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mutual fund loosing way
MUTUAL FUND – LOSING WAY
R.YUVARANI
M.Phil Scholar
Department of Commerce
Periyar University
Abstract
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
Of late, mutual funds find their going very tough. Most of the funds are not able to collect the targeted amount from small investors. The mutual fund industry has to face many problems also.
If mutual funds ensure good returns, quick liquidity and safety and create a good rapport with the investors, their future will be bright. They act as a via media between bank deposit and share in the sense it involves a higher risk than a bank deposit and hence a better return, but a lower risk than a share and hence more safety. Hence, soon it would become and ideal vehicle for investment in India. It is time for the mutual funds to act as ‘mutual friends’ by creating a good rapport with the investors by rendering efficient and prompt services. No doubt, there is a bright future for mutual funds in India.
INDROCUTION
A Mutual fund is a professionally managed type of collective investment scheme that a Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
Mutual funds can invest in many kinds of securities. The most common are cash instruments, stock, and bonds, but there are hundreds of sub-categories. Stock funds, for instance, can invest primarily in the shares of a particular industry, such as technology or utilities. These are known as sector funds. Bond funds can vary according to risk (e.g., high-yield junk bonds or investment-grade corporate bonds), type of issuers (e.g., government agencies, corporations, or municipalities), or maturity of the bonds (short- or long-term). Both stock and bond funds can invest in primarily U.S. securities (domestic funds), both U.S. and foreign securities (global funds), or primarily foreign securities (international funds).
Most mutual funds’ investment portfolios are continually adjusted under the supervision of a professional manager, who forecasts cash flows into and out of the fund by investors, as well as the future performance of investments appropriate for the fund and chooses those which he or she believes will most closely match the fund’s stated investment objective. A mutual fund is administered under an advisory contract with a management company, which may hire or fire fund managers.
Performance of Mutual fund
The performance of mutual funds in India in the initial phase was not even closer to satisfactory level. People rarely understood, and of course investing was out of question. But yes, some 24 million shareholders was accustomed with guaranteed high returns by the beginning of liberalization of the industry in 1992. This good record of UTI became marketing tool for new entrants. The expectations of investors touched the sky in profitability factor. However, people were miles away from the preparedness of risks factor after the liberalization.
The net asset value (NAV) of mutual funds in India declined when stock prices started falling in the year 1992. Those days, the market regulations did not allow portfolio shifts into alternative investments. There were rather no choice apart from holding the cash or to further continue investing in shares. One more thing to be noted, since only closed-end funds were floated in the market, the investors disinvested by selling at a loss in the secondary market.
MUTUAL FUNDS vs. OTHER INVESTMENTS
Mutual funds offer several advantages over investing in individual stocks. For example, the transaction costs are divided among all the mutual fund shareholders, which allows for cost-effective diversification. Investors may also benefit by having a third party (professional fund managers) apply expertise and dedicate time to manage and research investment options, although there is dispute over whether professional fund managers can, on average, outperform simple index funds that mimic public indexes. Whether actively managed or passively indexed, mutual funds are not immune to risks. They share the same risks associated with the investments made. If the fund invests primarily in stocks, it is usually subject to the same ups and downs and risks as the stock market.
ADVANTAGES OF MUTUAL FUNDS
The advantages of investing in a Mutual Fund are:
Diversification:
The best mutual funds design their portfolios so individual investments will react differently to the same economic conditions. For example, economic conditions like a rise in interest rates may cause certain securities in a diversified portfolio to decrease in value. Other securities in the portfolio will respond to the same economic conditions by increasing in value. When a portfolio is balanced in this way, the value of the overall portfolio should gradually increase over time, even if some securities lose value.
Professional Management:
Most mutual funds pay topflight professionals to manage their investments. These managers decide what securities the fund will buy and sell.
Regulatory oversight:
Mutual funds are subject to many government regulations that protect investors from fraud.
Liquidity:
It’s easy to get the money out of a mutual fund.
Convenience:
Investor can usually buy mutual fund shares by mail, phone, or over the Internet.
