A mutual fund is an investment vehicle which pools together investor's money generally to purchase stocks and bonds. Investors participate in the mutual fund by purchasing shares of the entire pool of assets, thus diversifying their investment.
The pooled assets are invested by professional managers who buy and sell securities on behalf of the investors. The activity of investing and managing the portfolio is quite onerous, and hence delegated to a Asset Management Company (AMC) for a fee.
Since the Mutual Fund beneficiaries (or Unitholders, as they are more commonly called) may have their own pre-occupation, they also entrust the job of keeping an eye on the AMC to a set of Trustees.
Mutual Funds is a very large business activity world-wide and in India, SEBI regulates this industry for the protection of investors. SEBI has laid down that a Mutual Fund, the Trustees and the AMC should be three distinct entities. It also mandates that the Custody of the Portfolio should not be with the AMC but with a Custodian, specifically approved by SEBI.
Why do people use Mutual Fund scheme?
Many people purchase mutual funds because they are a convenient and cost effective method of obtaining diversification and professional management. Because mutual funds hold anywhere from a few securities to several thousand, risk is spread out over a number of investments. Additionally, mutual funds generally buy and sell securities in volume, which allows investors to benefit from lower trading, management and research costs. Another advantage that mutual funds offer is that fund performance is subject to frequent reviews by various publications and rating agencies, making it possible for investors to conduct direct comparisons between funds.
Who is a custodian?
A Custodian is an independent agency who holds the physical custody of the Financial Securities owned by a client. SEBI has registered a few agencies as Custodians who can provide these services. SEBI also requires that Mutual Funds appoint such registered Custodian for maintaining their securities.
The Custodian ensures that:
all Securities are maintained systematically
the Sales and Purchases are carried out properly
Bad deliveries are cleared by the broker
Dividends or Interest or Redemption proceeds are collected on the due date
Any benefits, such as Bonus or Rights are accrued
Who is a Registrar?
A Registrar holds and maintains the details of the transactions carried out by each Unitholder in a Mutual Fund scheme. He is appointed by the AMC to serve the Unitholder for the purchases, sales or switching of Units that he may carry out. The dividend distribution, recording of nominations or transfers are some other services rendered by the Registrar. He may also have Investor Service Centres in various cities, where an investor can get over-the-counter service.
What are Risk Factors?
Any investment is open to risks. Investment managers try to classify these risks into different categories for better understanding. Some of these categories are:
Market risk
The price of a security may be affected because of the overall sentiment in the market. Sentiment means how most people in the market feel.
Economic Risk
The prices of securities may fluctuate because the expectation about the national economy, whether the economy as a whole is slowing or growing. It also means how an economy is doing compared to other competing economies.
Interest Rate Risk
Changes in interest rate (which occur due to change in supply and demand for money) influence security prices. In case of fixed income securities, the impact is direct. If interest rate rises, price falls and vice-a-versa. Fall in interest rates may benefit share prices because cost of funds to companies may move down, hence their profit may go up.
Credit Risk
The risk of failure on part of a borrower to meet interest and principal amount obligations.
Regulatory risk
Pries of securities may be affected due to changes in law, procedures, import export policy etc.
Industry risk
A particular industry may be affected due to certain developments peculiar to that industry.
Technology Risk
Discovery of new processes or radical change in technology used by certain companies may affect prices of shares of that company. This is also known as risk of obsolescence.
Environmental Risk
Certain companies may be adversely affected because of certain restrictions imposed on them by the authorities for protection of the environment.
Event Risk
Some times an event such as an accident or an earthquake may influence prices of securities because the event may cripple the operations of a company temporarily or permanently.
Country risk
A country in financial difficulty may impose restrictions on trade and capital flows affecting investments made in that country.
The above list is not exhaustive; only illustrative. Such categories of risk are often referred to as risk factors.
What is a Portfolio?
A single investment does not make a portfolio. A portfolio comprises of two or more investments which are not similarly affected by various risk factors. If the price of an investment drops because of the influence of a risk, the price of another investment may rise reducing the impact on the total investment. The risk on a portfolio is thus generally lower than the risk on a single investment. The portfolio risk depends on the nature of each investment in the portfolio and the overall impact (favourable or unfavourable) of the various risk factors on each security. A scheme of a mutual fund states the kind of portfolio it seeks to construct. It also states how a set of risk factors is likely to affect such a portfolio.
How is Investment in a Mutual Fund different From a Bank Deposit?
When you deposit money with the bank, the bank promises to pay you a certain rate of interest for the period you specify. On the date of maturity, the bank is supposed to return the principal amount and interest to you. You have no right to know how the bank invests the money in turn and you have no right to seek a share in the profit a bank may make. Whereas, in a mutual fund, the money you invest, is in turn invested by the manager, on your behalf, as per the investment strategy specified for the scheme. The profit, if any, less expenses of the manager, is reflected in the NAV or distributed as income. Likewise, loss, if any, with the expenses, is to be borne by you.
