Module 1 INVESTMENTS INVESTMENT IS A SACRIFISE OF CERTAIN PRESENT VALUE FOR FUTURE REWARD Investment is employment of funds with aim
of achieving additional income or growth in value.It’s a long term commitment , where essential quality is waiting for a reward.It’s a commitment of resources which have been saved or put away from current consumption in the hope that some benefit will occur in future. Investment in economic sense: Investment is a Net addition to the economy’s capital stock, which consists of goods and services that are used in the production of other goods and services. It’s a formation of productive capital. Net additions to the capital stock of the society ( those goods which are used in the production of other goods) Investment in financial sense: Investment is a Monetary assets purchased with the idea that the asset will provide an income and capital appreciation. Its an exchange of financial claims like stock, bonds, real estate etc. Investment is parting with one’s fund to be used by another party for productive activity. Investment is a conversion of money or cash into a monetary asset on a claim on future money for a return. SPECULATION Investment and speculation are somewhat different and yet similar because speculation requires an investment and investments are at least somewhat speculative. Both are leading to claim on money, aims at maximizing return. Investment is putting money in an asset not necessarily in marketable in short run, where as speculation is selecting an investment with higher risk in order to profit from an anticipated price movement. If investment is done with long term objective, speculation is of short term objective. Investment is distinguished from speculation in 3 ways. •Risk •Capital gain •Time. investment, a well grounded and cerefully planned speculation GAMBLING Gambling is a High risk venture, where the investor plays for high stakes. Reckless venture to look for very quick profits in the short term. Gambling is based upon tips, rumors , its un planned, unscientific, and without the knowledge of the exact nature of risk.
Characteristics of gambling •It is typical, chronic and repetitive experience •Gambling Absorb all other interests •Displays persistent optimism without winning •Never stops while winning •Risks more than what Can be afforded •Enjoys a strange thrill, a combination of pleasure and pain. ARBITRAGE •Deliberate switching of funds between markets in order to maximize net gains on short term investments. Such dealings may be in currencies, commodities, Arbitrage is not considered as pure speculation Difference between investment and speculation INVESTMENT Basis of acquisition Length of commitment Source of income Quantity of risk Earnings Stability of income Reason for purchase Psychological attitude Very stable Scientific analysis Cautious and conservative Uncertain Tips, inside information etc Daring and careless Outright purchase Long term Earnings of enterprise Small •SPECULATION On margin Short term Change in market price Large
NEED FOR INVESTMENT a) Longer life expectancy and planning for retirement b) Increasing rates of taxation c) Inflation d) Increase in income level e) Availability of different investment channels OBJECTIVES OF INVESTMENT 1) Increasing the returns 2) Reducing the risk 3) Improving the liquidity ( trough marketability) 4) Hedge against inflation 5) Providing for safety of funds CHARACTARISTICS OF INVESTMENTS •RISK - RETURN RELATIONSHIP •MARKETABILITY – LIQUIDITY RELATIONSHIP •TAX BENIFITS INVESTMENT PROCESS The following steps are involved in the process of investments. These steps are not only applicable for individuals but also for institutions. 1) Determining investment objectives and policy.
Investment objectives are determined in terms required rate of return, need for regular income, risk perception and need for liquidity. Risk takers objective is to earn higher rate of return, where as objective of risk averse investors is the safety of funds. Investment policy calls for determining categories of financial assets, amount of wealth, tax status. Acquiring the knowledge about the different opportunities available is v important. 2) Security analysis
It is an examination of risk return characteristics of the individual securities identified under the last step. It is done with an aim to know whether securities worthwhile to invest There are different approaches involved in security analysis.
Technical analysis – This Studies the past and recent price movements of securities. Fundamental analysis –This analyses the true or intrinsic value of securities, which are worked out to compare with current market price. There are some more important approaches involved in security analysis. Market analysis Industry analysis Company analysis 3) Construction of portfolio •Portfolio is a combination of securities. This step consists of identifying the specific security to invest and determining the proportion of investor’s wealth to be invested in each Portfolio construction includes Determination of diversification level Consideration of investment timings Selection of investment assets 4) Portfolio revision Securities once attractive may ceases to be so. Therefore portfolio has to revised from time to time. New securities may be available in the market with high returns and low risk. 5) Portfolio evaluation It is a continuous process. It is examining the portfolio for determining return and risk characteristic continuously. Such risk return must be compared with a certain yardstick. Proper portfolio evaluation leads to timely revision.
