Posts Tagged: ‘MF’

Death of the Mutual Fund

December 30, 2014 Posted by admin

For many decades the core investment of most individual accounts, 401ks, and IRAs has been the mutual fund. Various structures of loads, annual fees, or 12b-1s may exist but the main concept has stayed the same. This involves the computation of the fund’s NAV (Net Asset Value) on a daily basis with the gain or loss being posted shortly after the market close. In my opinion, this concept will soon go the way of fractional stock quotes due to the emergence of ETFs (Exchange Traded Funds), where efficiency and management effectiveness can be factored into the price.

ETFs are much more efficient than traditional MFs. Most traditional mutual funds have to keep a percentage of the fund’s assets in cash to handle redemptions. This hurts the performance of the fund since investors pay fund managers to invest in companies, not cash. Having to keep cash on hand to deal with this “redemption burden” is one reason that the majority of all mutual funds underperform the S&P 500 each year. Some funds would combat this by having their funds “closed” for most of the year, and only “opening” their funds at a few specific dates for new investor money and redemptions. This is plain scary as many people have recently learned the value of liquidity the hard way due to mortgage or other financial problems. “Penned-up” capital gains have also caught many investors off guard. When investors purchase the recent “hot performing” fund or buy a mutual fund after a market upswing, many do not realize that they are buying into this fund’s capital gains also. Getting a large unexpected capital gain distribution from a recently bought mutual fund can be frustrating and add uncertainty to your tax planning strategies.

How is management effectiveness priced into an MF? In the case of traditional mutual funds, the simple answer is that it is not. Investors have to rely on ratings from Morningstar, Value Line, or even promotional material from the fund itself to evaluate management effectiveness since the fund’s bid price is almost always based on its NAV. Manage effectiveness, like stocks, are best evaluated on a free market basis. Since ETFs trade just like a stock on an exchange, their premium or discount for management effectiveness is factored directly into its trading price.

More and more often I find myself recommending ETFs to my clients instead of mutual funds. I realize that I won’t be getting any all-expense paid trips to some Caribbean island where many mutual fund companies take their top producing brokers for “due diligence meetings”, but I would rather keep my integrity and bring higher performance to my clients instead. The only time I still consider buying a traditional mutual fund for a client is when I am planning for a long-term purchase, with a well-respected fund manager, and no potential needs for liquidity for several years.

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Mutual Fund Investments

September 25, 2014 Posted by admin

It is usually observed that an investor, investing capital in mutual funds (MF) for the first time, is apprehensive about the investment all together and more so about the safety of his capital. The disclaimer that haunts the investor is ‘Mutual funds are subject to market risk, please read all scheme related documents carefully before investing’. However, the risks when compared to other market investments are substantially low. But what is a mutual fund really?

MF is a kind of trust that stands primarily on five pillars. They are: unit holders, trustees, sponsors, a custodian and an Asset Management Company (AMC). In simple words, it is an indirect investment plan. It is an investment where the primary investor does not have a clue as to where his capital has been invested. However, he is assured of a fixed amount of interest. It is a collective scheme where a big investor collects different amounts of capital from smaller investors and invests them in some bigger opportunities. It is from these big investments that big returns are received and later distributed to the smaller primary investors. The sum that is passed on to the primary level is a pre-assured one. The big investor assures the smaller investors of the minimum amount of interest or profit they would be getting, thus minimising the risks for the smaller investors. Some MFs are ‘open – ended’. It means that the investors can buy or sell the shares of the fund at any given time.

The next most important part in understanding what is a mutual fund, is to understand how it is different than the other market investments. MFs invest in securities like; bonds, convertible bonds, debentures, shares etc; depending on what is the expected result of the investment scheme. Such a fund has two clear benefits: one, the profit earned; and second, any capital appreciation realised by the sale in the process. In India, the investments in mutual funds are in consonance with the regulations of the Securities and Exchange Board of India (SEBI). Mutual funds are different from other kinds of investments as they are not individual investments.
After understanding the components of the mutual funds investments, it is necessary to understand what NAV or Net Asset Value of a scheme is. It is basically, the performance indicator of the scheme. It is the market value of the securities held by the scheme. The Net Asset Value changes each day, with the changing value of the security invested in by the scheme. The per unit value of the NAV is the market value of the securities invested in for the scheme, divided by the total number of units of the scheme at any particular point in time.

The main purpose of investing in the MF is the traditional investment idea. Collective investments always run a lesser risk, as compared to individual investments in the market. Individual investments might be able to give higher returns, but when the markets are volatile, it may result in catastrophic loss, unlike mutual funds, which always assure the primary capital to be safe.

Pros and Cons of Mutual Funds

August 5, 2014 Posted by admin

As a structure, mutual funds(MF) have inherent advantages: Expert research team and fund managers ?�EUR” Unless you devote full time to research, you cannot expect to do justice to your portfolio. In mutual funds, you just leave the research to the specialists and relax while they do their job and deliver returns for you Diversification ?�EUR” A single stock or a single bond inherently has risks. Think of the Satyam or the Enron debacle. But as a market, the risks are far lower. This simple concept, wherein you use the fact that not all stocks go bad at the same time, though individual stocks sometimes could, is called diversification. MFs use this to your advantage, through holding several stocks or bonds at any given time Risk control ?�EUR” Experts in the regulatory bodies, and in the fund houses themselves, have laid down strict rules that funds must follow. This is a scientific way to keep risk low and manageable. You would struggle to do this yourself. There are some special advantages of MFs in the Indian context:
1. Customer friendly regulatory environment: MFs in India are regulated by the Securities and Exchange Board of India (SEBI). Over the years, SEBI has introduced several features to make mutual funds customer friendly ?�EUR” such as safety, low transaction costs, transparency on fund portfolio and strict disclosure norms for the funds. Indeed, in several ways, investing in MFs in India is cheaper and easier than in the West. 2. Tax treatment: MFs enjoy a favourable tax treatment in India, far better than even the US and several Western markets. In India, they are treated as a pure pass-through, i.e. there is no separate taxation of funds. In case of equity and gold, the only tax that happens is at the product level. In case of debt, it is even better. While interest from debt if you invest in a fixed deposit is taxed as income, mutual fund debt is taxed as capital gains, a far more lenient system.
3. Low cost: As a result of the above points, the annual cost of holding MFs in India is very low (hardly 2% in case of equity and less than 1% in case of debt). This is a very small price to pay compared to the returns you can generate, and the other benefits mentioned above.
There are very few cons of a MF. In fact, we struggle to think of any serious contender! But yes, for certain expert and involved investors who are regularly updated on the market, mutual funds may be unnecessary. They may prefer to deal in the equity or debt markets directly.For more knowledge and wisdom on Personal Finance, visit the website of fintotal