What is a "Close-end fund" vs. an "Open-end fund" ?
A closed-end fund has a fixed number of shares outstanding and is traded just like other stocks on an exchange or over the counter. The more common open-end funds sell and redeem shares at any time directly to shareholders. Sales and redemption prices of open-end funds are fixed by the sponsor based on the fund's net asset value; closed-end funds may trade a discount (usually) or premium to net asset value.
What are the features of Escorts Income Plan ?
Investment Objective
The primary investment objective is to generate current income by investing predominately in a well diversified portfolio of fixed income securities with moderate risk levels. As a secondary objective, the Scheme's income may be complemented by possible capital appreciation. There is no assurance and guarantee that these objective will be achieved.
Investment Pattern
Money market instruments :10 - 20 %
Fixed Income securities : 70 - 80 %
Equity Shares and equity related instuments : 0 - 10 %
Units of other Mutual Fund Scheme(s) : 0 - 5 %
Repurchase/Redemption
The Units can be redeemed on any business day (which excludes Saturday, Sunday and any holiday declared under the Negotiable Instuments Act, 1982)
Repurchase Price
The prevailing NAV less an exit load communicated to you at the time of investment. For this purpose holding will be reckoned on First in First out (FIFO) basis.
Payments of Redemption Proceeds
Within 5 working days from the date of notice for redemption
Listing
Being an open ended Scheme listing of Units on a recognised Stock Exchange is not contemplated.
On-going Expenses
Not Exceeding 2.25% of weekly average net assets, in any financial year, on the First Rs. 100 crores, including investment Management and Advisory Fees not exceeding 1.25 %
What are investment options available?
Dividend Option
Dividend option will suits the needs of those investors who are desirous of receiving regular income by way of dividends, which are exempte from tax along with income from specified securities/deposits subject to specified limits under section 80L(1) of the Income-tax Act, 1961. Under the Dividend Option, dividend shall be declared at annual rests, as may be after the close of relevant period.
Growth Option
Growth Option will suit those investors who do not require regular income, by way of dividends but are desirous of enjoying capital appreciation. They will enjoy the twin tax benefits of indexation and lower tax rate on long term capital gains under section 48 and 112 of the Act. No dividend will be declared under the Growth option.
What is NAV?
The net asset value (NAV) is the value of the fund's underlying securities. It is calculated at the end of the trading day. Any open-end fund buy or sell order received on that day is traded based on the net asset value calculated at the end of the day. A few funds calculate net asset value at more frequent intervals and process trades at those values.
NAV =
( Market value of investments
+
Unmortised initial offer expenses
+
Receivables
+
Accrued income
+
Other current assets
-
Payables
-
Accrued expenses
-
Other currenet liablities and provisions )
/
No of Units outstanding
How much can one earn in Escorts Mutual Fund?
There is no formal assurance given regarding yeild on units.Interest on Government Securities will be accrued on daily basis and will be reflected in the NAV irrespective of when a unit holder enters or exits a plan in the scheme. Investors should note that even though interest is accrued on daily basis, the NAV shall also reflect the prices of investments in government securities and Equity for Tax Plan. Irrespective of what happens to NAV because of price fluctuations, interest will continue to accrue through out the life of a government security where receipt of interest and principal is not in doubt. Hence, the unit remains a safe investment.
There is a small charge of 0.05% in case a unit holder wishes to exit within 5 working days of entry in the Income Plan. The charge is 0.15% if a unit holder exits with 30 days of entry from the Income Plan. Escorts Mutual fund, does plan to periodically distribute income through the dividend to those investors who opt for this options. Income to unit-holders will be by way of capital gains when they redeem their units as and when they require
Even though there is no distribution of income, what yield one can expect?
Before we answer that question, please note that the scheme is divided into two separate plans. The two plans are (a) Savings Plan; and (b) Investment Plan. Each plan will have a separate NAV. 70% of the money collected under the saving plan will be invested in Government securities with maturity less than one year.
Balance money will be invested in Government securities with maturity more than one year. If one uses the market rates of Government securities prevailing during most of October 98, the average yield can be expected to be around 8.5% p.a. after expenses which is far better than what one gets in a savings bank account or comparable to short term bank deposits without the penalty on premature withdrawal. In Investment Plan
70% of the money collected will be invested in Government securities with maturity of more than 1 year. 30% will be invested in maturity of less than 1 year. The average yield works out to about 10% p.a. after expenses based on prices available during October 98. Yields in both cases will be available as capital gains.
For investors who hold the units for a period longer than one year, will be entitled to pay long term capital gains tax with indexation benefit. Assuming inflation rate is 8%, the effective pre-tax yields for tax brackets of 30% is tabulated below.
