Mutually Understanding The Fund

Mutually Understanding The Fund


R.S. Raghavan

Banking and Financial Analyst and

author of “RISK, the Business Driver in Banks”

The Investment Guru, Warren Buffett famously said, “Someone is sitting in a shade today, because someone else planted a tree a long time ago” and the simple financial meaning of the same is – It is better to start saving as early as possible for a comfortable life in the future. When one invests, the same should earn enough interest or return that actually negates the effects of inflation and thereby increases wealth.

Money received from individual investors are pooled to create a large sum so that the large opportunities available in the market are utilized to capitalize. This is managed on day to day baasis by the Fund Managers of the Asset Management company. The expenses of the Fund Manager are being met through a nominal fee collected by way of Fees. The plus or minus in the Net Asset Value of Units goes to the investors as the NAV fluctuates depending on the market conditions and the mix of investments made by the Fund Manager.

Mutual Funds are basically of two Types – one on the basis of constitution and the other by way of Means of Investment. By way of Constitution implies the structure in the form of Close Ended or Open Ended or Interval, In the case of Open Ended Funds, there is flow of money at any point of time. Hence the number of Units fluctuates depending on the interest of the investors in the Fund. In the case of Close Ended Funds, the total number of Units remain the same and no new investors are permitted to enter. With a view to make the close ended fund more liquid and attractive, sale of unit to other investors may be permitted and not the purchase of units by the Asset Management company itself. The Fund which is strictly neither Open Ended or Close Ended, but having the combination of these two features is known as Interval Fund. By Means of Investments what is meant is the tools through which the investment is made and it can be Equity Fund or Debt Fund or Hybrid Fund or Money Market Fund. The name itself suggests the tools of instrument through which the Investment is made.

Risk of investing is pronounced prominently for those who do not have even the basic knowledge about Equity and to their rescue only the concept of Mutual Fund has been evolved. This is relatively a better option compared to directly investing in stock market, as the M F is managed by professionals and in the case of directly investing in equity, one has to spend lot of time, acquire knowledge on an on-going basis, understand ow the industry operates and finances are handled. Therefore, the first and foremost step towards investing is to get the right knowledge on certain basics. Technology platform would facilitate one to gain knowledge, without physically moving out of your comfort zone of house or office. This would also help in overcoming the issues arising out of financial myths being propogated ar4ound financial products and aspects.

Just because there is a New Fund Offerings (NFO) or for that matter an Initial Public Offer (IPO), one should not jump in a hurry to invest. This is akin to one do not rush to a chemist shop to buy the newly launched drug or medicine, as the same may not be required for one’s need. Therefore, one needs to carry out a verification mechanism as to its suitability to the need of that particular individual. Only if the Fund is likely to take the investor to the nearest place of the goal one has set in, one can think of investing. Depending on the financial Goals, one need to achieve, one can choose a suitable fund. There are very many schemes such as Liquid Fund to handle short term needs, Equity Linked Savings Schemes to handle tax planning, Monthly Income Plans for retired populace, Balanced Fund to those who wants to avoid huge risk and at the same time to have exposure to stock market, etc. It is not enough to just start saving. One has to be regular on saving in a disciplined manner. Else one is likely to miss on good opportunities coming along.

Portfolio of more than 6 or 7 schemes is not going to carry any destination as it cannot provide any incremental diversification benefit. It only becomes unwieldy and cumbersome to handle to the point of creating confusion and unmanageable. Investment in knowledge about the Mutual Fund, if not the stock market intricacies, is a pre-requisite for attempting to invest in MF, so that it works better for the Retail Investors.

While investing in Mutual Fund, it is better to avoid the following pitfalls / shortcomings, as individual investors investing in Mutual Fund are generally risk averse and less knowledgeable as far as financial and business or industry matters are concerned.

 . Dont ignore Expense Ratio being charded towards managing the Fund It is generally high for an actively managed Fund Scheme such as Multi-Cap, Diversified Equity, Balanced fund or Sector specific and obviously for a passive fund, such as Index Fund or Fixed Income Fund, etc. same is low.

 Do not follow some one’s Plan. Have your own plan to suit your age, financial goals and requirements. In case you are already aged / retired, higher exposure to equity can be considered, provided you have assured income from other sources like pension , FD, etc. Risk is a factor of age and also future income. Normally younger the age, higher can be the exposure in equity.

 Better to avoid short term out look as investing in MF would be fruitful and would grow if only it remains untouched and allowed to grow.

