Mutual Fund Flashcards
Open ended and close ended mutual fund
Open-Ended scheme, the investor can make entry and exit at any time. Also, the capital of the fund is unlimited, and the redemption period is indefinite.
Close-Ended scheme, the investor can buy into the scheme during Initial Public offering or from the stock market after the units have been listed. The scheme has a limited life at the end of which the corpus is liquidated.
Portfolio classification
Equity fund
Debt fund
Special fund
Equity fund
Growth Funds:capital appreciation to the investor and are best to long term investors.
Aggressive Funds:: super normal returns for which investment is made in start-ups, IPOs and speculative shares. They are best to investors willing to take risks.
Income Funds:: investing in safe stocks paying high cash dividends and in high yield money market instruments.
Debt fund
(A): Bond fund :
invest in fixed income securities
less volatile
bond funds also have following risks:
Interest Rate Risk:
:change in interest rate (YTM)
:interest rate goes up market value of Bond falls and vice versa.
Credit Risk:
:risk of default in repayment of loans or payment of interest or both by the borrowers of the funds.
:risk is higher in case of companies with lower Credit Rating.
Prepayment Risk:
:: This risk is related to early refund of money by the issuer of Bonds before the date of maturity.
(B)Gilt Funds::
mainly invested in Government securities.
Special funds
1: index fund
2: international fund
3: offshore funds
4: sector fund
5: money market fund
6: fund of funds
7: capital protection oriented fund
8: gold fund
9: quant fund
Funds of funds
Investment in other mutual funds
Gold fund
These fund is to track the performance of gold
These are in the form of ETF are listed in stock exchange
These provide an opportunity in the bullion market without having to take physical delivery of gold
Quant funds
Quant Fund works on a data-driven approach for stock selection and investment decisions based on a pre-determined rules or parameters using statistics or mathematics-based models.
While an active fund manager selects the volume and timing of investments (entry or exit)
based on his/her analysis and judgement in this type of fund complete reliance is placed on
an automated programme that decides making decision for quantum of investment as well as its timings and action and concerned manager has to act accordingly.
Index fund manager vs quant fund manager
Sometime the term ‘Quant Fund Manager’ is confused with the term ‘Index Fund Manager
but it should be noted that both terms are different because while the Index Fund Manager
entirely hands off the investment decision purely based on the concerned Index
the Quant Fund Manager designs and monitors models and makes decisions based on the outcomes
Types of fund in mutual fund
1: Balanced Funds
Balanced funds make strategic allocation to both debt as well as equities
2: Equity Diversified Funds:
Diversified funds is a fund that contains a wide array of stocks
3 : equity linked savings scheme
ELSS is one of the options for investors to save taxes under Section 80 C of the Income Tax Act.
They also offer the perfect way to participate in the growth of the capital market
4: sector fund:
Highly focused on a particular industry
Take advantage of industry cycle
Offer good returns if the timing is perfect
5: thematic funds
A Thematic fund focuses on trends that are likely to result in the ‘out-performance’ by certain sectors or companies.
6: arbitrage fund
funds promise safety of deposits, but better returns, tax benefits and greater quidity
7: hedge fund
Hedge funds are aggressively managed portfolio of investments which use advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns
8: cash fund
Cash Fund is an open ended liquid scheme that aims to generate returns with lower volatility and higher liquidity through a portfolio of debt and money market instrument.
9: exchange traded fund
10: fixed maturity plan
Exchange traded funds and different types of etf
Exchange Traded Funds (ETFs) are hybrids product that combine the features of listed stocks and index fund
their prices are linked to the underlying index
ETFs can be bought and sold like any other stock on an exchange
ETFS may be attractive as investments because of their low cost tax efficiency, and stock-like features
Types of etf
1:Index ETFs
hold securities and attempt to replicate the performance of a stock market index
2:Commodity etf:
ETFS invest in commodities
3:Bond etf:
invest in bonds are known as bond ETFs
4:Currency ETFS
investor gets access to the FX spot change
Fixed maturity plan
closely ended mutual funds in which an investor can invest during New Fund Offer(NFO)
FMP usually invest in Certificates of Deposits (CDs), Commercial Papers (CPs), Money Market Instruments and Non-Convertible Debentures over fixed investment period. Sometimes, they also invest in Bank Fixed Deposits
FMPs are not liquid instruments.
they are free from any interest rate risk because FMPs invest in debt instruments that have the same maturity as that of the fund. However, they carry credit risk, as there is a possibility of default by the debt issuing company
launched with tenure of three years to take the benefit of indexation
Advantages of mutual fund
1: professional management
2: diversification
3: higher return
4: transparency
5: highly regulated
6: economies of scale
7: flexibility
Drawbacks of mutual fund
1: no guarantee of return
2: selection of proper fund
3: cost factor
4: taxes
5: unethical pratice
Side Pocketing
Side Pocketing in Mutual Funds leads to separation of risky assets from other investments and cash holdings. The purpose is to make sure that money invested in a mutual fund, which is linked to stressed assets, gets locked, until the fund recovers the money from the company or could avoid distress selling of illiquid securities
Side Pocketing is beneficial for those investors who wish to hold on to the units of the main funds for long term. Therefore, the process of Side Pocketing ensures that liquidity is not the problem even in the circumstances of frequent allotments and redemptions.
Side Pocketing is quite common internationally. However, Side
Pocketing has also been resorted to bereft the investors of genuine
returns
