets of a mutual fund include the total market value of the fund's
investments, cash and cash equivalents, receivables and accrued income.
The market value of the fund is computed once per day based on the
closing prices of the securities held in the fund's portfolio. Since a fund
may have a certain amount of capital in the form of cash and liquid assets,
that portion is accounted for under the cash and cash equivalents heading.
 Receivables include items such as dividend or interest payments
applicable on that day, while accured income refers to money that is
earned by a fund but yet to be received. The sum of all these items and
any of their qualifying variants constitute the fund’s assets.
 The liabilities of a mutual fund typically include money owed to the lending
banks, pending payments and a variety of charges and fees owed to
various associated entities. Additionally, a fund may have foreign liabilities
that may be the shares issued to non-residents, income or dividend for
which payments are pending to non-residents, and sale proceeds pending
repatriation. All such outflows may be classified as long-term and short-
term liabilities, depending upon the payment horizon. The liabilities of a
fund also include accured expenses like staff salaries, utilities, operating
expenses, management expenses, distribution and marketing expenses,
transfer agent fees, custodian and audit fees, and other operational
expenses.
 To compute the NAV for a particular day, all these various items falling
under assets and liabilities are taken as of the end of a particular business
day.
References :

 https://www.investopedia.com/terms/m/mutualfund.asp
 https://www.principalindia.com/new-investor-basics/types-of-mutual-fund-schemes
 https://money.mobikwik.com/resources/mutual-funds-best-way-start-investing
 https://www.investopedia.com/terms/n/nav.