A mutual fund collects money from investors and invests the money on their behalf. It charges a small fee for managing the money. Mutual funds are an ideal investment vehicle for regular investors who do not know much about investing. Investors can choose a mutual fund scheme based on their financial goal and start investing to achieve the goal. 

How to invest in mutual funds? 
You can either invest directly with a mutual fund or hire the services of a mutual fund advisor. If you are investing directly, you will invest in the direct plan of a mutual fund scheme. If you are investing through an advisor or intermediary, you will invest in the regular plan of the scheme. 

If you want to invest directly, you will have to visit the website of the mutual fund or its authorized branches with relevant documents. The advantage of investing in a direct plan is that you save on the commission and the money invested would add sizeable returns over a long period. The biggest drawback of this method is that you will have to complete the formalities, do the research, monitor your investment... all by yourself. 

Types of Mutual Funds in India - 
The Securities and Exchange Board of India has categorised mutual fund in India under four broad categories: 

  • Equity Mutual Funds
  • Debt Mutual Funds
  • Hybrid Mutual Funds
  • Solution-oriented Mutual Funds
  • Equity mutual fund scheme: These schemes invest directly in stocks. These schemes can give superior returns but can be risky in the short-term as their fortunes depend on how the stock market performs. Investors should look for a longer investment horizon of at least five to 10 years to invest in these schemes. There are 10 different types of equity schemes.
  • Debt mutual fund schemes: These schemes invest in debt securities. Investors should opt for debt schemes to achieve their short-term goals that are below five years. These schemes are safer than equity schemes and provide modest returns. There are 16 sub-categories under the debt mutual fund category. 
  • Hybrid mutual fund schemes: These schemes invest in a mix of equity and debt, and an investor must pick a scheme based on his risk appetite. Based on their allocation and investing style, hybrid schemes are categorised into six types. 
  • Solution-oriented schemes: These schemes are devised for particular solutions or goals like retirement and child’s education. These schemes have a mandatory lock-in period of five years. 
  •  

Articles 

 

Article No. 5

Brief Note on Equity & Debt market and few mutual fund products risk & return profile

Prepared on 22/04/2016 (Index 25838). This note is  Prepared  by KVC Financial Services Private  Ltd, here in after referred to as " The Company"

 A.    Preface

 1. This note is prepared for investment in equity mutual fund & debt mutual fund investors. Accordingly reference to the word debt & equity shall mean debt mutual fund or equity mutual fund.            

2. Our opinion is based on our prediction of certain economic events and valuation of market. Accordingly the expected returns may be more or less than what we have stated. 

3. Please remember that there is no guaranty of capital as well as returns, as mutual fund investments are subject to market risk.

4. This note is valid today. It may or may not be valid in some further date.

5.  In any case the company is not liable to investor for the loss, if any, that investor may suffer. Investor is free to act or not to act on advice of the company.

B. Product Returns & Risks

1. Liquid Fund:- At present the liquid fund returns are likely to be in the  range of 7% p.a. to 7.5% p.a. If the RBI further reduces the interest rate then the liquid fund returns  will also reduce proportionately.Generally the modified duration of liquid fund is less then 100 days. There are also liquid plus funds where the modified duration is 200 to 300 days. In liquid plus funds returns are more by 0.5% to 1% than liquid fund.

 2. D-2 Fund:- The returns of the D-2 fund are likely to be 9%p.a. When the RBI reduces interest rate, the returns in D-2 fund will increase further due to mark to market concept. Generally the modified duration of D-2 fund is approximately 2 years.

 3. MIP Fund:- The returns of the MIP fund are likely to be in the range of 12%p.a. to13% p.a. In MIP, approximately 75% to 80% is debt investment &  remaining 20% to 25 % is equity investment. Therefore if the equity market go down then MIP returns  will be lower and may show loss also. Generally the modified duration of  debt investment in MIP is approximately 4 years.

 4. Balance Fund:- The returns of the Balance fund are likely to be 18% p.a. In balance fund 65% to 70% is equity investment & remaining 25% to 35%  is debt investment.

 5. Equity Fund:- As the name suggests, 100% amount is invested in share market. In opinion of the company, these funds are likely to deliver returns of 25% p.a. to 27% p.a. over next 3 to 5 years.