Low cost:
Mutual fund expenses are often no more than 1.5 percent of the investment. Expenses for Index Funds are less than that, because index funds are not actively managed. Instead, they automatically buy stock in companies that are listed on a specific index
Transparency, flexibility, Choice of schemes, Tax benefits, well regulated.
DRAWBACKS
Mutual funds have their drawbacks and may not be for everyone:
No Guarantees:
No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money.
Fees and commissions:
All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales commissions or “loads” to compensate brokers, financial consultants, or financial planners. Even if you don’t use a broker or other financial adviser, you will pay a sales commission if the investor buy shares in a Load Fund.
Taxes:
During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If the fund makes a profit on its sales, will pay taxes on the income receive, even if reinvest the money made.
Management risk:
When the investor invests in a mutual fund, depend on the fund’s manager to make the right decisions regarding the fund’s portfolio. If the manager does not perform as well as you had hoped, might not make as much money on the investment as you expected. Of course, if invest in Index Funds, forego management risk, because these funds do not employ managers.
REASONS FOR MUTUAL FUNDS LOSING WAY
Of late, mutual funds find their going very tough. Most of the funds are not able to collect the targeted amount from small investors. Investors tend to keep out of the new issue mutual funds and they prefer to buy units from the secondary market even by paying a brokerage fee of 3 percent. The mutual fund industry has to face many problems also. Some of them are:
1. Mutual funds have high expenses
The stocks in a particular index are not a mystery. A company that runs an index fund does not need to pay analysts to pick the stocks to be held in the fund. This process results in a lower expense ratio for index funds. Thus, if mutual funds an index fund both posts a 10% return for the next year, once deduct the expenses ratio for the average large cap actively-managed mutual fund is 1.3%to 1.4%.
2. Mutual funds put all the risk on the investors
The mutual fund company puts up 0% of the money to invest and assumes 0% of the risk. The investor put up 100%of the money and 100% risk. The mutual fund company makes a guaranteed return, the investor, not only are not guaranteed a return, the investor lose a lot of money.
3. Mutual funds are unpredictable.
Because a mutual fund’s benchmark isn’t a particular market index, its performance can be rather unpredictable. Index funds, on the other hand, are more predictable because they track the market.
4. Mutual funds don’t beat the market
72% of actively managed large-cap mutual funds failed to beat the stock market over the past five years. An index fund attempts to mirror a particular index. Thus, because an index fund matches the stock market, it performs better than the average mutual fund that attempts to beat the market.
5. Mutual funds have high turnover
Turnover is a fund’s selling and buying of stocks. Mutual funds don’t write off this cost. Contrast this problem with index fund which have lower turnover. Because the stocks in a particular index are known, they are easy to identify. An index fund does not need to buy and sell different stocks constantly; rather, it hold its stocks for a large period of time, which results in lower turnover.
6. Disparity between NAV and Listed price
Though the NAV seems to be good, the listed prices are awfully poor. Of course, the NAV is used as a parameter to rate the performance of the mutual funds. However, in practice, almost all mutual fund schemes are deeply discounted to their NAV by as much as 30-40 percent.
7. Investors Psychology
Investors often compare units with that of shares and expect a high listing price. They don’t realize that unit is a low-risk long-term instrument. Indeed, mutual funds are only for those who have the patience to wait for a long period say 3 to 5 years. But, in practice, people don’t have the patience. Hence, units are not popular among the public.
8. Other reasons
Few funds which have not performed well have actually demoralized the investing public. Moreover, the listing of close ended funds on the stock exchanges has compelled the medium and small investors to go back to the stock market and face the hassles and headaches of its dealing.
CONCLUSION
If mutual funds ensure good returns, quick liquidity and safety and create a good rapport with the investors, their future will be bright. They act as a via media between bank deposit and share in the sense it involves a higher risk than a bank deposit and hence a better return, but a lower risk than a share and hence more safety. Hence, soon it would become and ideal vehicle for investment in India. It is time for the mutual funds to act as ‘mutual friends’ by creating a good rapport with the investors by rendering efficient and prompt services. No doubt, there is a bright future for mutual funds in India.
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