SOURCES OF INVESTMENT RISK 1) BUSINESS AND FINANCIAL RISK These risks arises due to competition, tech, preference of customers , incompetent management, use of fixed cost securities etc. 2) INTEREST RATE RISK change in interest rates brings about change in market price of securities, especially long term bonds. This price change leads to interest rate risk 3) PURCHASING POWER RISK Purchasing power or inflation risk arises on account of loss of purchasing power of currency, which is mainly because of inflation. This purchasing power risk affects fixed interest securities more, than equity 4) MARKET RISK Market risk is more popular for securities especially equity shares. This risk is caused due to variability of return caused by alternating force of bull and bear market. 5) SOCIAL OR REGULATORY RISK social or regulatory risks includes adverse legislation, harsh regulation, nationalization by government etc. These risks can be classified into systematic and unsystematic risk. A detailed discussion about these risk is covered in second module
INVESTMENT ALTERNATIVES The following is the list of different investment alternatives available for an investor 1)NEGOTIABLE SECURITIES A) VARIABLE INCOME SECURITIES Equity shares B) FIXED INCOME SECURITIES Preference shares Debentures issued by corporate Bonds
IVP and KVP Government securities (gilt edged securities) Money market securities ( which is issued for short duration) like, treasury bill, CP, certificate of a deposits, etc. 2) NON NEGOTIABLE SECURITIES A) DEPOSITS Bank deposits P O deposits N B F C deposits B) TAX SHELTERED SAVINGS SCHEMES PPF NSS ( PRESENTLY NOT AVAILABLE) NSC C) LIFE INSURANCE 3) MUTUAL FUNDS ( a detailed discussion is made relating to mutual fund later.)
4) REAL ASSETS Gold and silver Real estate Art Antiques
It is an old concept in USA. “It is essentially giving opinion by a rating agency on the relative willingness and ability at the issuer of a debt instrument to meet the debt servicing obligation in time and in full”. In simple words it is a process where by a credit rating agency after thorough analysis, gives its opinion about creditworthiness of the company issuing debt instruments. It helps the investors to analyze the risk associated with the debt instruments.
Features of credit rating
1) 2) Specificity:- credit rating is done specifically to a particular debt instrument. Relativity:- It is based on the relative capability and willingness of the issuer of the debt instruments to meet obligation. 3) 4) 5) 6) Guidance: Credit rating is just a guidance given by the agency. It is not a recommendation to buy the debt instruments. It is based on the broad parameters. No guarantee by credit rating agency on the debt instruments issued by the company. 7) Uses both qualitative and quantitative information to give the rating.
Advantages of credit rating 1) To investors a) b) c) d) e) f) a) b) c) Provides information about the company and instrument. It is a systematic risk evaluation. Professional competency is used to give rating. It is easy to understand Lost of analysis will be less. Efficient portfolio management can be done by credit norms worth. Credit ranking is an index of faith It assists the company to have wider investors base. It is a benchmark.
2) To Issuer
Key factors considered in credit rating: i) Business analysis :- In includes nature of business, risk associated with business growth prospects etc. ii) Financial analysis: here it includes profitability, liquidity conditions, net worth etc.
Management evaluation:- analysis of Promoters, their credit worthiness, their past tract records are analyzed.
Regulatory and competitive environment:- Which includes government regulations on the basis of competitions the business etc.
Fundamental analysis:- It includes liquidity, profitability , interest loan
SEBI and RBI guidelines on credit rating: SEBI guidelines requires issue of debentures, bonds, convertibles, or redeemable for a period beyond 18 months needs credit rating. As per RBI guidelines issue of commercial papers requires credit rating. Limitations of credit rating:
No rating for equity Only indicator of risk Only opinion and no guarantee Need to be updated frequently
Types of credit rating
•Bond or debenture rating. •Equity share rating •preference share rating •Commercial paper rating •FD’s rating •Borrowers rating • •Individuals rating •Structured obligations rating. ( asset backed loan taken directly) • Sovereign rating. ( rating of a country)
Credit rating agencies in India:
CRISIC(Credit Rating Information Services India Ltd.): Jointly set up in 1988 by ICICI, UTI, LIC, GIC and few others financial institutions. Head office at Mumbai most of the grading is done by CRISIL.
ICRA (Investors Information and Credit rating agencies:- started in 1991 promoted by IFCI and others
Care (Credit analysis and Research Ltd):- set up in 1993 by IDBI and other financial institutions.
