Mar 15, 2002 07:04 AM
6113 Views
(Updated Mar 15, 2002 07:08 AM)
These days, of avenues available for investing one’s savings, mutual funds are a very good option. The investments in mutual funds score on all counts of ease of investment and withdrawal, liquidity, net rate of returns and the risks involved in such investments.
Mutual funds provide returns to investors by investing the money collected from investors either in the debt market or the equity market. Mutual fund schemes are classified as debt funds if they invest primarily in debt investments(bonds, government securities etc.), equity funds if they invest primarily only in equities(stocks) and balanced funds, if they invest in both debt and equity. The brochure given with the application for a scheme will clearly specify the type of the scheme with the limits the fund is setting for investment in debt and equity. You will have to ascertain which of these categories your chosen scheme falls into, because the returns and risk from the scheme will depend on the debt and equity component of the scheme.
Mutual fund units are sold typically for Rs.10 per unit(face value) when a scheme is started by a mutual fund. The value of each unit after that is estimated by the total value of the investment from all units on any given day divided by the number of units. This is called the Net Asset Value or NAV of the scheme. An investor has to purchase mutual fund units at the NAV of the day of purchase and will receive the NAV of the units held at the time of redemption or withdrawal of one’s investment in the scheme. The return one receives from investments in a mutual fund is from the difference in the NAV of the scheme on the day of investment and day of purchase of mutual fund units. Dividends are also provided by mutual funds depending on the option chosen: in the growth option no dividends are given, whereas under the dividend option, the scheme may declare dividends, quarterly or annually or at any other frequency depending on the pace of growth of the scheme.
Mutual fund investment can be done without having to leave one’s home by just filling out the application for the scheme selected and by making the payment by cheque. The application can be mailed directly to the investor service center or handed over to a mutual fund distributor or your personal financial advisor. Repeat investments in a scheme may be made by using the forms for additional purchases that are sent by your mutual fund with your account statement. One of the good ways of investing in mutual funds is by use of their Simplified Investment Plans(SIPs) or plans which allow you to make monthly or quarterly investments in a scheme. You can do this by providing at one time either six or twelve post-dated cheques(the six cheques for a six month SIP and the twelve cheques for a twelve month SIP) and four cheques for quarterly SIPs. Your mutual fund will deposit the cheques on the date issued and credit to your account the number of units that can be purchased for the amount of the cheque on the date of issue of the cheque. The SIPs can be used akin to a recurring deposit facility in a bank.
It is important to provide information requested about you(in the application) to your mutual fund by completely filling the initial application. Nomination for the investment is possible in all mutual fund schemes and should be done like in a bank account. Mutual funds are keeping up with technology and if you provide them with your email address, they will keep you informed through email about transactions on your account, apart from mailing you hard copies of account statements.
Returns from mutual funds are likely to be in the range of 8-14% per annum for debt oriented schemes and in the range of 15-18% per annum for equity oriented schemes and may be expected to be 12-16% per annum for balanced schemes. Actual returns may be lower or higher than those indicated depending on market conditions for debt and equity instruments. Your decision to invest in a scheme should be based on the consistency and rate of returns from a scheme, which you can ascertain from the annual ratings of mutual fund schemes published by many magazines. Look for average returns over atleast 1 year and preferably over 3 years, because even 1 year is too short a time to be getting a fair idea of a scheme’s performance. Keep in mind too that the risk of debt schemes is lower than those of equity schemes with the exact risk being a factor of type of debt and equity in which the schemes have invested in.
Mutual funds have entry loads and exit loads to regulate the funds being invested in their schemes. These have to be verified prior to investment because the entry and exit loads can influence the rates. You will also have to verify whether your scheme has a lock-in period during which you cannot redeem units held by you – check this before making an investment in any mutual fund scheme.
You should look at the responsiveness of the investor or customer service center of the Mutual Fund House that you choose. These centers are expected to provide immediate assistance on the telephone or by email and also by regular mail. More importantly, the mutual fund should send you the redemption amount(by cheque) within 3-5 days of your request for redemption reaching them. Some funds have recently initiated moves to directly credit redemption proceeds to the investors bank accounts and this will reduce the time required for redemption of mutual fund units and make mutual funds more attractive to investors.
The disclosure and information sharing practice of each mutual fund house is also a factor to be considered for comparing mutual funds. Investors should receive details of the investments made in the scheme they have invested, at least once in a quarter. Of course, mutual funds reveal the NAV’s of their schemes daily and these are available from newspapers or through the websites of the concerned mutual fund.
There are several mutual funds in the country today and the good ones among them are Franklin Templeton, HDFC, Prudential ICICI, Pioneer ITI and Zurich India Mutual Fund Houses. Of course these are not the only mutual funds with good customer service or providing good returns on investments – each investor will either need to consult their personal financial advisor or mutual fund distributor for advice on the right fund house and the scheme that is worth investing in. One of the recent developments in the mutual fund industry is that the postal department has tied up with leading mutual funds and post offices are now one more place where one can invest in mutual funds.
