MBA

Education
&
Careers
36 December 2010
Eco Fundas for you
I
nvestors whose risk tolerance is low, dread
the stock market because of the inherent fear
that the market will crash and they will loose
their savings. The reasoning behind this is very
straight forward: almost every boom in the market
has been followed by a crash (correction as
market analysts call it), when over-priced stocks
in the market correct their value. In order to
reduce the risk of losing ones money, it is
important to have a well diversified investment
portfolio. Also, it so happens that, sometimes, the
money one has is not enough to buy such a
diversified portfolio. It is in this context that mutual
funds (also called an AMC) come into picture.
What is an AMC? What is an AMC? What is an AMC? What is an AMC? What is an AMC?
An Asset Management Company (AMC) pools
money from investors and invests it in a
portfolio on behalf of the investors. The money
pooled is the mutual fund, which is invested
in various asset classes like equity, bonds,
debentures, commercial paper, and
government securities. In simple words, a
mutual fund is simply a financial intermediary
that allows a group of investors to pool their
money together with a predetermined
investment objective.
All about Mutual Funds
PROMOD JOSEPH
MBA, VIRGINIA TECH.
Who is a Fund Manag Who is a Fund Manag Who is a Fund Manag Who is a Fund Manag Who is a Fund Manager? er? er? er? er?
A
n MF has a fund manager who is
responsible for investing the pooled
money into specific securities. The fund manager,
with his team, tracks and researches different
financial instruments and manages the fund. Even
though one of the advantages is the services of
professionals, the biggest advantage is the
diversification.
What is Div What is Div What is Div What is Div What is Diversification? ersification? ersification? ersification? ersification?
D
iversification is the idea of spreading
money across different types of
investments. When one investment is down,
another might be up. Diversifying the investment
reduces the risk considerably. AMCs make
investments in a variety of stocks and securities
which reduces the risk by providing a diversified
portfolio.
The most basic level of diversification is to buy
multiple stocks rather than just one stock. MFs
are set up to buy many stocks. Beyond that, they
can diversify even more by purchasing different
kinds of stocks, bonds, gold, commodities, and
so on. A person would have to invest a lot of time
to buy all these investments and may not be able
to buy because of financial constraints. But if a
few MF units are purchased, then investments are
automatically diversified in a predetermined
MBA
Education
&
Careers
December 2010 37
ECO FUNDAS FOR YOU: ALL ABOUT MUTUAL FUNDS
M E &
C
category of investments. Here the investor is
spared the time and effort of tracking investments,
collecting income, etc. Another advantage is that
investments can be made in small amounts, that
too as and when the investor has money to invest.
Mutual funds are registered with SEBI and are
highly regulated. In this way, investors are also
assured about a trusted monitoring of their money.
T TT TTypes of Mutual Funds ypes of Mutual Funds ypes of Mutual Funds ypes of Mutual Funds ypes of Mutual Funds
A
n Equity Fund invests a major part in
shares (equities). Since the returns are
directly linked to the performance of the stock
market, an EF carries a comparatively higher risk.
A Diversified Fund invests in companies spread
across sectors. If one sector does not do well,
another sector would bail the fund out.
A Sector Fund invests mainly in equity shares of
companies in a particular business sector or
industry (for example, IT).
An Index Fund replicates the portfolio of a
particular benchmark index like Sensex. The
value of the IF varies in proportion to the
benchmark index.
A Tax Saver Fund offers tax benefits to investors
under the Income Tax Act.
A Debt / Income Fund invests in instruments like
bonds, debentures, government securities, and
commercial paper. The fund aims to provide a
regular and steady income to the investor.
A Liquid Fund / Money Market Fund aims at
providing easy liquidity, safety of capital, and
some decent returns. An LF invests in highly
liquid short term instruments like treasury bills
and commercial papers. The period of investment
could be as short as a day.
A Gilt Fund ensures safety of the principal
amount and also a secured return. A GF is able to
ensure this as it invests exclusively in
government securities which guarantee returns.
A Balanced Fund invests both in equity shares and
fixed-income-bearing instruments (debt) in some
proportion. The idea is to provide the safety and
steadiness of debt market while capitalising on the
high returns earned from the equity markets.
A Hedge Fund is a high risk fund that adopts
highly speculative trading strategies.
Cardinal Rule of Investing
The amount of money you make or lose depends
on the amount of risk you take.
The author is Centre Director, T.I.M.E. Madurai