Mu­tual Funds Turned Inside Out

21 Prod­ucts As­sessed

Consumer Voice - - Front Page - Gopal Ravi Kumar & Subas Ti­wari

At this point if most of your in­vest­ments are in your sav­ings ac­count or a fixed de­posit, and your big­gest as­set so far is your home, then you are in the majority. Like you, most smal­land mid­dle-in­come in­vestors, es­pe­cially salaried in­di­vid­u­als, rarely invest in stocks or mu­tual funds. The pri­mary rea­son is the lack of knowl­edge and pre­con­ceived no­tions about the risk of los­ing the in­vest­ment. This ar­ti­cle is our at­tempt to col­late es­sen­tial fac­tual in­for­ma­tion on al­ter­na­tive and con­tem­po­rary in­vest­ment op­tions that gen­eral con­sumers may look at. The idea is to ex­plain the sig­nif­i­cance and oper­a­tive model of mu­tual funds as well as re­buff sev­eral myths for the av­er­age con­sumer in or­der to help them make sound in­vest­ment de­ci­sions.

Mu­tual funds were con­cep­tu­al­ized to make in­vest­ments in stocks a bit easy, with the op­tion of buy­ing and sell­ing stocks with small amounts as and when one wants. Ba­si­cally, your small in­vest­ment in a mu­tual fund is clubbed with other such small in­vest­ments to make it a large pool of in­vest­ment in var­i­ous se­cu­ri­ties. The fund is ap­pro­pri­ately named mu­tual fund since all in­vestors ‘mu­tu­ally’ share the fund’s gains as well as losses on an equal ba­sis, pro­por­tion­ately to the amount they invest.

In­ter­est­ingly, you can di­ver­sify your in­vest­ment port­fo­lio across a large num­ber of se­cu­ri­ties, thereby min­i­miz­ing the risk of ma­jor loss. You need not worry about fluc­tu­a­tions in in­di­vid­ual se­cu­ri­ties in the fund’s port­fo­lio.

Sys­tem­atic trans­fer plan (STP)

In STP, you invest a lump-sum amount in some mu­tual fund and then a fixed sum is trans­ferred from that mu­tual fund to another mu­tual fund.

Sys­tem­atic with­drawal plan (SWP)

If a mu­tual fund in­vestor re­deems the units ev­ery month and gets the same de­posited in their bank ac­count, it is called SWP. The plan is rec­om­mended to liq­ui­date the mu­tual funds cor­pus after one sees a good bull mar­ket.

Sys­tem­atic in­vest­ment plan (SIP)

SIP is a way of in­vest­ing in mu­tual funds on monthly ba­sis wherein a fixed amount goes from your bank ac­count to the mu­tual funds.

Fixed ma­tu­rity plan (FMP)

They are the equiv­a­lent of a fixed de­posit in a bank, though with a caveat (stip­u­la­tion). The ma­tu­rity amount of a fixed de­posit in a bank is not ‘guar­an­teed’ but only ‘in­di­cated’ in the FMP of a mu­tual fund. The reg­u­la­tor does not al­low fund com­pa­nies to guar­an­tee re­turns, and hence the ‘in­di­cated re­turns’ in FMPs. FMPs are debt schemes and are gen­er­ally open for two to three days with min­i­mum in­vest­ment set at about Rs 5,000. The preva­lent yield mi­nus the ex­pense ra­tio (that varies from 0.25 per cent to 1 per cent) will be the in­dica­tive re­turn that can be ex­pected from the FMP.

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