 6. Product Risks:- The risk of loss or less returns, in case of market (Equity or Debt) going down, is in the ascending order as given below.

(1)   Liquid Fund

(2)   D-2 Fund

(3)   MIP Fund

(4)   Balance Fund

(5)   Equity Fund

In brief, liquid fund will not give loss but returns will be slightly less. D-2 returns may be less than liquid fund returns. MIP returns may be less thanD-2 or MIP may given loss also. Loss in balance fund will be more than MIP losses. Loss in equity will be more than loss in balance fund. The extent of loss that the investor may have to suffer will be determined by the extent of fall in market. But it is unpredictable.

 Please  keep it in mind that in mutual fund investment (Equity or Debt) there is no written guarantee of principal and also returns. As per SEBI (Securities and Exchange Board of India ) regulations, no mutual fund can give such guarantee or undertaking. However based on the method of investment and investment papers, in our opinion, we are giving below the risk for various  products.

1 Liquid fund :- This is as safe as bank fix deposit. After 3 years, due to indexation capital gain tax will be nil or negligible. Before 3 years, income will be taxable as per the tax slab of investor.

2 D-2 Fund :- As safe as bank fix deposit. If interest rate goes up then returns may be 6% p.a. to 7% p.a. instead of 9% p.a. Taxation same as liquid fund.

3 MIP Fund:- If share market goes down and interest rate also goes up then in 1 year it may give 10% loss also. Otherwise after 3 year returns may be 8% p.a. to 9% p.a. instead of 12% p.a. to 13% p.a. Taxation same as liquid fund.

4 Balance Fund:- If the share market goes down then this fund may be give loss which will be proportional to the market fall. For example market goes down by 10 %, loss is 7% to 10%. Market goes down by 20% loss is 13 % to 20% extra. After 1 year  no tax, before 1 year 15 % tax on profit.

5 Equity Fund:-  Risk & Returns directly proportional to share market fall or rise. If market goes down by 40 % loss may be 40%.

In any case, on all the open ended mutual fund, you can withdraw amount at any time whether it is at loss or profit. There is no way that the mutual fund is not traceable (absconding) and the principal is 100% lossed.

For liquid fund investment there is no exit load. You can withdraw at any time. For all other investment, for a period of 1 year or more there is a exit load of 1% or more depending  upon the scheme conditions.  

C.  Equity & Debt Market

Equity & debt market returns are cyclical. In opinion of the company, due to various reasons, market is likely to go up in next 3 to 5 years. For the purpose of this document the company do not wish to write  all these reasons. If  the company writes these reasons, the document will become lengthy & loose it's purpose.

Advice of the company  is to stay invested and also invest more money till BSE index crosses 27000.

This doesn't mean that market will go up tomorrow. The company is also not saying that market will not  go down form this level. The historical data shows that even in bull market, market will keep coming down by 10% to 20% form its recent top.

One must be prepared to face these ups & downs in the market.

When a person sees his present investment in loss after one year or two years also, he is reluctant to invest more money. When the investment is showing the profit of 20% p.a.  to 25% p.a. after 1 or 2 years, a person is vary happy to invest more money. This is human psychology.

Human psychology doesn't work in investment. It is opposite in the investment. If you are in loss, invest more money. If you are in profit, don't invest more money, it may be a proper time to book profit. However advice to either invest more money or book profit will be given to the investor depending  upon our assessment of the situation at that time in future.        

The company believes, those  who are comfortable with these ups & downs will make decent  profit  both in equity (Share) market & Debt (Bond) market.

When the index PE starts going above 22 to 23 then the company will advice to start booking partial profit & maintain liquidity. Do not immediately enter equity market after booking profit.

For Debt market, when the interest rate cycle reverses, the company  will advice you to start booking profit.

D.  Conclusion

Happy investing. Risk & rewards fully yours.

 

 


 

 

   Article - 4

  Invest Now?

Written on  26.01.2016                                                                                                           

BSE Index - 24486

The consensus opinion today says that stock market (BSE Sensex) may go down to 22,000. It is heard from some corners that market may even go down to 17,000. The same people were saying in March 2015(when index was 30000) that in Diwali (November 2015) market will go to 33,000.Now however the majority of  investors are saying wait for investment into equity market. Few of them even go to the extent and  say that " Sell equity at this level".

