A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds). When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund. Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest in (you don't have to figure out which stocks or bonds to buy). If you would like to know the history of mutual funds, By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification.
A mutual fund is a collection of stocks, bonds, or other securities owned by a group of investors and managed by a professional investment company. For an individual investor to have a diversified difficult. But he can approach to such company and can invest into shares. Mutual funds have become very popular since they make individual investors to invest in equity and debt securities easy. When investors invest a particular amount in mutual funds, he becomes the unit holder of corresponding units. In turn, mutual funds invest unit holders money in stocks, bonds or other securities that earn interest or dividend. This money is distributed to unit holders. If the fund gets money by selling some stocks at higher price the unit holders also are liable to get capital gains. A mutual fund is quite simply a collection of stocks, bonds, or other securities owned by a group of investors and managed by a professional investment company. Thus the mutual funds are not the depositing instrument that has guarantee of getting certain amount but it is like any other securities where the investor can have capital gains or loss.
Professional Management The primary advantage of funds (at least theoretically) is the professional management of your money. Investors purchase funds because they do not have the time or the expertise to manage. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments.
Diversification By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. In other words, the more stocks and bonds you own, the less any one of them can hurt you (think about Enron). Large mutual funds typically own hundreds of different stocks in many different industries. It wouldn't be possible for an investor to build this kind with a small amount of money.
Economies of Scale Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than you as an individual would pay.
Liquidity Just like an individual stock, a mutual fund allows you to request that your shares be converted into cash at any time.
Simplicity Buying a mutual fund is easy! Pretty well any bank has its own line of mutual funds, and the minimum investment is small. Most companies also have automatic purchase plans whereby as little as Rs 1000 can be invested on a monthly basis.
| Debt Orient Mutual Fund | Hybrid Mutual Fund | Equity Orient Mutual Fund |
|---|---|---|
| Liquid Fund | Equity Orient Balanced fund | Diversified Growth Fund |
| Gilt Fund | Debt Orient Balance Fund | Sectoral Fund |
| Floating Rate Fund | Children Plan | Tax Saving Fund |
| Short Term Bond Fund | ||
| Income Fund | ||
| Monthly Income Fund |
Systematic Investment Plan (SIP) is a disciplined way of investing, where you invest fixed amounts at a regular frequency. You often decide to start saving and investing regularly, but get caught up in your day to day activities and forget investments. SIP, the time-tested investment approach helps bring in the much-needed discipline, and has shown good results the world-wide.
An SIP helps you reach your financial goals by investing a fixed sum monthly / quarterly, in your chosen fund, for a pre-determined number of periods. So that you -
Average out on market fluctuations (no need to time the market).
Get investment discipline, helping you invest for and reach your future goals.
Invest disposable funds – that might otherwise lie in Savings accounts, earning low interest and letting inflation eat into them.
| Month | Amount Invested (Rs.) | Rising Market | Falling Market | Volatile Market | |||
|---|---|---|---|---|---|---|---|
| NAV | Units Alloted | NAV | Units Alloted | NAV | Units Alloted | ||
| 1 | 1,000 | 10 | 100.00 | 10 | 100.00 | 10 | 100.00 |
| 2 | 1,000 | 12 | 83.33 | 8 | 125.00 | 12 | 83.33 |
| 3 | 1,000 | 14 | 71.43 | 6 | 166.67 | 8 > | 125.00 |
| 4 | 1,000 | 16 | 62.50 | 4 | 250.00 | 10 | 100.00 |
| Total | 4,000 | 52 | 317.26 | 28 | 641.67 | 40 | 408.33 |
| Average Purchase NAV (Sum Total of NAV's/Total Number of investments made) |
13.00 | 7.00 | 10.00 | ||||
| Average costs per unit (Sum Total of Investment/ Sum Total Units Alloted) |
12.61 | 6.23 | 9.80 | ||||
Thus we see that the average unit cost under Systematic Investment Plan will always be less than the average purchase price per unit irrespective of the market rising, falling or fluctuating.
Let us suppose that you would like to invest Rs. 1,000 every month, in an equity fund using the SIP. The following table shows how your investments would look in the two scenarios of fluctuating and rising market
| Month | AmountInvested (Rs.) | Fluctuating Market | Rising Market | ||
|---|---|---|---|---|---|
| Purchase Price (Rs.) | No. of Units Purchased | Purchase Price (Rs.) | No. of Units Purchased | Purchase Price (Rs.) | |
| Initial Investment | 1,000 | 10.00 | 100.00 | 10.00 | 100.00 |
| 1 | 1,000 | 8.20 | 121.95 | 10.50 | 95.24 |
| 2 | 1,000 | 7.40 | 135.14 | 11.00 | 90.91 |
| 3 | 1,000 | 6.10 | 163.93 | 11.50 | 86.96 |
| 4 | 1,000 | 5.40 | 185.19 | 12.00 | 83.33 |
| 5 | 1,000 | 6.00 | 166.67 | 12.40 | 80.65 |
| 6 | 1,000 | 8.20 | 121.95 | 12.90 | 77.52 |
| 7 | 1,000 | 9.25 | 108.11 | 13.35 | 74.91 |
| 8 | 1,000 | 10.00 | 100.00 | 14.00 | 71.43 |
| 9 | 1,000 | 11.25 | 88.89 | 14.50 | 68.97 |
| 10 | 1,000 | 13.40 | 74.63 | 15.00 | 66.67 |
| 11 | 1,000 | 14.40 | 69.44 | 15.50 | 64.52 |
| TOTAL | 12,000 | 1,435.90 | 961.11 | ||
| Average Unit Cost | (Rs. 12,000/1435.9) = Rs. 8.36 | (Rs. 12,000/961.1) = Rs. 12.49 |
|---|---|---|
| Average Unit Price | (Sum of Purchase price / 12) = Rs. 9.13 | (Sum of Purchase price / 12) = Rs. 12.72 |
| Assumed NAV @ Q12 | Rs. 14.90 | Rs. 16.00 |
| Market Value | (1435.9 units x Rs. 14.90) = Rs. 21,395 | (961.11 units x Rs. 16.00) = Rs. 15,378 |
Therefore, the average unit cost is lower than average unit price irrespective of market rising or fluctuating. This happens because you get the advantage of buying more units when the market is low and averaging out the purchase price.