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Transcript of mutuals fund
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MUTUAL FUNDS
Mutual Funds Definition refers to the meaning of Mutual Fund, which is a fund, managed by
an investment company with the financial objective of generating high Rate of Returns. These
asset management or investment management companies collects money from the investors
and invests those money in different Stocks, Bonds and other financial securities in a
diversified manner. Before investing they carry out thorough research and detailed analysis on
the market conditions and market trends of stock and bond prices. These things help the fund
mangers to speculate properly in the right direction.
The investors, who invest their money in the Mutual fund of any Investment Management
Company, receive an Equity Position in that particular mutual fund. When after certain period
of time, whether long term or short term, the investors sell the Shares of the Mutual Fund, they
receive the return according to the mark conditions. The investment companies receive profit
by allocating people's money in different stocks and bonds according to their Speculation about
the Market Trend. Other than some specific mutual funds which carry certain Maturity Term,
Investors can generally sell the shares of their mutual funds at any time they want. But, the
return will vary according to market value of the stocks and bonds in which that particular
mutual fund made investment. But, generally the share holders of mutual fund sell their share
when the prices are up and Capital Gain is sure to happen.
Scope of Mutual Funds
Scope of Mutual Funds has grown enormously over the years. In the first age of mutual funds,
when the investment management companies started to offer mutual funds, choices were few.
Even though people invested their money in mutual funds as these funds offered them
diversified investment option for the first time. By investing in these funds they were able to
diversify their investment in common stocks, preferred stocks, bonds and other financial
securities. At the same time they also enjoyed the advantage of liquidity. With Mutual Funds,
they got the scope of easy access to their invested funds on requirement. But, in todays world,
Scope of Mutual Funds has become so wide, that people sometimes take long time to decide
the mutual fund type, they are going to invest in. Several Investment Management Companies
have emerged over the years who offer various types of Mutual Funds, each type carrying
unique characteristics and different beneficial features. To understand the broad scope of
Mutual Funds we need to discuss the maintypes of MutualFunds that are normally offered by
the Mutual Companies. The wide choices in Mutual Funds go as the following:
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Equity Funds or Stock FundsThese types of Mutual Funds generally invest in stocks
which are publicly traded. Amount of risk, involved with these funds vary according to
different types of Equity Funds.
Types of Equity Funds are;1. Growth Funds-These funds invest in the stocks, which are under valued compared to
their worth. As these stock prices tend to rise in future and carry good growth potential,
Growth Funds go for these kinds of stocks.
1. Value Funds-These funds go for long term investment and aims at increase of valueover the years.
2. International Equity Funds-These funds invest in the stocks of foreigncompanies.
3. Global Equity Funds-These funds invest in stocks of both the domestic marketand the foreign markets.
4. Sector Funds or Specialty Funds-These funds invest in specific sectors likeHealth care and in specific commodities like Gold.
5. Index Funds-These funds reflect the performance of stock market indexes.Bond FundsThese funds invest in government bonds and corporate bonds. These
Bond Funds offer a steady source of income and in many times these incomes get the
advantage of Tax Exemption.
Money Market FundsThese funds invest in the money market. These funds involve low
level of risk and promises comparatively low rate of return.
Growth of Mutual Funds
Growth of Mutual Funds has been gradual and it took really long years to evolve the modern
day mutual funds. Mutual Funds emerged for the first time in Netherlands in the 18th century.
Then it got introduced to Switzerland, then Scotland and then to United States in the 19th
century. The very idea of mutual funds came from the urge to deliver a form ofDiversified
Investment Solution. Over the years the idea developed and people receivedmore andmore
choices of Diversified Investment Portfolio through the mutual funds. When in 1924,
Massachusetts Investors Trust first introduced mutual funds in U.S, they found it difficult to
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gain the trust of the investors. It was very natural that the people took time to adapt to a new
investment idea. There emerged some confusion regarding the Taxation of Investment Income
from mutual funds as there was no Regulation or legislation. Laws started to came in existence
from 1940s. The result was not immediate. The Mutual Fund Concept achieved warm
reception only in the middle of 1950s. By the end of fifties and in first half of 1960s mutual
fund investment triggered up tremendously. Monetary Funds benefited a lot from the mutual
funds. Earlier investors was used to invest directly in the stock market and many times suffered
from loss due to wrong Speculation. But, with the mutual funds which were handled by
efficient Fund Managers, Investment Risks was lowered by a great extent. The diversified
investment structure of mutual funds also diversified risk and this contributed tremendously in
the Growth of Mutual Funds. Over the years not only the new types of mutual funds emerged,
the way, in which mutual funds were sold also changed. But, the Growth of Mutual Funds has
not stopped. It is continuing to evolve to a better future, where investors will get newer
opportunities.
Mutual Funds Investment: Mutual Funds Investment has become a subject of great
importance in the present context, especially when all the investors are keen to diversify their
investment to maintain a balance between Investment Return and Investment Risk. Mutual
Funds Investment not only provides the customers with their much desired diversified
investment portfolio, but also offers the benefit of high liquidity. Investors are free to sell their
mutual fund shares any time to get the back the amount that was invested in the mutual funds.
