Mutual Fund Prot and Div

7/29/2019 Mutual Fund Prot and Div

1/13

MUTUAL FUND

DIVERSIFICATION & PORTFOLIO MANAGEMENT

ABSTRACT:- Diversification & Financial innovations have become the central driving

force taking any financial system towards economic efficiency. Indian Capital market has shown

a spurt growth for diversification becoming a regular feature leading to change in investor's

preferences for newly fangled financial innovations. Mutual fund has become an obvious choice

for most of the investors because of its performance in terms of providing higher returns at low

risk.

Although past performance of fund is an important parameter in selecting a

particular Asset Management Company (AMC) for investment yet some other parameters that

should be considered involves knowledge and diligence of fund managers in deciding asset mix

for funds as it results in significant difference in financial performance of fund as compared to

other funds. This paper employs as a risk measure that measures the variability of fund in terms

of return provided and if fund manager was able to provide return over and above risk free return

and Expected return. Results of the study show that funds under study vary to some extent in

terms of risk level assumed and returns generated from investment. Diversifying in investment

style adopted by various funds managers in designing portfolio with updated market knowledge

certainly yield them superior returns in comparison to other funds.

INTRODUCTION: -Mutual fund is a trust that pools the savings of a number of investors

who share a common financial goal. This pool of money is invested in accordance with a stated

objective. The joint ownership of the fund is thus Mutual, i.e. the fund belongs to all investors.

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 capitalappreciations realized are shared by its unit holders in proportion 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.

A Mutual Fund is an investment tool that allows small investors access to a well-diversified

1


2/13

Portfolio of equities, bonds and other securities.

When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets

of the fund in the same proportion as his contribution amount put up with the corpus (the total

amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit

holder.

Any change in the value of the investments made into capital market instruments (such as shares,

debentures etc.) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the

market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is

calculated by dividing the market value of scheme's assets by the Total number of units issued to

the investors.

HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY:-

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at

the initiative of the Government of India and Reserve Bank. 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 improvement, both Qualities

wise as well as quantity wise. Before, the monopoly of the market had seen an Ending phase; the

Assets under Management (AUM) was Rs67 billion. The private Sector entry to the fund family

raised the AUM to Rs. 470 billion in March 1993 and till April 2004; it reached the height if Rs.1540 billion.Assets under management by Indian mutual fund houses breached the Rs 6 lakh

crore mark in March 2012 on the downside, plunging to Rs 5,87,217 crore.

The Mutual Fund Industry is obviously growing at a tremendous space with the mutual fund

industry can be broadly put into four phases according to the development of the sector. Each

phase is briefly described as under.

Q. Why Should I Invest In Mutual Funds?

2


3/13

ADVANTAGES OF MUTUAL FUND

1. Portfolio Diversification.

2. Professional management.

3. Reduction / Diversification of Risk.

4. Liquidity.

5. Flexibility & Convenience.

6. Reduction in Transaction cost.

7. Safety of regulated environment.

8. Choice of schemes.

9. Transparency.

DISADVANTAGE OF MUTUAL FUND

1. No control over Cost in the Hands of an Investor.

2. No tailor-made Portfolios.

3. Managing a Portfolio Funds.

4. Difficulty in selecting a Suitable Fund Scheme.

INVESTMENT STRATEGIES

1. Systematic Investment Plan: under this a fixed sum is invested each month on

a fixed date of a month. Payment is made through postdated cheques or direct

debit

Facilities. The investor gets fewer units when the NAV is high and more units

when the NAV is low. This is called as the benefit of Rupee Cost Averaging

(RCA)

2. Systematic Transfer Plan: under this an investor invest in debt oriented fund

and give instructions to transfer a fixed sum, at a fixed interval, to an equity

scheme of the same mutual fund.

3. Systematic Withdrawal Plan: if someone wishes to withdraw from a mutual

fund then he can withdraw a fixed amount each month.

3


4/13

TYPES OF MUTUAL FUND

Mutual funds can be classified as follow:-

By Constitution or Structure :-

1. Open-ended funds:-Investors can buy and sell the units from the fund, at any point of

time.

2. Close-ended funds:-These funds raise money from investors only once. Therefore, after

the offer period, fresh investments can not be made into the fund. If the fund is listed on a

stocks exchange the units can be traded like stocks (E.g., Morgan Stanley Growth Fund).

Recently, most of the New Fund Offers of close-ended funds provided liquidity window on a

periodic basis such as monthly or weekly. Redemption of units can be made during specified

intervals. Therefore, such funds have relatively low liquidity.

