Closed Ended Funds

In close-ended funds, the number of units issued is fixed. After the initial issue/ IPO, the units are traded on the exchange like any other stock. Investors can buy into these funds in the IPO after which such schemes do not issue new units except in case of bonus issue. Unlike open ended funds the buy/sell transactions happen between the investors after the initial issue. Close-ended schemes have fixed maturity periods. The market price of the units varies due to demand and supply factors, investors expectations and other market factors as well as the changing values of the securities in the funds holdings. Share/unit price may not be equal to the NAV since the price also depends on the demand and supply. Sometimes market price of a unit goes below NAV simply because of lack of liquidity. Liquidity in closed ended funds is poor. Hence risk is also more. They are not popular compared to open ended funds. The sponsor of the mutual fund company will raise funds through a process commonly known as underwriting to create a fund with specific investment objectives. The fund retains an investment manager to manage the fund assets in the manner specified.

Open Ended Mutual Funds

In open ended funds the units are sold continuously during the life of a scheme. Similarly the unit holders are free to redeem their units at prevailing NAV at any time. Hence number of units/unit holders fluctuates everyday. Units in the open-ended schemes do not have a fixed maturity period. These schemes have variable capitalization. These funds are not listed on the exchange and investors need to directly approach the company or their agents/dealers for any transaction. An open-ended fund allows an investor to enter the fund at any time, or to invest at regular intervals. The issuing company directly takes the responsibility of providing liquidity to the investors when they want to liquidate their investments. Daily NAV calculation - investors can buy or sell units at NAV-related prices from and to the mutual fund on any business day. As per the recent SEBI guidelines fund houses shouldnt levy any entry load (marketing and advertisement charges) on the purchases. Investors will directly pay to the dealer and the dealer has to disclose the charges. If you skip the dealer and directly go to the fund house/TA there is no need to pay entry load. Sale price could be subject to exit load. Fund can also charge fees on contingent and deferred basis

Classification of Mutual Funds

Mutual funds can be classified below Classification based on structure and management style Open Ended Funds Closed Ended Funds Unit Trusts Classification based on type of investment assets Equity Funds Bond Funds Gilt Funds Money Market Funds Asset Allocation Funds Sector Funds Index Funds Commodity Funds Classification based on investment objective Growth Funds Income Funds Balanced Funds Classification based on dividend payment These are basically options available to the investors rather than a specific category. Dividend Pay out Dividend Reinvest Growth Classification based on Tax benefits ELSS Funds

What is Foreign Exchange or Forex

Foreign exchange is abbreviated as Forex or FX. Its basically currency trading. Foreign exchange can be defined as purchase or sale of one currency against sale or purchase of another currency at an agreed price and date. Exchange rate in a way shows the purchasing power of one currency in another currency. After the globalisation Foreign Exchange has assumed a lot of importance. The foreign exchange (FX) market is a multibillion-dollar market for monetary transactions associated with international trade and finance. In this market, people who need the currency of another country can obtain it in exchange for the currency they have. The foreign exchange market is the largest in terms of the daily transaction volumes and is the most liquid market in the world. Trading in foreign exchange happens in markets

operating worldwide and 24 hours a day. FX market is not a physical market and transactions are done through internet enabled online system or over phone. The profit margins in Foreign Exchange is very less compared to other markets. But since the volume of transactions is heavy profits are generally high. Banks and financial institutes involve in high volume trades and also offer services to retailers who need other currencies for personal purpose. Deutsche Bank is a leader in Forex operations with a good percentage of market share followed by UBS and Barclays Capital. Why Foreign Exchange required? All the countries world over use different currencies. So its required to pay bills in local currencies when goods are purchased. It helps settlement of international trades and investments.

What is systematic risk and how to measure it

Systematic risk is the risk that affects a security or portfolio due to its relationship with the market. Systematic risk is also called market risk, aggregate risk, or undiversifiable risk. Systematic risk cant be reduced through portfolio diversification. Since this risk is associated with overall market sentiment rather than performance of few stocks. Systematic risk results from forces which cant be controlled by a firm. Systematic risk is measured with beta coefficient. It represents the securitys volatility relative to that of an average security. Say for example if beta = 1 means that security is of average risk (or exactly in sync with market). If beta = 2 means that security is of double the risky as that of average risky stock. If beta = 0.8 means, it is a less risky stock compared to average stock.

What is investment risk?

An investment risk is a chance where actual return on the investment is lower than expected. This includes the possibility of losing some part of or all of the original investment By looking at the definition, it is easily understandable that no one really wants any risk. But still people take risk. Why? The only reason is hope for higher returns. People are Hoping higher returns and taking a chance!! We will cover different risk concepts and our understanding of that in the upcoming topics. Diversification is one of the strategy to reduce the risk.

If you deposit money in any nationalized bank return will be around 7 to 8% per annum. If you invest the same money in stock market you may get double of your investment. Which one you prefer? Think of it!