It is another issue that any time sell of mutual fund shares may result in poor rate of return. For
gaining the Diversified Investment Solution and the liquidity advantage, any person needs to
invest in Mutual Funds. But, before investing their hard earned money one needs to carry out
sincere research on the performance of those mutual funds, he is considering to invest in.
The things that one needs to consider before deciding on any particular mutual fund are the
following:
Performance of the Fund and the Rate of Returns: It is perhaps needless to say that
one requires to be well informed about the Fund Performance before investing. Excellent
Performance not only means high Rate of Return, it also needs the consistency. The funds
which have been proved of being able to generate satisfactory rate of return consistently over a
period can be considered for investing.
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Investment Psychology of the Mutual Fund: Before taking final investment decision
one needs to to know about the Investment Psychology of the mutual fund. The investment
psychology of the fund has to match with the Financial Objective of the customer. A track
record of excellent performance and high rate of returns cannot be the only yard stick to judgewhether that fund is suitable for the particular investor or not.
Risk Adjustment: It is also very important to check that how the funds adjusted with risk
over the years.
Fund Management: Management of funds is the ultimate thing and it in many ways
depends on the efficiency of the Fund Mangers who actually allocates asset by making
Speculation based on the market research and market analysis.
Mutual Fund Fees: Investors should be well prepared about the fees and charges associated
with mutual Funds. There are loaded funds and no load funds. Loaded Funds are those mutual
funds which involve sales charges and other fees and no load funds are those which carry no
charges.
Opportunities of Mutual Funds: Opportunities of Mutual Funds are tremendous
especially when investment is concerned. For any individual who intends to allocate his assets
into proper forms of investment and want to diversify his Investment Portfolio as well as the
risks, Mutual Funds can be proved as the biggest opportunity. Investors get a lot of advantages
with the Mutual Fund Investment. Firstly, they are not required to carry on intensive research
and detailed analysis on Stock Market and Bond Market. This work is done by the Fund
Mangers of the Investment Management Company on behalf of the investors. In fact, the
professional Fund Managers who handle the mutual funds of any particular company, are able to
speculate the market trend more correctly than any common individual. Good Speculation about
the trends of stock prices and bond prices leads to right allocation of funds in the right stocks
and bonds resulting in good Rate of Returns. Investors also get the advantage of high Liquidity
of the mutual funds. This means the investors can enjoy easy access to the funds invested in the
mutual funds whenever they require the money. When the investors invest in any mutual fund,
they are given some equity position in that fund. The investors can any time sell their mutual
fund shares to get back the money invested in mutual funds. The only thing is that the Rate ofReturn that they will get may not be favorable as the return depends on the present market
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condition. The greatest opportunity that the mutual funds offer is the opportunity of diversifying
their investments. Investment Diversification actually diversifies the Risk associated with
investment. This is because, if at a time, if prices of some stocks are declining, deceasing the
Value of Investment, prices of some other stocks and bonds may tend to rise and in this way the
loss of the mutual fund is offset by the strength of the stocks whose prices are rising. As all the
mutual funds diversify their investments in various common stocks, preferred stocks and
different bonds, the risk to be borne by the investors are well diversified and in other terms
lowered.
Challenges Facing Mutual Funds:There are many Challenges Facing Mutual
Funds which is of prime concern to the people who have an investment spree. People find
mutual fund investment so much interesting because they think they can gain high rate of return
by diversifying their investment and risk. But, in reality this scope of high rate of returns is just
one side of the coin. On the other side, there is the harsh reality of highly Fluctuating Rate of
Returns. Though there are other disadvantages also, this concern of fluctuating returns is most
possibly the greatest challenge faced by the mutual fund.
The Issue of Fluctuating Returns
In spite of being a diversified investment solution, mutual funds investment in no way
guarantees any return. If the market prices of major shares and bonds fall, then the value of
mutual fund shares are sure to go down, no matter how diversified the mutual fund portfolio
be. It can be said that mutual fund investment is somewhat lower risky than Direct Investment
in stocks. But, every time a person invests in mutual fund, he unavoidably carries the risk of
losing money.
Mutual Funds Vs Individual Stocks: Mutual Funds Vs Individual Stocks hasalways been a debatable issue. While some like to play safe with mutual fund investment, some
others prefer investment in individual stocks.When any investor invests in any mutual fund all
that he is required to do is pay the Shareholder Fees and Fund Operating Fees. The whole work
of managing funds, starting from Market Research and analysis of stock and bond price and
recent market trends up to final Allocation of Funds or assets in various stocks and bonds is
completely done by the Professional Fund Managers employed by the Investment Management
Company. In this case, the fund management remains in the hands of the fund managers of themutual fund company. But, in case of Direct Investment in individual stocks, the total control
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remains in the hands of the individual investors. But, most of the people agree about the fact,
that mutual funds hold some important benefits over and above Individual Stocks. So, to get
the actual depiction of Mutual Funds Vs Individual Stocks, we will discuss the advantages put
forwarded by Mutual Funds.