ONICRA – (Onida individual Credit Rating Agency of India Ltd.)
Promoted by ONIDA group. It’s a First individual rating agency. It has also developed a rating model and methodology for assessing the credit risk to SMEs
) Duff and phelps :- Set up in private sector in 1996.
Certain ratings of Crisil relating to debt instruments :AAA AA A BBB BB B C D – Highest Security – Limitations of credit rating – Adequate safety – Moderate safety – Inadequate safety – High risk – Substantial risk – Default There is a need to have a different credit rating for different instruments like, debentures, bonds, medium term debt including FD’s and short term debt instruments including commercial papers.
For the investors who does not have the expertise to to invest the money in equity market , mutual funds have become the talk of the day. Mutual funds help the investors to reap the benefit of equity investment without taking much risk and witout possessing much expertise in capital market.
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:
Mutual Fund Operation Flow Chart
ORIGIN OF MUTUAL FUND
The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered the industry. In the past decade, Indian mutual fund industry had seen a dramatic imporvements, both qualitywise as well as quantitywise. Before, the monopoly of the market had seen an ending phase, the Assets Under Management (AUM) was Rs. 67bn. The private sector entry to the fund family rose the AUM to Rs. 470 bn in March 1993 and till April 2004, it reached the height of 1,540 bn. Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than
the deposits of SBI alone, constitute less than 11% of the total deposits held by the Indian banking industry. The main reason of its poor growth is that the mutual fund industry in India is new in the country. Large sections of Indian investors are yet to be intellectuated with the concept. Hence, it is the prime responsibility of all mutual fund companies, to market the product correctly abreast of selling. FEATURES OF MUTUAL FUND 1) MOBILISATION OF SAVINGS Mutual funds mobilizes funds by selling its shares popularly known as units. This in turn encourages the household savings and investment. 2) PROVIDES INVESTMENT AVENUE Mutual funds provides investment avenues for small and retail investors who does not have the expertise of investing in equity market. 3) DIVERSIFICATION IN INVESTMENT Mutual funds invest the funds collected from retail investors in securities of different industries. This diversification leads to reduction in the risk associated with investment. 4) PROFESSIONAL MANAGEMENT Panel of experts who possesses professional knowledge manages mutual funds. This leads to professional and profitable management of mutual funds. 5) REDUCES RISK Mutual funds reduces the risk associated with investment by going for better liquidity of units, professional management and diversification. 6) BETTER LIQUIDITY Mutual fund units can be sold/liquidated easily as they possess ready market. 7) PROVIDES TAX BENEFITS Investing in many schemes of Mutual funds provides tax exemptions.
ORGANISATION OF A MUTUAL FUND There are many entities involved and the diagram below illustrates the organisational set up of a mutual fund:
ADVANTAGES OF MUTUAL FUNDS
The advantages of investing in a Mutual Fund are: • Diversification: The best mutual funds design their portfolios so individual investments will react differently to the same economic conditions. For example, economic conditions like a rise in interest rates may cause certain securities in a diversified portfolio to decrease in value. Other securities in the portfolio will respond to the same economic conditions by increasing in value. When a portfolio is balanced in this way, the value of the overall portfolio should gradually increase over time, even if some securities lose value. Professional Management: Most mutual funds pay topflight professionals to manage their investments. These managers decide what securities the fund will buy and sell. Regulatory oversight: Mutual funds are subject to many government regulations that protect investors from fraud. Liquidity: It's easy to get your money out of a mutual fund. Write a check, make a call, and you've got the cash. Convenience: You can usually buy mutual fund shares by mail, phone, or over the Internet. Low cost: Mutual fund expenses are often no more than 1.5 percent of your investment. Expenses for Index Funds are less than that, because index funds are not actively managed. Instead, they automatically buy stock in companies that are listed on a specific index Transparency Flexibility Choice of schemes
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Tax benefits Well regulated
Drawbacks of Mutual Funds
Mutual funds have their drawbacks and may not be for everyone: • No Guarantees: No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money. Fees and commissions: All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if investor don't use a broker or other financial adviser, they will have to pay a sales commission in a Load Fund. Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If fund makes a profit on its sales, investors will have to pay taxes on the income received, even Management risk: When investment is done in a mutual fund, investor depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as investor had hoped, they might not make as much money on investment as you expected. Of course, if investor invest in Index Funds, they forego management risk, because these funds do not employ managers.
