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Indirect Investing
OUTLINE
Entities in a Mutual Fund Operation Equity Schemes
Hybrid Schemes
Debt Schemes Open-ended Schemes versus Closed-ended Schemes
Custodian The custodian handles the investment back office operation of a mutual fund. Registrars and Transfer Agents The registrars transfer agents handle investor-related services. and
Equity Schemes
Equity schemes (all called growth schemes) invest the bulk of their corpus (8595 percent) in equity shares or equityrelated instruments and the balance in cash: Equity schemes may be classified into the following sub-types: Diversified Equity Schemes Index Schemes Sectoral Schemes Mid-cap Schemes Tax Planning Schemes
Hybrid Schemes
Hybrid schemes, also referred to as balanced schemes, invest in a mix of equity and debt instruments. Hybrid schemes may be classified into the following sub-types Equity-oriented Schemes Debt-oriented Schemes Variable Asset Allocation Schemes
Debt Schemes
Debt schemes also called income schemes invest in debt instruments viz., bonds and cash. They may be divided into the following sub-categories. Gilt Schemes Mixed Debt Schemes Floating Rate Debt Schemes Fixed Maturity Plans Cash Schemes
Closed-ended schemes are listed on the secondary market whereas open-ended schemes are ordinarily not listed.
Net Asset Value (NAV) The actual value of a share / unit on any business day.
Market value of the funds investments + Receivables + Accrued income Liabilities Accrued expenses NAV = Number of shares or units outstanding
Repurchase and Reissue Price The repurchase and reissue price of an open-ended scheme are closely linked to its NAV
Discount Closed-ended schemes typically trade at a discount over their NAV
Ex-Mark The extent to which the return of a mutual fund is Explained by a particular financial Market. Beta Beta of a fund measures its price volatility relative to a particular Stock market index. Portfolio Turnover Ratio The churn in the portfolio: Lower of purchase or sales during a given period Portfolio turnover ratio = Average daily net assets Expense Ratio The annual recurring costs as a percentage of the net assets of the scheme
Costs Of Investing
There are four costs associated with mutual fund investing: Initial Issue Expenses Entry Load Exit Load
Options
With respect to a number of schemes, mutual funds offer the following: Dividend and Growth Options Systematic Investment Plan Systematic Withdrawal Plan
Value-Added Services
Redemption Over Phone Triggers and Alerts Cheque Book Facility New Points of Purchase
Cons
Cost Lack of Thrill
Choice
Invest on your own if you: Have fairly strong speculative instincts Find the game of investing enjoyable Have the time to manage your investments Can earn superior returns
Invest through a mutual fund if you: Have a small amount to invest Hold fewer than five stocks Think that you need better advice on investing Have difficulty in deciding when to sell Find the paperwork relating to investments cumbersome.
SUMMING UP
A mutual fund represents a vehicle for collective investment. In India, the following entitles are involved in a mutual fund operation the sponsor, the mutual fund, the trustees, the AMC, the custodian, and the registrars and transfer agents.
fund investing.