Now  in this situation what the investor should do ? Invest, wait or sell ? To answer the question this article is written. It is divided into three parts A, B & C as follows.

A) The main principles of investment & features of investment process.

 

1. Investment in equity market essentially involves predicting the future. Predicting the future is very very difficult and only people with insight can do that consistently. There are very few people in this world who can predict equity market correctly and consistently. Majority considers that extrapolating the past means predicting the future. Actually it is not.

2. Therefore in equity market investment there is no certainty but only probability. You may decide to invest at any index level but the probability of loss still remains. The question is whether the probability of loss is relatively more or less.

3. If you invest at very high valuation then the margin of error which means decision going wrong leading to loss is not in your favor and vise a versa.

4. Further the investor commits two types of mistakes. Mistake  of omission that is not buying when valuation is low and mistake of commission that is buying when valuation is high. When a investor follows consensus opinion, it invariably leads to both mistakes.

5. Any investment decision is dominated by two broad methods, psychological or fundamental. That is subjective or objective decision making . The question is which one would you choose for yourself ? Following the consensus or crowd at this juncture is obvious and easy. I would say doing this, ignoring fundamentals is psychological or subjective decision making . However following facts and figures , fundamental decision making, requires lot of adventure and bravery. Because you are alone and may feel left out.

6. One must understand that, in equity market you get average or market return by following the consensus opinion but you get superior(above average) returns by taking a stand. That is to say by following fundamentals and ignoring psychology.

7. Market has a tendency in the short term to become overvalued or undervalued due to sentiments. However in the long term rationality will prevail.

8. Very important to see your risk appetite & liquidity requirement in equity investment. If you don't have both. Strictly don't go for equity investment.

 

B) Psychologically most of us ( including me)  have already decided not to  invest now. Now let us look at certain fundamental facts and figures, given below, and see whether we take different decision.

1. Equity market are cyclical. Generally these are long cycles and cycle    continues for 3 years,5 years or even 10 years. What is our call on the  direction of the cycle. Whether the cycle is likely to go up or down from the present level. If we look at the data, which will do in few next paragraphs, then in my view we are currently at the beginning of a long cycle which is likely to go up only. 

2.In any cycle (up or down) , for unknown reason, the market will go down by 10 % to 20 %  from its recent top. Similarly the market will go up by 10 % to 20 % from its recent low. The historical data gives ample evidence of the same. In my opinion the present 20% market fall is due to this factor. And therefore no need for panic. 

3.Big  falls generally happens for the following reasons.
 

  • a) High valuation - PE ratio more then 25.
  • b) Poor macro conditions .
  • c) Extreme  natural or man made events.
  • d) Global economic conditions.

 

We have to decide whether one of the above has occurred at present. In my view it is not.

4. Majority is talking about China. In my view how many of us really have a strength to understand any economy whether it is strong or weak ?         Majority has a strong belief that China is in trouble and will collapse. Let    us look at different views as follows.

  • a) China is a strong economy, merely the growth has slowed down in short term. China as well as few other economies may have to face  bad period due to this in short term. However one doesn't no what does short term means. How much time it will take to reveres these economic conditions of China. But in long term the impact on India will not be felt. Whether the  worst for the market, due to china impact, is already over? 
  •  b) In fact India is net importer with China. Devaluation of Chinese currency will only benefit us. 
  •  c) India has various strengths, so bad impact on India will not be there sooner or than later.

 5. Now let us look at some fundamental facts & figures.

  •  a) Recently IMF has maintained India's GDP growth for F. Y 16-17 and 17-18 at 7.5 % whereas it has reduced global economic growth rate to 3.4 % and  3.6 % in the year 2016 and 2017.
  •  b) GDP to market cap ratio is in the range of 62 % . The same was 147 % in the year 2007 and was  near 100 % in March 2015 when BSE Index was 30000. 
  •  c) PE ratio of sensex is near 15 now which was 29 in January 2008.This suggests that market is at fare valuation or slightly undervalued. 
  •  d) Interest rates are reducing. Inflation is also reducing. 
  •  e) Fiscal Deficit is 3.9% of GDP which is in acceptable limits. 
  •  f) Current account Deficit as on December 2015 is approximately 1.5 % of the GDP. The same was approximately 4 % to 5 % in 2011-12.
  • g) Forex Reserves are near 350 billion US dollar.
  • h) Central Government in huge majority so reforms will happen. Government is not taking any short cuts, government is focusing on long term growth.
  • i) Commodity price down - India is the biggest beneficiary of this. We are net importers of commodity. Emerging markets are commodity exporters and therefore are in deep pain.