Mutual Funds India
Mutual funds have been a significant source of investment in both government and corporate securities. It has been for decades the monopoly of the state with UTI being the key player, with invested funds exceeding Rs.300 bn. (US$ 10 bn.). The state-owned insurance companies also hold a portfolio of stocks. Presently, numerous mutual funds exist, including private and foreign companies. Banks--mainly state-owned too have established Mutual Funds (MFs). Foreign participation in mutual funds and asset management companies is permitted on a case by case basis. UTI, the largest mutual fund in the country was set up by the government in 1964, to encourage small investors in the equity market. UTI has an extensive marketing network of over 35, 000 agents spread over the country. The UTI scrips have performed relatively well in the market, as compared to the Sensex trend. However, the same cannot be said of all mutual funds. All MFs are allowed to apply for firm allotment in public issues. SEBI regulates the functioning of mutual funds, and it requires that all MFs should be established as
trusts under the Indian Trusts Act. The actual fund management activity shall be conducted from a separate asset management company (AMC). The minimum net worth of an AMC or its affiliate must be Rs. 50 million to act as a manager in any other fund. MFs can be penalized for defaults including non-registration and failure to observe rules set by their AMCs. MFs dealing exclusively with money market instruments have to be registered with RBI. All other schemes floated by MFs are required to be registered with SEBI. In 1995, the RBI permitted private sector institutions to set up Money Market Mutual Funds (MMMFs). They can invest in treasury bills, call and notice money, commercial paper, commercial bills accepted/co-accepted by banks, certificates of deposit and dated government securities having unexpired maturity upto one year.
DIFFERENT TYPES OF MUTUAL FUNDS IN INDIA
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Closed-end funds Open-end funds Large cap funds Mid-cap funds Equity funds Balanced funds Growth funds No load funds Exchange traded funds Value funds Money market funds International mutual funds Regional mutual funds Sector funds Index funds Fund of funds
Closed-End Mutual Funds A closed-end mutual fund has a set number of shares issued to the public through an initial public offering. These funds have a stipulated maturity period 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. Once underwritten, closed-end funds trade on stock exchanges like stocks or bonds. The market price of closed-end funds is determined by supply and demand and not by net-asset value (NAV), as is the
case in open-end funds. Usually closed mutual funds trade at discounts to their underlying asset value. Open End Mutual Fund An open-end mutual fund is a fund that does not have a set number of shares. It continues to sell shares to investors and will buy back shares when investors wish to sell. Units are bought and sold at their current net asset value. Open-end funds keep some portion of their assets in short-term and money market securities to provide available funds for redemptions. A large portion of most open mutual funds is invested in highly liquid securities, which enables the fund to raise money by selling securities at prices very close to those used for valuations.
Large Cap Funds Large cap funds are those mutual funds, which seek capital appreciation by investing primarily in stocks of large blue chip companies with above-average prospects for earnings growth. Different mutual funds have different criteria for classifying companies as large cap. Generally, companies with a market capitalisation in excess of Rs 1000 crore are known large cap companies. Investing in large caps is a lower risk-lower return proposition (vis-à-vis mid cap stocks), because such companies are usually widely researched and information is widely available. Mid Cap Funds Mid cap funds are those mutual funds, which invest in small / medium sized companies. As there is no standard definition classifying companies as small or medium, each mutual fund has its own classification for small and medium sized companies. Generally, companies with a market capitalization of up to Rs 500 crore are classified as small. Those companies that have a market capitalization between Rs 500 crore and Rs 1,000 crore are classified as medium sized. Big investors like mutual funds and Foreign Institutional Investors are increasingly investing in mid caps nowadays because the price of large caps has increased substantially. Small / mid sized companies tend to be under researched thus they present an opportunity to invest in a company that is yet to be identified by the market. Such companies offer higher growth potential going forward and therefore an opportunity to benefit from higher than average valuations.