3. Interval Schemes: - These combine the features of open-ended and close- ended

schemes. They may be traded on the stock exchange or may be open for sale or redemption

during pre-determined intervals at NAV related prices.\\

4


5/13

By Investment Objective :-

1. Equity funds: These funds invest in equities and equity related instruments. With

fluctuating share prices, such funds show volatile performance, even losses. However, short term

fluctuations in the market, generally smoothens out in the long term, thereby offering higher

returns at relatively lower volatility. At the same time, such funds can yield great capital

appreciation as, historically, equities have outperformed all asset classes in the long term. Hence,

investment in equity funds should be considered for a period of at least 3-5 years. It can be

further classified as:

i) Index funds- In this case a key stock market index, like BSE Sensex or Nifty is

tracked. Their portfolio mirrors the benchmark index both in terms of composition and

individual stock weightages.

ii) Equity diversified funds- 100% of the capital is invested in equities spreading

Across different sectors and stocks.

iii|) Dividend yield funds- It is similar to the equity diversified funds except that

they invest in companies offering high dividend yields.

iv) Thematic funds- Invest 100% of the assets in sectors which are related through

Some theme.

e.g. -An infrastructure fund invests in power, construction, cements sectors

etc.

v) Sector funds- Invest 100% of the capital in a specific sector. e.g. - A banking

sector fund will invest in banking stocks.

vi) ELSS- Equity Linked Saving Scheme provides tax benefit to the investors.

Balanced fund:-Their investment portfolio includes both debt and equity. As a result,

on the risk-return ladder, they fall between equity and debt funds. Balanced funds are the

5


6/13

ideal mutual funds vehicle for investors who prefer spreading their risk across various

instruments.

Following are balanced funds classes:-

i) Debt-oriented funds -Investment below 65% in equities.

ii) Equity-oriented funds -Invest at least 65% in equities, remaining in debt.

2. Debt fund:- They invest only in debt instruments, and are a good option for investors

averse to idea of taking risk associated with equities. Therefore, they invest exclusively in fixed-

income instruments like bonds, debentures, Government of India securities; and money market

instruments such as certificates of deposit (CD), commercial paper (CP) and call money. Put

your money into any of these debt funds depending on your investment horizon and needs.

i) Liquid funds- These funds invest 100% in money market instruments, a large

Portion being invested in call money market.

ii) Gilt funds ST- They invest 100% of their portfolio in government securities of and T-

bills.

iii) Floating rate funds - Invest in short-term debt papers. Floaters invest in debt

instruments which have variable coupon rate.

iv)Arbitrage fund- They generate income through arbitrage opportunities due to mispricing

between cash market and derivatives market. Funds are allocated to equities, derivatives and

money markets. Higher proportion (around 75%) is put in money markets, in the absence of

arbitrage opportunities.

v) Gilt funds LT- They invest 100% of their portfolio in long-term government

securities.

vi) Income funds LT- Typically, such funds invest a major portion of the portfolio in long-

term debt papers.

6


7/13

vii) MIPs- Monthly Income Plans have an exposure of 70%-90% to debt and an exposure of

10%-30% to equities.

viii) FMPs- fixed monthly plans invest in debt papers whose maturity is in line with that of the

fund.

ANALYSIS

Q. How to choose the right Mutual Fund?

Choosing the right mutual fund scheme out of thousands of schemes available can be daunting.

But it is much easier than it looks. Let us tell you how through the following steps:

Step 1: Identify your investment objective

Different people have different needs. Therefore your choice of mutual fund scheme will vary

based on your investment objective, age, lifestyle, risk profile, investment horizon, and family

commitments among many other factors. You should ask yourself:

1. Why do I want to invest?

I need regular income.

I need sufficient funds for my daughters wedding.

I want to buy a house.

I need to raise fund for my childrens education.

I need extra cash .

2. How much risk can I absorb?

Based on your risk taking capacity you can be categorized as:

Very conservative: Liquid and money market funds are best for you

Conservative: Money market and debt funds are best for you

7


8/13

Moderate: Balanced funds or a mixture of equity and debt funds is the right solution

Aggressive: Predominantly equity funds will suit you

Very aggressive: Equity diversified, international equity and sectoral funds are best for

you

3. What is my investment horizon?

I want to invest my idle funds for two months: Money market funds is the right solution.

I need cash to pay off my load in one year: Debt funds will be more suitable for you.

I want to invest for my childs education in eight years: Equity Funds will be the right

solution.

Once you have done a self-analysis you need to select a scheme category that matches your

investment objectives:

For Capital Appreciationgo for equity sectoral funds, equity diversified funds or

balanced funds.

For Regular Income and Stabilityyou should opt for income funds/MIPs.

For Short-Term Parking of Fundsgo for liquid funds, floating rate funds, short-

term funds.

For Growth and Tax Savings go for Equity-Linked Savings Schemes.

Step 2: Do your performance !!!

Fund Performance

Investors often feel that a simple way to invest in a mutual fund is to keep investing in the best

performing funds. But they often forget that todays best performing scheme may not give you a

consistent performance. It may be by sheer luck that the scheme is currently rated well in

8


9/13

performance. Therefore it is important that you choose the Mutual Fund Company, scheme and

fund manager with a solid track record of investing in both buoyant and sluggish markets.

When evaluating a scheme consider its long-term track record rather than short-term

performance. It is important because long-term track record moderates the effects which

unusually good or bad short-term performance can have on a fund's track record. Besides,

longer-term track record compensates for the effects of a fund manager's particular investment

style.