 

All these fundamental  facts & figures suggest that it is good time to invest now..

 

C) After reading A & B , What is your decision? Invest, Wait or Sell?

 

1.  Market is down by 20 % from its recent top therefore in my opinion it is good time to invest now . It  doesn't mean that it will go up tomorrow. Based on the  fundamentals given above can market further go down substantially ? If at all it does how long it will stay there ? What is the reason that the fundamental will change and become negative.

2. You all know that no one can buy at bottom and sell at top. If at all market goes down from this level, take a brave decision and invest further. Also do not repent for your earlier investment at higher index level. Simply because if you are repenting then you will not be investing.

3. In my opinion, the worst is over or likely to over soon .The data suggests that market is more likely to go up than not . The valuations are already down by 20 % from its recent peak. So the chances that mistake of commission will take place are much less at present.

4.  You were willing to invest when the market was 25000 in June 2014. Why afraid to invest in January 2016 when market is again at 25000. From that period(June2014) inflation has gone down, interest rate have gone down, CAD(current account deficit) is also gone down, sensex EPS has gone up. Are these not positive factors for investment?   

5. In order to achieve superior investment returns , investor has to keep aside consensus opinion and take individual call . What is your call ? Risk and reward fully yours.

 BSE Sensex) may go down to 22,000. It is heard from some corners that market may even go down to 17,000. The same people were saying in March 2015(when index was 30000) that in Diwali (November 2015) market will go to 33,000.Now however the majority of  investors are saying wait for investment into equity market. Few of them even go to the extent and  say that " Sell equity at this level".

Now  in this situation what the investor should do ? Invest, wait or sell ? To answer the question this article is written. It is divided into three parts A, B & C as follows.

A) The main principles of investment & features of investment process.

  1. Investment in equity market essentially involves predicting the future. Predicting the future is very very difficult and only people with insight can do that consistently. There are very few people in this world who can predict equity market correctly and consistently. Majority considers that extrapolating the past means predicting the future . Actually it is not.
  1. Therefore in equity market investment there is no certainty but only probability. You may decide to invest at any index level but the probability of loss still remains. The question is whether the probability of loss is relatively more or less.
  1. If you invest at very high valuation then the margin of error which means decision going wrong leading to loss is not in your favor and vise a versa.
  1. Further the investor commits two types of mistakes. Mistake  of omission that is not buying when valuation is low and mistake of commission that is buying when valuation is high. When a investor follows consensus opinion, it invariably leads to both mistakes.   
  1. Any investment decision is dominated by two broad methods, psychological or fundamental. That is subjective or objective decision making . The question is which one would you choose for yourself ? Following the consensus or crowd at this juncture is obvious and easy. I would say doing this, ignoring fundamentals is psychological or subjective decision making . However following facts and figures , fundamental decision making, requires lot of adventure and bravery. Because you are alone and may feel left out.
  1. One must understand that, in equity market you get average or market return by following the consensus opinion but you get superior(above average) returns by taking a stand. That is to say by following fundamentals and ignoring psychology .
  1. Market has a tendency in the short term to become overvalued or undervalued due to sentiments. However in the long term rationality will prevail .
  1. Very important to see your risk appetite & liquidity requirement in equity investment. If you don't have both. Strictly don't go for equity investment .   

B) Psychologically most of us ( including me)  have already decided not to invest now. Now let us look at certain fundamental facts and figures, given below, and see whether we take different decision .