But mid cap funds are very volatile and tend to fall like a pack of cards in bad times. So, caution should be exercised while investing in mid cap mutual funds. Equity Mutual Funds Equity mutual funds are also known as stock mutual funds. Equity mutual funds invest pooled amounts of money in the stocks of public companies. Stocks represent part ownership, or equity, in companies, and the aim of stock ownership is to see the value of the companies increase over time. Stocks are often categorized by their market capitalization (or caps), and can be classified in three basic sizes: small, medium, and large. Many mutual funds invest primarily in companies of one of these sizes and are thus classified as large-cap, mid-cap or small-cap funds. Equity fund managers employ different styles of stock picking when they make investment decisions for their portfolios. Some fund managers use a value approach to stocks, searching for stocks that are undervalued when compared to other, similar companies. Another approach to picking is to look primarily at growth, trying to find stocks that are growing faster than their competitors, or the market as a whole. Some managers buy both kinds of stocks, building a portfolio of both growth and value stocks. Balanced Fund Balanced fund is also known as hybrid fund. It is a type of mutual fund that buys a combination of common stock, preferred stock, bonds, and short-term bonds, to provide both income and capital appreciation while avoiding excessive risk. Balanced funds provide investor with an option of single mutual fund that combines both growth and income objectives, by investing in both stocks (for growth) and bonds (for income). Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss. But on the flip side, balanced funds will usually increase less than an all-stock fund during a bull market.
Growth Funds Growth funds are those mutual funds that aim to achieve capital appreciation by investing in growth stocks. They focus on those companies, which are experiencing significant earnings or revenue growth, rather than companies that pay out dividends. Growth funds tend to look for the fastest-growing companies in the market. Growth managers are willing to take more risk and pay a premium for their stocks in an effort to build a
portfolio of companies with above-average earnings momentum or price appreciation. In general, growth funds are more volatile than other types of funds, rising more than other funds in bull markets and falling more in bear markets. Only aggressive investors, or those with enough time to make up for short-term market losses, should buy these funds. No-Load Mutual Funds Mutual funds can be classified into two types - Load mutual funds and No-Load mutual funds. Load funds are those funds that charge commission at the time of purchase or redemption. They can be further subdivided into (1) Front-end load funds and (2) Back-end load funds. Front-end load funds charge commission at the time of purchase and back-end load funds charge commission at the time of redemption. On the other hand, no-load funds are those funds that can be purchased without commission. No load funds have several advantages over load funds. Firstly, funds with loads, on average, consistently underperform no-load funds when the load is taken into consideration in performance calculations. Secondly, loads understate the real commission charged because they reduce the total amount being invested. Finally, when a load fund is held over a long time period, the effect of the load, if paid up front, is not diminished because if the money paid for the load had invested, as in a no-load fund, it would have been compounding over the whole time period. Exchange Traded Funds Exchange Traded Funds (ETFs) represent a basket of securities that are traded on an exchange. An exchange traded fund is similar to an index fund in that it will primarily invest in the securities of companies that are included in a selected market index. An ETF will invest in either all of the securities or a representative sample of the securities included in the index. The investment objective of an ETF is to achieve the same return as a particular market index. Exchange traded funds rely on an arbitrage mechanism to keep the prices at which they trade roughly in line with the net asset values of their underlying portfolios. Value Funds Value funds are those mutual funds that tend to focus on safety rather than growth, and often choose investments providing dividends as well as capital appreciation. They invest in companies that the market has overlooked, and stocks that have fallen out of favour with mainstream investors, either due to
changing investor preferences, a poor quarterly earnings report, or hard times in a particular industry. Value stocks are often mature companies that have stopped growing and that use their earnings to pay dividends. Thus value funds produce current income (from the dividends) as well as long-term growth (from capital appreciation once the stocks become popular again). They tend to have more conservative and less volatile returns than growth funds.
Money Market Mutual Funds A money market fund is a mutual fund that invests solely in money market instruments. Money market instruments are forms of debt that mature in less than one year and are very liquid. Treasury bills make up the bulk of the money market instruments. Securities in the money market are relatively risk-free. Money market funds are generally the safest and most secure of mutual fund investments. The goal of a money-market fund is to preserve principal while yielding a modest return. Money-market mutual fund is akin to a high-yield bank account but is not entirely risk free. When investing in a money-market fund, attention should be paid to the interest rate that is being offered. International Mutual Funds International mutual funds are those funds that invest in non-domestic securities markets throughout the world. Investing in international markets provides greater portfolio diversification and let you capitalize on some of the world's best opportunities. If investments are chosen carefully, international mutual fund may be profitable when some markets are rising and others are declining. However, fund managers need to keep close watch on foreign currencies and world markets as profitable investments in a rising market can lose money if the foreign currency rises against the dollar.