The objective is to differentiate investment skill of the fund manager from luck and to identify

those funds with the greatest potential of future success.

But remember not to compare apples to oranges:

When measuring past performance, always compare similar funds. This means asset class, fund

objective and financial market. A fund that invests in services sector for instance, should not be

compared to a diversified equity fund.

Fund Manager

Look for a manager who has a track record of outperforming the competition. Levels of

excellence vary. Some portfolio managers are better than others. Another factor considered

important is consistent portfolio management style. This quality is the discipline by the fund's

managers to establish specific investment criteria and stick with them rather than trying out

whatever is in vogue. A checklist for choosing a fund manager:

The fund's performance track record.

Independent ratings of the fund.

The fund managers strategy.

Discipline.

Awards and industry recognition that have been bestowed on the fund.

9


10/13

Other factors to consider

When choosing the right mutual fund scheme also consider the schemes:

Stock allocation:A good diversified fund should have less than 40% of net assetsspread evenly across the top 10 stocks in its portfolio and no exceptional concentration in

any of these. This helps the fund navigate safely during volatile periods. Stock picks

must be consistent with no frequent churning of stocks by the fund manager over the past

few months.

sectoral allocation:Your chosen fund must be well diversified across sectors apart

from stocks. Sectorial concentration can be harmful unless the fund has a top-down

investment approach. You must combine similar sectors, such as auto and ancillaries,

when considering sectorial allocation. Different funds may categorize same companies

across different sectors due to lack of standardization. Look for this anomaly when

analyzing sectors.

Asset allocation: Dont overlook asset allocation. This tells you about the spread of

assets across stocks, current assets, and cash. Cash reserves of an equity fund can tell a

lot. A high cash level may indicate a fund managers discomfort in staying fully invested

in the market.

Turnover ratio: This shows you the stock churning in a funds portfolio. Its

measured by considering the number of stocks bought and sold over a certain assessment

period. A higher or lower Portfolio Turnover Ratio doesnt matter as long as its aligned

with the funds investment philosophy. A high turnover ratio can be good for equity

funds, though high trading costs can lower your returns.

Expense ratio and loads:A high expense ratio indicates that your fund is expensive

compared to its peers. Currently the expense ratio has a regulatory ceiling of 2.50% for

equity and debt funds.

10


11/13

Q. Is a fund with low NAV better?

Investors often get confused with NAV and try to judge it like a share price. They often make the

NAV of a fund as a deciding criterion for investment. It is a common myth that a low NAV is

cheap and a good buy, but that is not the case. You cannot view a mutual fund unit like a share.

A companys share price may get overvalued if its price shoots up, but that is not the case with a

mutual fund. It is irrelevant how high or low the NAV of a fund is. Lets take an example, say

you want to invest Rs 10,000. Irrespective of which fund you invest in, this amount stays

constant.

Now let's say that your choice is restricted between two funds with identical portfolios. Since

they both have identical portfolios, their value will increase in the same proportion. You may

buy the units of one fund at a higher price than the other. But, the percentage increase would be

the same. Hence, your investment of Rs 10,000 will increase by the same percentage,

irrespective of the fund you invest in.

So the number of units you get as well as a high or low NAV are irrelevant. Thus, it is the stocks

in a portfolio that determine the returns from a fund, the value of the NAV being immaterial. The

only instance where a higher NAV will get you fewer units that may affect you is where a

dividend has to be received. Dividend is given per unit. So the fewer the units you get, the lesser

the dividend. But even here, total returns will remain the same.

So from whichever angle you see it, the NAV makes no difference to returns. Mutual fund

schemes have to be judged on their performance, risk and other such factors.

11


12/13

CONCLUSION

These are different types of mutual fund that you can choose to diversify your

mutual fund portfolio. You have to plan your mutual fund investment depending

on your fund, time period for which you are willing to invest and of course your

risk tolerance. You can surely choose to invest in more fund of different nature to

diversify your investment and to strike profitability and stability of your

investment.

A mutual fund allows for diversification between many different stocks and

also allows for diversification between various sectors, styles, etc. This

diversification allows investors to reduce the risk of one particular stock or sector,

but also allows for more potential reward by offering a broader exposure to various

stocks and sectors.

BIBLIOGRAPHY AND REFRENCES

1. From the following websites:

http://www.sharegyan.com/

http://www.ninemilliondollars.com/mutual-funds/

www.mutualfundsindia.com

www.google.com

www.valueresearchonline.com

www.amfiindia.com

www.investmentz.com

www.arihantcapital.com

http://www.ici.org/

2. FROM BOOKS AND AIRTICLES:-

Mutual fund industry in india (amit singh sisodiya).

Security analysis & Portfolio management by Prasanna Chandra.

12
http://www.investmentz.com/http://www.arihantcapital.com/http://www.investmentz.com/http://www.arihantcapital.com/


13/13

13

Documents

Mutual Fund Prot and Div