  1. 1. Equity market are cyclical. Generally these are long cycles and cycle continues for 3 years,5 years or even 10 years. What is our call on the direction of the cycle. Whether the cycle is likely to go up or down from the present level. If we look at the data, which will do in few next paragraphs , then in my view we are currently at the beginning of a long cycle which is likely to go up only.
  2.  
  3. 2. In any cycle (up or down) , for unknown reason, the market will go down  by 10 % to 20 %  from its recent top. Similarly the market will go up by 10 % to 20 % from its recent low. The historical data gives ample evidence of the same. In my opinion the present 20% market fall is due to this factor. And therefore no need for panic.

3. Big  falls generally happens for the following reasons.

a) High valuation - PE ratio more then 25.

b) Poor macro conditions .

c) Extreme  natural or man made events.

d) Global economic conditions.

We have to decide whether one of the above has occurred at present. In my view it is not.

4. Majority is talking about China. In my view how many of us really have a strength to understand any economy whether it is strong or weak ? Majority has a strong belief that China is in trouble and will collapse. Let us look at different views as follows.                                    

a)  China is a strong economy, merely the growth has slowed down in short term. China as well as few other economies may have to face  bad period due to this in short term. However one doesn't no what does short term means. How much time it will take to reveres these economic conditions of China. But in long term the impact on India will not be felt. Whether the worst for the market, due to china impact,  is already over?

b)  In fact India is net importer with China .Devaluation of Chinese currency will only benefit us. 

c)  India has various strengths, so bad impact on India will not be there sooner or than   later. 

5.  Now let us look at some fundamental facts & figures.

a)    Recently IMF has maintained India's GDP growth for F. Y 16-17 and 17-18 at 7.5 % whereas it has reduced global economic growth rate to 3.4 % and  3.6 % in the year 2016 and 2017.

b)    GDP to market cap ratio is in the range of 62 % . The same was 147 % in the year 2007 and was  near 100 % in March 2015 when BSE Index was 30000.

c)     PE ratio of sensex is near 15 now which was 29 in January 2008.This suggests that market is at fare valuation or slightly undervalued.

d)    Interest rates are reducing .Inflation is also reducing.

e)    Fiscal Deficit is 3.9% of GDP which is in acceptable limits.

f)     Current account Deficit as on December 2015 is approximately 1.5 % of the GDP. The same was approximately 4 % to 5 % in 2011-12. 

g)    Forex Reserves are near 350 billion US dollar.

h)    Central Government in huge majority so reforms will happen. Government  is not taking any short cuts , government is focusing on long term growth.

i)      Commodity price down - India is the biggest beneficiary of this. We are net importers of commodity. Emerging markets are commodity exporters and therefore are in deep pain.

 

All these fundamental  facts & figures suggest that it is good time to invest now..

C)  After reading A & B , What is your decision? Invest, Wait or Sell?

1.  Market is down by 20 % from its recent top therefore in my opinion it is good time to invest now . It  doesn't mean that it will go up tomorrow. Based on the  fundamentals given above can market further go down substantially ? If at all it does how long it will stay there ? What is the reason that the fundamental will change and become negative.

2.  You all know that no one can buy at bottom and sell at top. If at all market goes down  from this level, take a brave decision and invest further. Also do not repent for your  earlier investment at higher index level. Simply because if you are repenting then you  will not be investing.

3.  In my opinion, the worst is over or likely to over soon .The data suggests that market is more likely to go up than not . The valuations are already down by 20 % from its recent peak. So the chances that mistake of commission will take place are much less at present.

 4.  You were willing to invest when the market was 25000 in June 2014. Why afraid to invest in January 2016 when market is again at 25000.From that period(June2014) inflation has gone down, interest rate have gone down , CAD(current account deficit) is also gone down, sensex EPS has gone up. Are these not positive factors for investment?

5. In order to achieve superior investment returns , investor has to keep aside consensus opinion and take individual call . What is your call ? Risk and reward fully yours.

 


 

Article - 3

      Financial Goal-Our view and approach (Prepared  on 05/06/2015)

 

  1. Every investor must have financial goal. Investing your money on impulses, heard mentality, greed will always give you losses or less than desired returns.
  1. Taking investment decision based on capturing the market movement may sometime give you profit. However in majority of the cases it will give losses only .
  1. Financial goal is a very relative goal and it varies from person to person. We decide a financial goal of a person after considering the following factor:
  • Age
  • Family requirements
  • Liquidity requirements
  • Existing Investments made by the person
  • (If the person discloses same to us)
  • Risk profile of the person
  • Returns requirements of the person

We conduct periodic meetings with the investors for deciding the financial goal .