 When the goal and objectives are met, then it would be better to exit the Fund, instead of remaining passive, as erosion cannot be ruled out. Set new goals in new schemes, after review.

 If the information you have already or gathered through various means such as paper report, TV analysis, known circle of friends, etc., better to consult a trusted Financial Planner rather than get confused.

 Investing in stock market requires good amount of knowledge, but in the case of MF, certain basic knowledge would do as there are professional Fund Managers to carry out the analysis and investment. Beginners should start taking indirect exposure through MF before directly investing in Stocks.

 In the case of SIP, decide first how much money you can set a side every month and know likely return you are expecting.

 Quantify your Risk Appetite, implying how much loss you can bear and depending on that the quantum of investment can be arived at.

 Slowly and steadily build a portfolio of your Fund, without sticking on to one particular scheme, during the investment cycle period.

 Keep a watch on the Taxation angle as some of the MF scheme can be leveraged to reduce your tax burden.

Select a Fund that has good track record and consistent return, as you can bet even during bear times. The above is just indicative and certainly not an exhaustive one for the investors in Mutual Fund.

Merger and Acquisitions (M&A) are not only common in Banking, but also are now prevalent in the field of Mutual Fund. In a span of eight years, since 2008, up-till 2015, the mutual fund industry has seen the following M&A, in the order of its happening, for certain long term strategic reasons:-



The trigger of merger among M F industry really commenced after the steep fall of sensex, owing to financial crises engulfed the world economics in the year 2008, as giants like Alliance, ABN Amro, AIG, Newton, etc decided to sell their stakes in M F. Further, there was no incentive for foreign fund houses to be in business in India as the volumes were low and economic growth was slow. But such exit of foreign players paved way for Indian M F sector to grow and strengthen their foot hold. Domestic players were able to build on their Fund on the strength of established brand, steady flow of funds, strong domestic institutional set up. This was facilitated by the SEBI who tightened thier grip on the mutual fund sector and put in place good governance mechanism besides having check of malpractices. A complete ban on upfront entry load on all fund products, higher minimum Net Worth stipulation, carving out a separate tax breaks for mutual fund industry, elimination of market intermediary like agents as well as “Feet on the Street” people, stipulations on Expenses Ratio, etc really helped the MF industry

Despite the fact that in comparison with Sensex / Equity Market, Mutual Fund industry playing in the same field has given more return than the stock market, when we analyse some of the well managed Mutual Funds. In all, there may be nearly fifty Fund Houses operating in India at present. But the news trend on MF is not that much positive as that of Capital Market and this is far away from the ground realities. Further, because of this negative mind set on Equity M F, the Debt Mutual Fund has grown well with good potentials. All said and done, furtunes of M F industry depends very much on the performance of Capital / Stock Market. With a balancing act of optimum mix of equity and debt oriented mutual fund, the volume as well as popularity of M F have grown significantly.

With interest rate fluctuations, movement of inflation, short term money market instruments and bond market on the play, the Debt Fund area has picked up momentum. In comparison to alternate fixed income oriented Bank Deposits, Small Savings, Debt Funds are more tax efficient, as the Capital Gain Tax is more advantageous than Income Tax, for the general public, when it comes to long term perspective.

As could me seen from the table, some of the global giants have quit the M F industry, thus paving way for the Domestic Mutual Fund Houses. In this regard, one need not hesitate to appreciate the role of Securities Exchange Board of India (SEBI), as they shifted their role from being a regulator to facilitator. The mode of Bond Fund market facilitates the general public to convert their physical assets savings kept in Gold, Real Estate, etc. into financial assets through the   Mutual Fund sector.

In the financial world, through the route of direct stock market or through the Mutual fund, there is no gain without an ounce of risk and knowledge is the only way to defeat the fear of risk or failure.

Adopting SIP mode of investments in M F, one need not worry about timing the Capital Market. In fact, it is very difficult to time the Capital Market, be it for the entry or for the exit. The money invested grow over time horizon, as returns one earns on them also earn giving compounding effect. As such any time is the starting time for the Retail Investors

Last, but not the least important one, is the matter pertaining to nomination aspects. It is mandatory to nominate someone from the family before investing in any scheme of a Mutual Fund. Nomination facilitates smooth transition of the financial wealth represented in units of Mutual Fund to the desired family members so that the surviving family members do not face any problems or issues in handling the wealth of the deceased.

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