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 Mutual funds can be either or both of open ended and closed ended investment companies depending on their fund management pattern. An open-end fund offers to sell its shares (units) continuously to investors either in retail or in bulk without a limit on the number as opposed to a closed-end fund. Closed end funds have limited number of shares. Mutual funds have diversified investments spread in calculated proportions amongst securities of various economic sectors. Mutual funds get their earnings in two ways. First is the most organic way, which is the dividend they get on the securities they hold. Second is by the redemption of their shares by investors will be at a discount to the current NAVs (net asset values)
ADVANTAGES OF MUTUAL FUNDS The advantages of investing in a Mutual Fund are: · Professional Management · Diversification · Convenient Administration · Return Potential · Low Costs · Liquidity · Transparency · Flexibility · Choice of schemes · Tax benefits · Well regulated
DISADVANTAGES OF MUTUAL FUND Fund management fees may be unreasonable for the services rendered. The investor must rely on the integrity of the professional fund manager. In some cases the fund manager may not pass on transaction savings to the investor. The fund managers are not liable for fund losses due to poor judgment on their part. The fund managers may make so many transactions in the fund that high fee/cost result and are passed on to the investor. Prospectuses and Annual reports are hard to understand. Restrictions on when and how an investor sells/redeems his mutual fund shares. The investor may feel a loss of control of his investment.
FREQUENTLY USED TERMS Net Asset Value (NAV) Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. Sale Price Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load. Repurchase Price Is the price at which units under open-ended schemes are repurchased by the Mutual Fund. Such prices are NAV related. Redemption Price Is the price at which close-ended schemes redeem their units on maturity. Such prices are NAV related. Sales Load Is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’ load. Schemes that do not charge a load are called ‘No Load’ schemes. Repurchase or ‘Back-end’Load Is a charge collected by a scheme when it buys back the units from the unitholders.
doc_570150897.doc
Mutual Fund Operation Flow Chart Mutual funds can be either or both of open ended and closed ended investment companies depending on their fund management pattern. An open-end fund offers to sell its shares (units) continuously to investors either in retail or in bulk without a limit on the number as opposed to a closed-end fund. Closed end funds have limited number of shares. Mutual funds have diversified investments spread in calculated proportions amongst securities of various economic sectors. Mutual funds get their earnings in two ways. First is the most organic way, which is the dividend they get on the securities they hold. Second is by the redemption of their shares by investors will be at a discount to the current NAVs (net asset values)
ADVANTAGES OF MUTUAL FUNDS The advantages of investing in a Mutual Fund are: · Professional Management · Diversification · Convenient Administration · Return Potential · Low Costs · Liquidity · Transparency · Flexibility · Choice of schemes · Tax benefits · Well regulated
DISADVANTAGES OF MUTUAL FUND Fund management fees may be unreasonable for the services rendered. The investor must rely on the integrity of the professional fund manager. In some cases the fund manager may not pass on transaction savings to the investor. The fund managers are not liable for fund losses due to poor judgment on their part. The fund managers may make so many transactions in the fund that high fee/cost result and are passed on to the investor. Prospectuses and Annual reports are hard to understand. Restrictions on when and how an investor sells/redeems his mutual fund shares. The investor may feel a loss of control of his investment.
FREQUENTLY USED TERMS Net Asset Value (NAV) Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. Sale Price Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load. Repurchase Price Is the price at which units under open-ended schemes are repurchased by the Mutual Fund. Such prices are NAV related. Redemption Price Is the price at which close-ended schemes redeem their units on maturity. Such prices are NAV related. Sales Load Is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’ load. Schemes that do not charge a load are called ‘No Load’ schemes. Repurchase or ‘Back-end’Load Is a charge collected by a scheme when it buys back the units from the unitholders.
doc_570150897.doc