  1. Financial goal is never static .It changes with the changes in family dynamic and therefore periodically financial goal need to be changed.
  1. We monitor financial goal regularly and if required change the asset allocation.
  2.  
  3. Asset allocation is very important. It means deciding how much money to be invested in low risk instruments ( Broadly bond or Debt investments) and how much money to be invested in high risk instruments ( Shares or Equity related Investments).
  4.  
  5. We recommend the asset allocation and the changes in asset allocation based on the following factors :
  • We follow certain lead indicator and based on that we try to form our opinion about changes in broad market cycles.

 We believe that equity ( share market) as well as debt ( Bond  market ) both run in cycles and these cycles are broad cycles .

  • When  the financial goal is achieved .
  • When the market becomes very high and not supported by fundamental lead indicator .
  1. Financial goal is broadly required for two reasons as follows:
  • When we want to create corpus for spending or for acquiring some asset.
  • When you don't need financial goal for the above stated purpose, still you need financial goal for growing your investment at a decent rate for the following purpose:

a)     To earn 3 to 4 % more post tax returns than post tax return on bank fix deposit.

b)     To beat the inflation.

c)     To earn the return which you feel are necessary  & sufficient for you while taking the required risk . 

  1. Financial goal could be for short term and for long term.

 


 

Article - 2

 

Note on Liquid Fund 

 

1) Purpose : This  note  is  prepared  on 16/10/2014  for  the  people  who  are  first  time  Investors  in liquid  mutual fund.

2) Investment : Liquid  Funds  make  the  Investment  in  Treasury  bills , Certificate  of  Deposits   , Commercial  papers  and  other  money  market  Instruments . The  Investment  is  made  for  short  duration  and  generally  the  duration   is  less  than  90  to  100  days.

3) Types of Liquid fund : There  are  broadly  two  types  of  liquid  funds. First category  is  called  liquid  fund  whereas  the  second  category  is  called  Ultra  short  term  fund. The  Investment  duration  or modified  duration (MOD) as  it  is  generally  called ,  is  more  in  ultra  short  term  fund  than  in  liquid  fund.

4) Returns : The  returns  of  liquid  funds  are  higher  by  1% or  2%  than  the  Repo rate . Therefore  when  in  the  RBI policy  Repo  rates  are  increasing  , the  liquid  fund  returns  are  also  increasing  whereas  when  in  the  RBI  policy  Repo  rates  are  reducing ,  the  liquid  fund  returns  also  starts reducing . At  present , the  liquid  fund  returns  are  in  the  range  of  9% p.a.

5) Entry / Exit  load : Liquid  funds  do  not  have  any  Entry or Exit  load.

6) Period  of holding  : There  is  no  period  of  holding  for  liquid  fund . You  can  Invest  in  liquid  fund   even  for  one  day . There  is  no  upper limit  for  number  of  days  for  which you  can  stay  Invested in  liquid  fund .

 7) Risk : Technically  liquid  fund  has  got  two  types  of  risk. One  credit  risk  and  two  Interest  rate  risk. However  in  practice  both  are  either  not  there  or  if  at  all  they  are  there , the  scale is absolutely  minimum .

As  the  duration  is  less  than  90  or  100 days , the  Interest  rate  risk  is  absolutely minimum .

As  the  Investment  is  made  in  AA  or  AAA  rated  instruments generally , the  credit  risk  is  also   practically  not  there .

In  fact  there  is  no  evidence  that  liquid  fund  investments  have  given  loss  if  stayed  invested  for  more  than  one  month . For  a  period  shorter  than  one  month , due  to  interest  rate  changes ,  the  return  can  be  slightly  less  or  in  very  exceptional  situation  can  be  negative  also  by  approximately   0.50% in  absolute  terms .