Regional Mutual Fund Regional mutual fund is a mutual fund that confines itself to investments in securities from a specified geographical area, usually, the fund's local region. A regional mutual fund generally looks to own a diversified portfolio of companies based in and operating out of its specified geographical area. The objective is to take advantage of regional growth potential before the national investment community does. Regional funds select securities that pass geographical criteria. For the investor, the primary benefit of a regional fund is that he/she increases his/her diversification by being exposed to a specific foreign geographical area.
Sector Mutual Funds Sector mutual funds are those mutual funds that restrict their investments to a particular segment or sector of the economy. These funds concentrate on one industry such as infrastructure, heath care, utilities, pharmaceuticals etc. The idea is to allow investors to place bets on specific industries or sectors, which have strong growth potential. These funds tend to be more volatile than funds holding a diversified portfolio of securities in many industries. Such concentrated portfolios can produce tremendous gains or losses, depending on whether the chosen sector is in or out of favour.
Index Funds An index fund is a type of mutual fund that builds its portfolio by buying stock in all the companies of a particular index and thereby reproducing the performance of an entire section of the market. The most popular index of stock index funds is the Standard & Poor's 500. An S&P 500 stock index fund owns 500 stocks-all the companies that are included in the index. Investing in an index fund is a form of passive investing. Passive investing has two big advantages over active investing. First, a passive stock market mutual fund is much cheaper to run than an active fund. Second, a majority of mutual funds fail to beat broad indexes such as the S&P 500.
Fund of Funds A fund of funds is a type of mutual fund that invests in other mutual funds. Just as a mutual fund invests in a number of different securities, a fund of funds holds shares of many different mutual funds. Fund of funds are designed to achieve greater diversification than traditional mutual funds. But on the flipside, expense fees on fund of funds are typically higher than those on regular funds because they include part of the expense fees charged by the underlying funds. Also, since a fund of funds buys many different funds which themselves invest in many different stocks, it is possible for the fund of funds to own the same stock through several different funds and it can be difficult to keep track of the overall holdings.
FACTORS TO BE CONSIDERED WHILE INVESTING IN MUTUAL FUND
• Investment Needs It is essential to decide - why investment is being done.To what purpose investment is being done? This is because depending on specific need, investors can choose a specific investment avenue. For instance if an investor is investing for some future event like
retirement or children's marriage, and there's plenty of time left for both, it makes sense for them to invest in equity-dominated funds. On the other hand, if they want to invest the lump sum they get on retirement for a regular income that sees them through their retired life, then a fixed income dominated fund would be best for an investor. • Risk Profile How much of a daredevil an investor is? Does thinking of even the slightest risk or uncertainty make an investor break out in cold sweat? It is vital that they invest according to their appetite for risk-taking! Thus, if investor is the kind who'd rather be safe than sorry, equity funds would not be suitable for them as volatile equity markets can impact fund returns, so they can imagine what effect they'd have on them. Time Frame How long investor wants his funds to stay tied up? If investor are comfortable waiting for the money to come to them at some future date or would rather have it as fast as possible? Would they prefer it in a lump sum or in smaller, regular amounts? Different funds meet different time-based needs. Generally, equity funds are considered to be performers over a relatively longer period of time. In the short term, they are prone to market fluctuations. Thus, if investors have invested in an equity fund, at the time of withdrawal of their investment, they may not get any returns at all! In such a case, rather than going for an equity fund, they might consider an income fund or a money market scheme instead. Liquidity This is linked to the above point. If the time frame of the investment is short, then it is not really advisable to invest in close-ended schemes. Units of these schemes are generally listed on stock exchanges, and past experience has shown that they quote at a heavy discount to their value. So if investors are in a hurry, a close-end scheme may not be their thing. On the other hand, if they willing to invest for a certain defined period, a close-ended scheme may be perfect. Not just when investors will get your money - but also how well the fund will be able to liquidate its portfolio - that's another thing an investor should look into before choosing mutual fund. Service Levels / Expenses With most top funds offering similar returns, service levels have become a major differentiating factor. Investors have to choose a fund that offers efficient service in terms of prompt delivery of account statements and quick redressal of grievances. Also they have to consider the charges they 'll have to pay and the expense ratios of the funds they propose to invest in. It may sound like a drag, but it's better to be warned beforehand than shocked later! Transparency How much investor know about the fund? For their peace of mind and for the safety of their money, they have to choose a fund that is open about its investments, its investment style, and has a history of clear and direct communication with its investors.