Ask Mint | If you find the market puzzling, try the mutual fund route

Ask Mint | If you find the market puzzling, try the mutual fund route
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First Published: Mon, Nov 19 2007. 01 09 AM IST

Shailaja and Manoj K. Singh
Shailaja and Manoj K. Singh
Updated: Mon, Nov 19 2007. 01 09 AM IST
Shailaja and Manoj K. Singh
Our friend Johnny thinks that the rise in the Sensex this year has been the outcome of interest shown by some invisible aliens from Mars. What else could explain the doubt expressed by some regarding the source of money sloshing around the globe? Johnny has no complaints against the aliens, but he regrets not having joined the party sooner. Johnny missed the tide because he has neither the time nor the expertise to invest. Then what’s the solution? Let’s see what our friends are chatting about today:
Johnny: Hi Jinny! What a wonderful rise the stock market saw this year. I really regret not having entered the market at the right time. But what else could I have done? After a day’s job in the office, I hardly get any time to think about the stock market.
Jinny: I don’t know what makes you think aliens are behind the rise of our stock market. But you could have joined the party by using the expertise of mutual funds.
Johnny: Mutual funds? But how can they help me?
Jinny: Look, to invest in the stock market, you need to first understand how the market works. You also need to understand the fundamentals of the firm in which you want to invest. As if that’s not enough, you are also required to keep track of different economic indicators that can shake the market. All of this requires time. But even after putting in so much effort, you may end up picking a wrong stock at the wrong time. To end all this trouble, you have the option of investing through a mutual fund, which pools the savings of a number of investors for investing in the stock market. The main advantage of investing through mutual funds is that you do not have to worry about the day-to-day management of your investment. Mutual funds offer you different schemes that have well-defined investment objectives. Mutual funds use the expertise of professional fund managers for investing your money in different kinds of securities such as money market instruments, shares, debentures, and so on, depending on the objectives of the schemes.
Johnny: Different schemes, different objectives, how will I know?which?one suits me best?
Jinny: The?choice?of schemes depends upon many factors, including your age, financial position and your risk appetite and return expectations. On the basis of their structure, mutual fund schemes can be of three types: open-ended, closed-ended and schemes of a third type, which carry the features of both the open- and closed-ended schemes. Open-ended schemes do not have any prefixed maturity date. You can walk in or out of the scheme any time at the net asset value (NAV) of your investment. In contrast, closed-ended schemes have a prefixed maturity period. You can directly invest in the scheme at the time of initial launch of the issue. Subsequently, the units of the scheme are listed on the stock exchange, where you can buy or sell at the market price, which could be different from the NAV of your units. The schemes of the third type are traded on the stock exchange and, at the same time, they may also offer you an option of redemption at predetermined intervals at NAV-related prices.
Johnny: But what about the investment objectives?
Jinny: Mutual?fund?schemes cater to many objectives. First, there are growth-oriented schemes, the primary objective of which is to invest in equities so that your investment grows with the rising stock market. Second, there are income-oriented schemes, the primary aim of which is to provide you a steady source of income at regular intervals. These schemes mainly invest in fixed-income securities such as bonds and debentures. Third,?there?are schemes that try to balance both the growth and the income objectives by investing in both shares and fixed-income securities in different proportions, which could vary from scheme to scheme. Fourth, there are money markets and liquid schemes that invest in short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. The main objective of these is to offer high liquidity and security to investors. Fifth, there are tax-saving schemes such as equity-linked savings schemes and pension schemes, the main objective of which is to provide tax saving to investors. In this manner, you could have as many schemes as the number of objectives.
Johnny: Yeah! Multiple schemes take care of multiple needs. But what about the multiple jargon that crops up? Can you explain what net asset value means?
Jinny: I can surely explain, but for that you will have to wait till next week.
IN SHORT:
What:Mutual funds pool the savings of retail investors to collectively invest them in the stock market.
Why: Mutual funds are popular because they provide professional management of funds at an affordable cost.
How: Mutual funds make use of professional fund managers to make investments in different securities such as shares, debentures, money market instruments and other securities.
Shailaja and Manoj K. Singh have important day jobs with an important bank. But Jinny and Johnny have plenty of time for your suggestions and ideas for their weekly chat. You can write to them at realsimple@livemint.com
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First Published: Mon, Nov 19 2007. 01 09 AM IST