Sunday, September 24, 2006

Concepts Clarified !!!!

Some Concepts Clarified
There are certain concepts that I would like to clarify before we touch upon the much awaited subject of Mutual Fund investing.
NAV is a term that you will often hear in the context of Mutual Fund investment.

Net Asset Value is the market value of the assets of the scheme and cash on hand minus its liabilities and management fees.

The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. So, Net Asset Value is the market value of a unit of a scheme after accounting for all expenses on any given business day. The market value of the investments is determined on the basis of their closing prices on the principal stock exchange.

For most funds, the NAV is determined daily, after the close of trading on some specified financial exchange, but some funds update their NAV multiple times during the trading day. Open-end funds sell and redeem their shares at the NAV, and so only process orders after the NAV is determined.

Closed-end funds may trade at a higher or lower price than their NAV; this is known as a premium or discount, respectively. If a fund is divided into multiple classes of shares, each class will typically have its own NAV, reflecting differences in fees and expenses paid by the different classes.

Some mutual funds own securities which are not regularly traded on any formal exchange. These may be shares in very small or bankrupt companies; they may be derivatives; or they may be private investments in unregistered financial instruments (such as stock in a non-public company). In the absence of a public market for these securities, it is the responsibility of the fund manager to form an estimate of their value when computing the NAV. How much of a fund's assets may be invested in such securities is stated in the fund's prospectus.

The NAV is what one share or unit is worth right now. You don't invest in a mutual fund by buying a fixed number of units but rather by a lump rupee sum such as Rs.1,000. Since it would be a fluke for the unit price to be an exact, even multiple of your investment, you will be issued some partial units to make up enough to cover your investment to the paise.

In the next blog, I shall explode a myth commonly associated with NAV.

Tuesday, September 19, 2006

Organisation of MF

Organisation of MF

Now, let us see the parties involved in the initiation and operation of a Mutual Fund.

A sponsor (promoter) creates a trust (the Mutual fund). The fund should be approved by the regulator, i.e., SEBI (Securities and Exchange Board of India).

The Trustee appointed by the sponsor is authorised to accept funds from various investors for management in accordance with a specified objective. The Trustee safeguards the interest of investors in the mutual fund and also ensures that the operations of the fund comply with the relevant regulations.

The investment of the funds and other functions are managed by an Asset Management Company (AMC) appointed by the Trustee of the fund. The Trustee oversees the performance of the AMC. The AMC employs professionals to manage the funds.

The AMC is assisted by a custodian and a registrar (transfer agent). The custodian, normally a bank or any other financially sound institution, is responsible for the custody of the assets of the fund and safeguarding the interests of the fund arising from the assets. The registrar maintains the records of the unitholders (the MF beneficiaries)and handles communications with them..

SEBI has laid down that a Mutual Fund, the Trustees and the AMC should be three distinct entities. It also mandates that the Custody of the Portfolio should not be with the AMC but with a Custodian, specifically approved by SEBI. SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent.

Sunday, September 10, 2006



Mutual Funds – a globally proven investment vehicle – is slowly finding a place in the investment itinery of Indians. For those averse to Mathematics, the title might sound a little intimidating but it is all the same inviting.There is no magic mathematical formula for successful Mutual Fund investing… all it requires is pure common sense and a clear understanding of the concept.

Welcome to the world of mutual funds…..

In this blog, it will be my endeavour to demystify the concept of Mutual Funds so that even a layman can reap the benefits it offers and build his wealth.

What is a Mutual Fund?

A Mutual Fund is a trust that is mutually beneficial to all those who have put their money in it. It is an investment vehicle that pools the money of several investors and invests it in different securities. It is not an alternative investment option to shares and debentures.Rather it pools the money of several investor s and invests in the same.

To understand Mutual Funds, we need to take a step back. If you want to invest, say in shares or debentures of companies, how do you go about it?

First, you decide on what level of risk you are willing to take and what kind of returns you are expecting. Your decision at this stage will determine the amount of investment you will do in shares (equities) and debentures (debt). Normally, shares carry a higher risk and result in higher returns while debentures carry a lower risk and have lower returns. This allocation of investments is known as asset allocation.

Once you have done this, you have to select the shares and debentures you want to invest in. You can do this by independently researching companies or act on tips. This process of choosing specific investments is known as scrip selection.

If you have selected shares, which are quoted on the stock markets, you will have to call up your broker and place the order. Alternatively, if you have selected a company whose share is available by way of a public issue, you will have to fill up the necessary application form and pray that you will get some amount of shares (especially if the public issue is considered attractive). Similarly you could be buying debentures, which are listed on the stock markets, or apply for them in public issues.

Now that you are invested in the companies of your choice and in the manner you choose, equity and/or debt, you have to continually monitor your investments. You have to track the company's performance, collect your dividends and interest payments and take that most crucial decision of selling your shares when you feel you have achieved your target price OR live with your losses if the share prices/investments have tanked.

Seems a lot of work, doesn't it? Wish there was someone who would do it all for you?

That's what a Mutual Fund does. It collects money from lots of small investors and invests on their behalf.
The investors pool their money with the Fund Manager who in turn invests it in securities. These securities generate dividends, interest and sales proceeds that are distributed to the investors on a pro-rata basis. The owner of a MF unit gets a proportional share of the fund’s gains losses , income and expenses.
And the cycle continues…

Thus, buying a MF is like buying a small slice of a big pizza.

Friday, September 08, 2006



Welcome to the Blog of Indian Mutual Funds.