8) Taxation : Being  a  debt  mutual  fund ,the  holding  period  for  Long  term capital  gain  is  three  years. Therefore  if  the  money  is  withdrawn  before  three  years  the  taxation  is  as  per  the  normal  slab  rate  of  the  Investor . However  after  three  years,  the  Investor  has  to  pay  20%  capital  gain  tax  after  doing  Indexation . In  this  method  Long  term  capital gain  practically   becomes  Zero .

9) General : All  the  AMC'S ( Asset  Management  companies ) i.e.  Mutual  fund  companies  have   liquid  funds.  One  has  to  select  the  AMC's  based  on  the  AUM ( Asset  under  management  ) , quality  of  the  management  , proven  track  record  , ease  of  operations  and  servicing .

10) Use  of  Liquid  fund : Instead  of  keeping  the  short  term  money  in  current account  or  saving  account  it  is  better  to  park  them  in  liquid  fund  for earning  slightly  higher  and  safer  returns .

Practical  experience  shows  that  Rs.one  crore  invested  in  liquid  fund  earns pre  tax returns of  Rs. 75000/-  per  month  whereas  in  saving  account  the  earning  is  Rs.35000/-  per  month  and  in  current  account  the  earning  is  zero.

 


 

Article - 1

 

 

Note on debt mutual fund  (Prepared  on 27/11/2013)

   

A] Categories

Broad categories of the Debt Mutual Funds are as follows.

1] Liquid fund

2] Debt fund

3] MIP fund

4] Income fund

5] Gilt fund

B] Investment

 

Generally the investments of the debt fund are made in the following debt instrument.

 

1] Treasury bill

2] Cash management bill

3] Commercial paper

4] Certificate of deposit (CD)

5] Non convertible debenture / bonds (Corporate bonds)

6] Government securities

7] Zero Copan bonds

8] Bill discounting

9] Floating rate notes

10] PTC

11] BRDS

12] CBLO (Collateralized borrowing and lending obligation)

13] Term deposit

14] Reserve repo

15] PSU/PFI Bonds (Public sector undertakings/Public Financial institution)

 

C] Duration

The duration of the instrument stated at para B are different & range from 7 days for treasury bill to 10 years for government securities.

The duration of Mutual fund categories in para A is also different. In liquid fund, sr. no. 1 the duration is lowest, it goes on increasing from sr. no. 2,3,4 & it is highest for sr. no. 5.

D] Returns

The returns of debt mutual funds are depends on 3 main factors :

1] Rate declared by RBI that is repo rate, MFS rate etc.

2] The instrument in which investment is made by the debt nutual fund & also the duration of the instrument.

3] Changes in interest rate is mark to market concept.

E] Mark to Market Concept

Even in debt mutual fund the returns keep changeing on daily basis, based on demand & supply. Further the returns keep changing due to change in interest rate as per RBI policy. The effect of change in interest rate on the debt mutual fund returns is given below.

1] Interest rate goes down - if interest rate goes down then the debt mutual earn profit & the simple formula is as follows.

[ Change Interest Rate x Modified Duration ]

2] Interest rate goes up - if interest rate goes up then the debt mutual fund makes a loss & the simple formula is as follows.

[ Change Interest Rate x Modified Duration ]

F] Risk in debt mutual fund

It must be understood & remembered that there will be variation in the return of debt mutual fund & verry important, debt mutual fund can give loss also.

 


 

 

What are Mutual Funds ?

The Definition

A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.

You can make money from a mutual fund in three ways:

1) Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution.

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.

Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.


Advantages of Mutual Funds

• Professional Management - The primary advantage of funds is the professional management of your money. Investors purchase funds because they do not have the time or the expertise to manage their own portfolios. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments.

• Diversification - By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out. 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. In other words, the more stocks and bonds you own, the less any one of them can hurt you (read about Enron scandal). Large mutual funds typically own hundreds of different stocks in many different industries. It wouldn't be possible for an investor to build this kind of a portfolio with a small amount of money.

• Economies of Scale - Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what an individual would pay for securities transactions.

• Liquidity - Just like an individual stock, a mutual fund allows you to request that your shares be converted into cash at any time. • Simplicity - Buying a mutual fund is easy! Pretty well any bank has its own line of mutual funds, and the minimum investment is small. Most companies also have automatic purchase plans whereby as little as $100 can be invested on a monthly basis.