Tutorials On Mutual Fund

There are two prominent NFOs (New fund offer) walking the ramps ready to be grabbed. One being the TATA Growing Economies Infrastructure Mutual Fund and HDFC Infrastructure Mutual fund. Well, Mutual funds are generally resorted to by those who are little finicky about taking plunge into the capital market at their own risk. The reasons being dearth of right advice, high speculation which brings with it the risk of default, obscurities about the functioning of the stock market ,etc. That’s where the Mutual Fund companies, technically called Asset Management Companies (AMCs) , have a key role in bridging the gap between the investors and the companies.

Structurally speaking, Mutual fund consists of a three-tiered structure, with the sponsor company taking the initiative to float a AMC. On granting of permission by SEBI, based on several criteria, the sponsor company forms a Trust to be governed by a Board of Trustees holding in trust the investment of the unit holders, Viz, the investors in the mutual fund scheme. With the formation of trust, trustees form the so-called AMC which will comprise of Fund Managers, among others, who are professionals with a great deal of knowledge on capital market. For example, in the case of HDFC mutual fund(the AMC) the sponsors being HDFC and Standard Life investment Limited and trustee being HDFC Trustee company Limited.

NFO in case of Mutual fund is offer from the sponsor company inviting money from the public with a specific investment objective. In the case of HDFC Infrastructure Fund the Offer Document specifies that Investment Objective is:
“To seek long term capital appreciation by investing predominantly in equity and equity related securities of companies engaged in or expected to benefit from the growth and development of Infrastructure”
Here the objective suggests that the pool of money to be collected from the NFO is to be invested primarily in equities. Thus, this basically is a Equity Fund as against a debt fund which aims to invest substantial amount in Debt securities. Equity Fund are generally growth oriented in nature where it undertakes to re- invest the proceeds of the capital appreciation (i.e. any increase in the value of its investment) than to distribute dividends.

This points out that Mutual Fund offers various schemes tailored to meet the specific needs of the investors ranging from fixed income, high returns, Focus on one particular sector, etc. However the major aim of Mutual Fund schemes is to diverse the risk. It is just based on the maxim , “Don’t’ Put all your eggs in one basket”. It creates a portfolio (collection) of investment and thereby making the performance of a particular scheme completely dependent on the underlying portfolio. This is indicated by Net Asset Value of the Unit (NAV). NAV per unit is arrived at by aggregation of Market value of the investment , accrued income deducted by expenses and other liabilities which as a whole is divided by the number of units under the scheme.

This NAV can be considered as quote price at which units can be sold or bought in the secondary market, in case of Closed-ended scheme which prohibits the investors to redeem it with AMC, unless otherwise stated. On the contrary Open-ended scheme gives the flexibility to sell the units to or buy the units from AMC with the specified Exit and Entry load respectively. Load refers to a charge made on the investors .
And these are basics one should know about Mutual fund. And before investing in Mutual fund, as all the advertisement would say, one should read the offer document carefully with regard to various terms and conditions keeping in mind one’s need for investment.

Now go and take a dive :)

Speculation Syndrome...

Of late, there has been too much of volatility in the stock market. This is a bad news for the economy as it is likely to devastate the confidence of the small investors. This was one of the concerns raised by the parliamentary standing committee on Finance,recently. It is time Ministry of Finance, Government of India and the Capital market regulator, SEBI (Securities Exchange Board of India), cannot afford to take the issue of speculation with pinch of salt anymore.

One needs to know what is speculation and how it can create volatility to get the complete picture of what’s going around. Well, a person is said to be a speculator when he enters the market with the sole intention of making profit from price variations. Whereas a investor stays invested in the company for a long time reaping the benefits that the company may shower on its shareholders. Now the question is how does one speculate. This can be done legally by resorting to what is called margin trading, which is a system that allows one to buy shares without having money, by borrowing or selling shares without owning it. Hmmm….that must sound interesting. Yes , it is!! Here the speculator neither takes delivery of shares or makes payment. All he does is to square off the position. It means doing the reverse thing- taking a sell position after a buy position and vice versa. He can pocket the difference if prices moved in his favour. That’s speculation.

But speculation is not all that bad. It creates competition and helps discover better price for the shares traded. This indeed helps the companies to raise funds from primary market for their business projects.

However, too much of speculation can be catastrophic to small investors. Reason being not all speculators make profit and as a result the risk of default rises. Payments are deferred and delivery doesn’t take place. It is the small and retail investors who are left in a quandary.

Government and SEBI has introduced measures like, among other things, deposit for margin trading , rolling settlement to curb the menace of speculation. Both NSE (National stock Exchange of India ) and BSE (Bombay stock exchange ) follow a settlement mechanism of T+2, under which settlement, in terms of payment for shares bought and delivery of shares sold , has to be made on the third day of trading.

Well, that’s speculation for you!!

Unbridled Passion...

Look around. There are very many obvious clues that tells you that the world is becoming more materialistic. Making money is the mantra that drives the people's lives. The passion to earn quick bucks has been unbridled. Inequality is widening far more alarmingly than ever before. The paradox that a country can have more than a dozen a billionaires and nearly a quarter of its population living below the poverty line is becoming a reality. After all it just takes a bit of getting used to.

My basic intention to start this blog is to share with people things i know about stock market and the factors that drive our economy .

Happy reading.....