Understanding Mutual Funds
How do mutual funds safeguard an investors’ interest?
Mutual funds are vehicles that invest in different assets as per their mandate stated in the Scheme Information Document on behalf of their investors. But as they are mandated by law to invest as per stipulated regulations, they have the high standards of investor interest and safeguards in place.
Over the years, the regulator, Securities Exchange Board of India(SEBI) , has streamlined and introduced robust regulations which not only set up guidelines on how a fund should invest its funds, but also what instituted the roles of promoters. SEBI has also clearly stated the prescribed securities that can be invested in as per the investing mandate of each scheme, investment limits in each of them individually and segment-wise, plus it has instituted strict disclosure norms. Fund houses have to send annual reports to all unit holders and disclose the entire portfolio to unit holders on a monthly basis. Fund houses also send monthly updates of their portfolios to investors through fact sheets. Besides, the net asset value, or the value of holdings per unit, is disclosed on a daily basis.
How do you mutual funds work?
Mutual funds pool money from various investors into a common scheme that is managed by a fund manager, which is then invested into various securities. The decision to invest in individual securities is taken by the fund manager. Some funds, that are passive in nature, follow an index and invest in the securities that constitute or are part of the index. A mutual fund takes out the worries of tracking the securities for investment or the sectors that one should invest in. The investors also need not worry about what to buy and when or what to sell and when. Besides, the investors get the benefits of diversification as he can buy a basket of securities through one scheme.
Who can invest in mutual funds?
Mutual funds provide an array of products suited to all kinds and classes of investors’ right from the layman investor who has a few thousand rupees to big corporate investors who have a few Crore to invest from products that invest in the equity, and debt and gold or a combination of these. All one needs to know is the kind of asset one is investing in and the risks involved, which brings us to the next question.
What are the risks involved when investing in funds?
Essentially, the prices of any and all securities that is traded in the market, either equity or debt, goes up and down over the shorter-term, depending on a host of a factors such as demand and supply, future prospects, attractiveness of investments, sentiment and so on. As these underlying investments fluctuate in price over the short-term, so does the value of the mutual fund scheme also known as the net asset value (NAV). If an underlying investment falls in value, the investor to that extent sees losses and the NAV comes down. However, over the longer term, mutual funds have the potential to create wealth for investors.
How do I know are the levels of risk in any mutual fund?
In keeping with the view that investors should know the level of risk they are undertaking, SEBI instituted product labeling for mutual fund products. These colours that are stamped on every form and communication depict the level of risk that the particular mutual fund scheme carries or has.
BLUE: A blue colour coded scheme typically denotes that principal is at low risk. These funds largely invest in debt securities and are fixed maturity plans, gilt funds, liquid schemes and income funds. One thing to note is that NAV of these schemes will also see a daily up and down movement, but it is relatively lower as compared with other schemes.
YELLOW: A Yellow colour coded scheme typically denotes that principal is at medium risk. These schemes invest in both equity and debt.
BROWN: A Brown colour coded scheme typically denotes that principal is at high risk. It indicates that one’s money is being invested in high risk assets such as equities and gold where the fluctuations are higher. Typically, diversified equity funds, mid- and small-cap funds, schemes investing in gold are coded brown. Schemes with brown colour code are high risk but also have potential to create wealth over long term.
These colour codes make it easier for investors to identify the levels of risk within each asset class, and investment schemes. As such, these are just markers for easy identification of risk levels.
How can investors use mutual funds to their advantage?
Investors can buy and accumulate units of mutual fund schemes to create wealth for themselves or save for a future need and goal. However, one should invest in mutual fund schemes depending on one’s risk appetite. One can always take the help of a financial planner to fine tune and understand their risk appetite of oneself. If one chooses the asset class according to one’s needs and plans, one can build a suitably diversified portfolio. And finally, mutual funds offer professional fund management which an investor can take advantage of. Mutual funds help transfer the hassle of day-to-day management, security selection, and portfolio shuffling according to market conditions in the hands of professional fund managers.
