Project on Investment in Securities Market
Financial Planing
(Source: SEBI Website - Securities Market Awareness Campaign
Empowering Investors Through Education)

How to transact in securities?
Mutual funds & Collective investment schemes

Some of you may prefer some kind of collective investment vehicle, which can pool your marginal resources, invest in securities and distribute the returns among you on cooperative principles. You benefit in terms of reduced risk, and higher returns arising from professional expertise of fund managers employed by such investment vehicle. This is the appeal of the mutual funds which offer a path to stock market far simpler and safer than call-a-broker-and-buy/sell-securities route. In India, we have a large number of funds offering a large variety of schemes to suit requirements of every type of investor.

The securities market is highly volatile. The risk of losing money is high. Selecting securities with growth and income potential from the securities market involves careful research and monitoring of the market, which is not possible for all investors. Also the key to successful investing in securities markets lies in building a diversified portfolio, which requires substantial capital.

The mutual fund is a professional intermediary between the investor and the securities market. The mutual fund mitigates to a large extent the shortcomings of direct investing. The specific advantages of investing in a mutual fund are:

• Professional Management:
  The mutual fund has investment management skills and research skills topped by a professional management.

• Diversification:
  An investor in a mutual fund acquires a diversified portfolio no matter how small his investment. Thus the risk of loss is spread over a large number of investors and thus the individual does not face the entire loss. Also the risk of one instrument is spread over a large number of investment instruments.

• Low Costs:
  The mutual fund has economy of scale; the fund pays lower cost because of larger volumes and this benefit is passed on to the investor.

• Liquidity:
  Units of a mutual fund can be sold back to the fund (Open-end), or sold in the market (Closed-end) or redeemed at end of specified period.

• Transparency:
  The NAV of the schemes are displayed everyday on Association of Mutual Funds in India (AMFI) website as well as other websites

• Choice of Schemes:
  The Mutual funds offer a wide range of schemes which can suit different types of investors.

• Regulated:
  Mutual funds are regulated by SEBI.

You should first know your own investment objectives i.e. whether you want liquidity or short-term returns or long term capital appreciation. Then you should select the type of schemes available matching your investment objective. After the scheme selection, you must compare the past track record and returns of such scheme by different mutual funds. For this you should thoroughly verify the offer document with emphasis on past performance, sponsors, investment objective, asset allocation pattern, etc.

You should choose a scheme by looking at the scheme highlights, scheme specific risk factors, details of fees, expenses and load and past performance, apart from the investment objectives and policies and comparing it with other schemes.

In case of open-end schemes, you can purchase the units directly from the fund itself. You can approach the fund's office or through the Distributors/Brokers/Sub-Brokers or Agents. In case of closed-end schemes, you can buy the units from the stock exchange where the units are listed or from the Mutual Funds providing repurchase facility. Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. You can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms. Forms can be deposited with mutual funds through the agents and distributors who provide such services. Nowadays, the post offices and banks also distribute the units of mutual funds. However, you should note that the mutual funds schemes being marketed by banks and post offices should not be taken as their own schemes. The only role of banks and post offices is to help in distribution of mutual funds schemes to the investors

The units of the mutual funds are extremely liquid. Incase of open-end schemes, you can redeem the units on any working day at the applicable NAV of that day from the mutual fund itself. Incase of closed end schemes, you can trade the units on the recognised stock exchange where the units of the fund are listed.

These are the funds/schemes, which invest in the securities of only those sectors or industries as specified in the offer documents e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. Sector specific funds are normally cyclical in nature and the risks faced by such funds are also sector specific risks. The returns in these funds are dependent on the performance of the respective sectors/industries.

These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme

Assured return schemes are those schemes that assure a specific return to the unit holders irrespective of performance of the scheme. A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or Asset Management Company (AMC) and this is required to be disclosed in the offer document. You should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year.

The performance of a scheme is reflected in its net asset value (NAV), which is disclosed on a daily basis in case of open-ended schemes and on a weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published in newspapers. The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of AMFI www.amfiindia.com and thus you can access NAVs of all mutual funds at one place and assess their performance.

The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes. You can also look into other details like percentage of expenses of total assets as these have an effect on the yield and other useful information in the same half-yearly format.

Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis. Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance. You should study these reports and keep yourself informed about the performance of various schemes of different mutual funds.

You can compare the performance of various schemes with those of other mutual funds under the same category. You may also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc.

On the basis of performance of the mutual funds, you should decide when to enter or exit from a mutual fund scheme.

You must study the offer document of the mutual fund scheme carefully. You may also look into the past track record of performance of the scheme or other schemes of the same mutual fund. You may also compare the performance with other schemes having similar investment objectives. Though past performance of a scheme is not an indicator of its future performance and good performance in the past may or may not be sustained in the future, this is one of the important factors for making investment decision. In case of debt oriented schemes, apart from looking into past returns, you should also see the quality of debt instruments which is reflected in their rating. A scheme with lower rate of return but having investments in better rated instruments may be safer. Similarly, in equities schemes also, you may look for quality of portfolio. You may also seek advice of experts.

Almost all the mutual funds have their own web sites. You can also access the NAVs, half-yearly results and portfolios of all mutual funds at the web site of AMFI www.amfiindia.com. You can log on to the web site of SEBI www.sebi.gov.in and go to "Mutual Funds" section for information on SEBI regulations and guidelines, data on mutual funds, draft offer documents filed by mutual funds, addresses of mutual funds, etc.

You would find the name of contact person in the offer document of the mutual fund scheme whom you may approach in case of any query, complaints or grievances. Trustees of a mutual fund monitor the activities of the mutual fund. The names of the directors of AMC and trustees are also given in the offer documents. Investors can also approach SEBI for redressal of their complaints. On receipt of complaints, SEBI takes up the matter with the concerned mutual fund and follows up with them till the matter is resolved.

Collective Investment Scheme(CIS) means an arrangement under which investors make contributions, which are pooled and utilised solely for the purpose of the arrangement, with a view to receive profit/income. All the CIS companies are required to be registered with SEBI.

You should ensure that the Collective Investment Management Company is registered with SEBI and is eligible to raise funds from the public by launching schemes. Such schemes have to be compulsorily credit rated as well as appraised by an appraising agency. The schemes also have to be approved by the Trustee and contain disclosures, as provided in the Regulations and is duly filed with SEBI.