Common question and common answers- Q4 to Q8

December 31, 2006

In what way mutual funds is different from Portfolio Management?

In mutual funds, the objective and process are decided first and then investors are sought. In portfolio management, an investor approaches an expert to do the investments on his behalf. Mutual funds are for every one without any reference to the size of individual investment. As per Guidelines of SEBI, a portfolio manager, can manage accounts with a minimum size of Rs. Five lacs.
A portfolio manager can be an individual whereas a mutual fund can not be run by an individual. There are clearly defined entities in forming and running a mutual funds: Sponsor, Trust , Asset Management Company. The regulations of SEBI clearly defines the roles of each entity.

A portfolio manager can manage the portfolio either on discretionary basis or on non- discretionary basis. A mutual fund is always on discretionary basis with clearly defined objectives and asset classes on which investment can be made. There are no limits or guidance on the amount of fees by a portfolio manager, whereas there are limits imposed by SEBI on the amount of fees and expenses.

What is the best way to save ?

Savings is known as habit. Hence if you form a habit of savings, then you are bound to reap the rewards. When we accept savings as a habit, we do not emphasise on the quantum, but regularity. Habit always refers to systematic and regular way.
To those, who still live under controlled economy age, investment in mutual fund is unthinkable. They have to test waters. To experience the risk-reward theory, I always suggest them investment in mutual funds. Depending on their risk profile I choose the fund. The method I always advocate is SIP. Systematic Investment Plan besides making savings a habit oriented one, also ensures value averaging

What is systematic investment plan?

You are used to these SIPs . They were called as recurring deposits. Similar to such recurring deposits, systematic investment plans calls for periodic investments at regular intervals.
In India, mutual funds decide the date on which the periodical investment will be made. It may be a fixed date on each month.

For example Sundram-BNP Paribas has the dates: 1,7,14,20 and 25th of every month. You can choose any date convenient to you.
Birla sun life has first, tenth and twentieth day of a month or of quarter as the date 0f your savings plans.
In all SIP, you provide a post dated cheques to the fund to be presented.

SIP explained further

Your cheques are cashed and you are allotted units based on the NAV of that date. Thus the cost of one unit of your savings at the end of the third month is not the NAV of that date, but the average price at which the units were purchased earlier. Thus you stand to benefit in the case of increasing NAV. Even in case of falling NAVs, the fall in value of your investments is not the same as that of fund, but slightly lower, as you would have been accumulated more units for the same amount of investment. Thus whichever the direction your fund goes, you stand to benefit in the case of systematic investment, as the strategy you have adopted is known as Value Averaging.

What are close ended funds and open ended funds?

The funds which accept subscription initially and do not accept any fresh investment is known as closed ended funds. This underlines the fact that close ended funds have specific time frame and limit the amount they accept. Does this mean that you will not be able to invest in close ended funds or the amount invested initially is also locked in for a fixed period? No. What it implies is that the fund will not be issuing additional units during the period in case of redemption of units. The periodicity of redemption and the frequency of declaration of NAV is detailed in the offer document, provided at the initial time of the offer. Normally the units are listed in the stock exchanges for instant liquidity. There are also funds which restricts the redemption, by redeeming them only during certain periods.

Common questions and common answers-3

December 26, 2006

Having said that many of the mutual funds from India are equity based mutual funds, will not be better if I directly invest in equities?

Not necessarily. Investment in equity calls for regular review of your investments and the stock market trends. It also calls for decent capital to get decent returns. Thus it requires a sizable investment in time and money. It is not disputed that direct investment may result in good returns,but the fall also may be steep.

In what way mutual funds is different from Portfolio Management?

In mutual funds, the objective and process are decided first and then investors are sought.  In portfolio management, an investor approaches an expert to do the investments on his behalf.  Mutual funds are for every one without any reference to the size of individual investment. As per Guidelines of SEBI, a portfolio manager, can manage accounts with a minimum size of Rs. Five lacs.
A portfolio manager can be an individual whereas a mutual fund can not be run by an individual. There are clearly defined entities in forming and running a mutual funds: Sponsor, Trust ,  Asset Management Company. The regulations of SEBI clearly defines the roles of each entity.

A portfolio manager can manage the portfolio either on discretionary basis or on non- discretionary basis. A mutual fund is always on discretionary basis with clearly defined objectives and asset classes on which  investment can be made.  There are no limits or guidance on the amount of fees by a portfolio manager, whereas there are limits imposed by SEBI on the amount of fees and expenses.

Common answers to common Questions-2

December 25, 2006

What is the major difference between Bank deposits and Mutual funds?

Banks make profits out of the spread between their cost of funds and return on funds. In other words, banks borrow money and lend it to others.They borrow money at a cost,one of which is the deposit rate of interest. The lend it to the customers at certain rate of interest. The difference between them is one of the avenues of profit for the banks, which is commonly known as” spread.”

Till last decade, the interest rates were regulated by RBI. Now the banks have been permitted to manage the interest spread on their own, excepting savings bank interest which is still regulated by RBI. Thus to ensure profitability, the banks will not be in a position to offer a good rate of return, in case they do not face any resource constraints. Till recently, the banks were offering very low return when compared to the market and now with hefty growth in their credit portfolio, the rate of interest on deposits are on increase. But how long this trend will last?

The mutual funds offer better returns than the bank deposits, but certainly at a risk. Still there are certain funds available which offer marginally better returns for shorter period than the bank deposits and reasonable return on longer terms.

One of the important difference between bank deposit and mutual funds is:

The bank is under obligation to pay back the deposit along with contracted rate of return, irrespective of the nature of assets they have created out of the deposits. In mutual funds, the fund will pay only the value of assets it has created out of the funds it received. Thus there is inherent risk in investment in mutual funds. Still it is one of the best avenues of investment, ( Known as asset class in the investing parlance), every one should have. There are funds available to suit the risk profile of every investor.

Common Questions and common answers

December 25, 2006

What is the difference between Investment in equity shares and Investment in mutual funds?

Investment in Equity shares Provides ownership in the company, Investment in mutual funds does not confer any such ownership of the company. It represents the investment in equities of various companies through an entity created for that purpose.
Investment in mutual funds means investment in stock market. Is it not?

Not necessarily. Equity based mutual funds are only a part of the mutual fund spectrum. There can be debt based mutual funds exclusively. There can be real estate mutual funds where the assets are real estate. There can be metal based mutual funds and there can be commodity based mutual funds.
So far in India we are exposed to equity based and debt based mutual funds. In future there can be various types are mutual funds such as Gold units. real estate units.
In short mutual funds are pooled funds for a pre-defined objective of investment.


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