Happy Investing
How do mutual funds safeguard an investors’ interest?
Mutual funds are vehicles that invest in different assets as per their mandate stated in the Scheme Information Document on behalf of their investors. But as they are mandated by law to invest as per stipulated regulations, they have the high standards of investor interest and safeguards in place.
Over the years, the regulator, Securities Exchange Board of India(SEBI) , has streamlined and introduced robust regulations which not only set up guidelines on how a fund should invest its funds, but also what instituted the roles of promoters. SEBI has also clearly stated the prescribed securities that can be invested in as per the investing mandate of each scheme, investment limits in each of them individually and segment-wise, plus it has instituted strict disclosure norms. Fund houses have to send annual reports to all unit holders and disclose the entire portfolio to unit holders on a monthly basis. Fund houses also send monthly updates of their portfolios to investors through fact sheets. Besides, the net asset value, or the value of holdings per unit, is disclosed on a daily basis.
How do you mutual funds work?
Mutual funds pool money from various investors into a common scheme that is managed by a fund manager, which is then invested into various securities. The decision to invest in individual securities is taken by the fund manager. Some funds, that are passive in nature, follow an index and invest in the securities that constitute or are part of the index. A mutual fund takes out the worries of tracking the securities for investment or the sectors that one should invest in. The investors also need not worry about what to buy and when or what to sell and when. Besides, the investors get the benefits of diversification as he can buy a basket of securities through one scheme.
Who can invest in mutual funds?
Mutual funds provide an array of products suited to all kinds and classes of investors’ right from the layman investor who has a few thousand rupees to big corporate investors who have a few Crore to invest from products that invest in the equity, and debt and gold or a combination of these. All one needs to know is the kind of asset one is investing in and the risks involved, which brings us to the next question.
What are the risks involved when investing in funds?
Essentially, the prices of any and all securities that is traded in the market, either equity or debt, goes up and down over the shorter-term, depending on a host of a factors such as demand and supply, future prospects, attractiveness of investments, sentiment and so on. As these underlying investments fluctuate in price over the short-term, so does the value of the mutual fund scheme also known as the net asset value (NAV). If an underlying investment falls in value, the investor to that extent sees losses and the NAV comes down. However, over the longer term, mutual funds have the potential to create wealth for investors.
How do I know are the levels of risk in any mutual fund?
In keeping with the view that investors should know the level of risk they are undertaking, SEBI instituted product labeling for mutual fund products. These colours that are stamped on every form and communication depict the level of risk that the particular mutual fund scheme carries or has.
BLUE: A blue colour coded scheme typically denotes that principal is at low risk. These funds largely invest in debt securities and are fixed maturity plans, gilt funds, liquid schemes and income funds. One thing to note is that NAV of these schemes will also see a daily up and down movement, but it is relatively lower as compared with other schemes.
YELLOW: A Yellow colour coded scheme typically denotes that principal is at medium risk. These schemes invest in both equity and debt.
BROWN: A Brown colour coded scheme typically denotes that principal is at high risk. It indicates that one’s money is being invested in high risk assets such as equities and gold where the fluctuations are higher. Typically, diversified equity funds, mid- and small-cap funds, schemes investing in gold are coded brown. Schemes with brown colour code are high risk but also have potential to create wealth over long term.
These colour codes make it easier for investors to identify the levels of risk within each asset class, and investment schemes. As such, these are just markers for easy identification of risk levels.
How can investors use mutual funds to their advantage?
Investors can buy and accumulate units of mutual fund schemes to create wealth for themselves or save for a future need and goal. However, one should invest in mutual fund schemes depending on one’s risk appetite. One can always take the help of a financial planner to fine tune and understand their risk appetite of oneself. If one chooses the asset class according to one’s needs and plans, one can build a suitably diversified portfolio. And finally, mutual funds offer professional fund management which an investor can take advantage of. Mutual funds help transfer the hassle of day-to-day management, security selection, and portfolio shuffling according to market conditions in the hands of professional fund managers.
Happy Investing
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