Average Annual Return: Average Annual Return refers to the return of a mutual fund
which is measured as an average after deducting the mutual fund's operating Expense Ratio.
These expenses do not contain the Sales Charges of the mutual fund. In many cases of Mutual
Fund Investment, the investors are required to pay Transaction Brokerage Commissions for
their Investment Portfolio. But, these commissions are not counted for at the time calculating
the Average Annual Return. This Average Annual Return is actually a figure which is
represented in percentage and is used to reveal a particular mutual fund's historical return.
Generally, Average Annual Return of a mutual fund shows the average returns of the fund over
last three years or five years or ten years. A fund can also calculate the Average Annual Return
on the basis of its returns for the whole life of the fund. It is a clear fact that Average Annual
Return is not a compounded rate of return. Annual Returns of a fixed number of years is added
and divided by the number of years, to get the figure of Average Annual Return and when the
returns are considered, the Expense Ratios are subtracted to get the net value of returns.
This Average Annual Return calculation is necessary to get a clear idea about the Reinvested
Dividend. Capital Gain Distribution is also related with AverageAnnual Return.
Automatic Investment Plan
Automatic investment plan is an investment mechanism through which investors will be able to
invest a small amount of money at regular intervals. It can alternatively called as systematic
investment plan. Normally funds are automatically invested in a retirement or mutual fundaccount. This is done by way of deduction from the savings or checking account. Automatic
investment plan also enables the investors to transfer a set of their amount electronically to
another account at an assigned number of occurrences. Automatic investment plan can be
regarded as an effective systematic mechanism as because these investments are of manageable
size and investors will be able to save their money as well. Some examples of automatic
investment plan: Examples of automatic investment plan can be mutual fund contribution,
stock, automatic withdrawal plan etc.
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Some effective guidelines as recommended by economists:
It is recommended that the investors should invest at a regular interval and this will protect
their accounts from any sort of market fluctuations. Investors should purchase maximum shares
when they observe that the prices are going low and they should purchase the minimum sharesif it goes high. But the best way is to purchase shares when investors think them most capable.
Investors should analyze a lot before going for any investment and should opt for those, which
have a uniform track record and benchmarks. This way investors will be able to instill a
method of practice to save their investments.
The truth: It has been observed that inflation increases the prices of commodities and reduce
the value of money. That is why investors should choose the best investment type to avoid the
effect of inflation. In the long run the average price per unit can be lesser than the average
market price of the fund and this will enable the investors to buy a higher amount of units at an
average market price. This will improve the volatility.
Automatic Reinvestment Plan: Automatic reinvestment plan is a mechanism
normally used by mutual funds that enable investors to buy additional shares using their
dividends or distribution out of their capital gains. Automatic reinvestment plan also enable the
one to electronically transfer his amount from one account to another. It can alternatively be
defined as an agreement through which dividends from mutual fund or capital gains are
utilized to buy additional fund shares.
Working principle: Individual can mechanically deposit his amount into his checking
account through this automatic reinvestment plan mechanism. In this systematic plan, the fund
manager reinvests the amount earned by the investor into his mutual fund account. Investors
can get the added advantage by adopting this mechanism, as this will enable him to acquire
more shares and at the same time they can avoid excess taxes. In automatic reinvestment plan
mechanism, the capital gains produced by the fund can be utilized to mechanically buy more
fund shares rather than dispensing these to the investors in form of cash.
Advantage from investors point of view:
This automatic reinvestment plan enables the investors to acquire more investment gains, as
after some period of time; the extra value produced by this automatic reinvestment can produce
a significant amount. Advantage from company's point of view
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This automatic reinvestment plan can make a smaller company to a larger one, as through this
mechanism, any capital and dividends made from the initial investments can enable the
company to buy more shares in the fund and it is a continuing process.
Advice by experts:
Investors should at first look at the prospectus and go through that section where there are
matters about automatic reinvestment plan. Secondly, they should confirm the matter that their
mutual fund is utilizing this automatic reinvestment facility. They can consult with the fund
manager for further clarification. Investors should also discuss with the fund manager about tax
liabilities etc.
Asset Management Fund
The Asset Management Fund or AMF Fund is actually a mutual fund, in which shares are sold
without any commission. Asset management fund primarily deals with client's investment.
This fund is specifically made for clients to provide some special privileges like access to an
array of products. These special facilities are not for average investors. Normally the financial
establishments invest on behalf of its clients. Alternative definition of Asset management fund.
The asset management fund can alternatively defined as an account at any financial
establishment which comprise of some facilities like credit cards, debit cards, loans, checking
etc. The asset management fund also enables the clients to automatically transfer their amounts
that go beyond a certain level into a higher interest earning account.
Asset management fund is alternative called as central asset account or an asset management
account.
Striking features:
Some of the prominent features of Asset management fund are:
Asset management fund expenses are normally confined to high deserving individuals,
business firms, governments, or financial negotiator. The expenses are based on products like
fixed income, equity, real estate, agriculture etc.
Somebody, when deposits his money into his account is normally put into a money market
fund. This money market fund usually offers more return in comparison to other regular money
market account like checking and savings accounts.
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