Fact: Yes, long-term investments have a slight advantage, but that doesn't mean that Mutual Funds are only for such investors. In fact, there are various short-term schemes where you can invest from a day to a few weeks.

Fact: People usually associate Mutual Funds with Equity Funds, but this is not entirely true. Mutual Funds invest in a variety of instruments ranging from equity to debt. Within debt they may invest in debt instruments that mature in a day (also known as Money Market Instruments) to those that mature in 1 or even 10 years.

Fact: This simply comes down to a subconscious movement towards what seems to be cheaper. But the fact is that what matters is the percentage return on invested funds. For example, given a similar performance level of 10% appreciation, a Rs. 10 NAV will rise to Rs. 11 whereas a fund with a NAV of Rs. 200 will rise to Rs. 220. The reality is, due to an already demonstrated performance, the chance of the Rs. 200 scheme posting the 10% appreciation is higher than the one that has just started its journey. So instead of concentrating on a "low" NAV and more number of units, it is worthwhile to consider other factors like the performance track record, fund management and volatility that determine the portfolio return.

Fact: This is a very common misconception because of the general association of Mutual Funds with shares. Buy you must remember that Mutual Funds invest in shares, so they can get in and out whenever the Fund Manager deems appropriate. If the Fund Manager feels that a stock has peaked, he can choose to sell it.

To understand the reality of this myth better you need to understand that the NAV is nothing but a reflection of the market value of the shares held by the fund on any day. In all probability the NAV is high on account of a good performance over the years.

Imagine two schemes. Scheme A is a new scheme with an NAV of Rs. 15 and Scheme B is an old scheme with an NAV of Rs. 150. If the holdings of both these schemes increase by 10%, the NAV of both schemes will go up by 10%. The NAV of scheme A will be Rs. 16.5 and that of scheme B be Rs. 165. So you realise that it doesn't really matter if the NAV is Rs. 15 or Rs. 150.

Fact: This is not true. You can buy Mutual Funds in both mode online and offline.

Fact: Investing should be for meeting your financial goals and not just to make more money. If the goals are still far away, there is no reason for you to redeem. If you feel markets are likely to go down, you may shift the funds fully or partially to safer debt funds, rather than disinvesting and then letting that money lie in bank products that give low returns.

Some of the aspects which can consider by selecting a suitable insurance co. are given below

• Solvency Margin ration (SMR) – is the amount by which an insurance company's capital exceeds its projected liabilities.
• Working solvency Margin ratio (WSMR) – is ratio of actual SMR to required SMR. Minimum SMR as per IRDA is 1.5 times. Higher the WSMR is better. Quartly SMR is declared by insurance company.
• Credit Rating – Credit rating from rating agency CRISIL or ICRA or CARE
• Bonus declared on traditional products.
• Claim repudiation ratio – Lower claim repudiation ratio is better.
• Premium amount
• Customer touch points and easier service

By Franklin Templeton Mutual Fund - www.franklintempletonacademy.com

By Birla Sun Life MF - http://www.janotohmano.com

By IDFC Mutual Fund TV - http://www.idfcmf.com/learning-channel.aspx

Mutual funds are ideal as long term investment avenues for retail investors. To encourage investments in this avenue, the Government of India offers investors a spate of tax benefits thus ensuring maximum benefit from mutual funds held beyond a year.

Sample some of the key benefits and refer to the table for a detailed list of tax rates for different types of schemes

• Avail deductions under Sec 80C of the Income Tax Act by investing up to a maximum of Rs. 1.5 lakh in designated Equity Linked Savings Schemes (ELSS). Such investments have a compulsory lock in period of 3 years.
• First time retail investors in equity with a gross total income of up to Rs. 12 lakh can invest up to Rs. 50,000 in specific MF schemes under Rajiv Gandhi Equity Savings Scheme (RGESS) and benefit from deductions under Section 80 CCG
• No tax is to be paid for redemption of units of an equity scheme held for over a year
• In case of non-equity mutual funds, benefit from indexation
• No tax is to be paid on dividends. The fund deducts a dividend distribution tax at source in case of non-equity schemes
• In case of Equity Oriented Scheme, no dividend distribution tax is deducted at source by the fund house

Absolute Return

The return an asset achieves over a period of time. This measure considers the appreciation or depreciation (expressed as a percentage) that an asset - usually a stock or a mutual fund - faces over a period of time. Absolute return differs from relative return in that it is concerned only with the return of the asset, and does not compare it with any other measure.

Alpha

A percentage that is a measure of the returns of a fund with its risk adjusted for. Alpha is calculated from the difference between a fund's actual and expected returns, given its market risk level as measured by its beta. It is also a measure of the value added or deducted by the fund's manager. An alpha of 1 means the fund produced a return 1 percent higher than what its beta would predict. An alpha of –1 means the fund produced a return 1 percent lower.

Asset allocation

The process of dividing a portfolio among major asset categories such as bonds, stocks or cash. The purpose of asset allocation is to reduce risk by diversifying the portfolio. 

Asset management company (AMC)

" Asset Management Company " means a company formed and registered under the Companies Act, 1956 (1 of 1956) and approved as such by the Board under subregulation (2) of regulation 21. The AMC is a company, floated by the sponsor, is responsible for managing the funds mobilized under the mutual fund.

Bear market

A prolonged period of falling prices, accompanied by widespread pessimism. In the stock market a bear is an investor who believes that the markets or a particular stock is going to fall and thus sells the shares with a hope of buying them back as and when the market falls.

Beta

It is a measure of a security's risk. Each security has a certain amount of risk attached to it. Beta tries to measure the risk involved with each security. Investor should choose a security which gives the highest return for a given risk level.

Bond

A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. Bond is a promise to pay the principal along with the interest after a specified period of time.

Call money

Money which is loaned, in the call market, which can be demanded for repayment on call.

Certificate of deposit

Short- or medium-term, interest-bearing, debt instrument offered by banks and financial institutions (FIs). It is a negotiable instrument and can be sold at a discount at short notice to raise cash.

Closed-end fund

A mutual fund scheme which is open for a fixed period and sells off its assets at the end of the period and distributes the money thus obtained among unit holders. These units may be bought and sold in the secondary market.

Debentures

They are bonds issued by a company to raise capital. There are various kinds of debentures: secured or unsecured, convertible or non convertible.

Debt/equity ratio

The ratio is determined by dividing long-term debt by common stockholder equity. It is one of the most useful financial ratios. Creditors use it to see whether it is safe to lend money to the particular company. The ratio should ideally be around 2 times.

Deep Discount Bond

A long-term debt instrument selling at a high discount of its face value.

Default Risk

The risk that companies or individuals will be unable to pay the contractual interest or principal on their debt obligations.

Derivative

An instrument that derives its value from an underlying asset: index futures and options, for instance, are called derivative instruments.

Diversified Fund

A type of investment fund that contains a wide array of securities and is adequately diversified. A mutual fund classified as a diversified fund actively maintains a high level of diversification in its holdings; the fund is thus able to reduce risks, because events that affect one sector are unlikely to have the same effect on other sectors. For example, the fund may restrict its purchases so it is not dominated by companies from one industry or representing one market capitalisation size.

Dividend 

Distribution of a portion of a company's earnings, as decided by the board of directors, to a class of its shareholders. It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.

Equity Linked Savings Scheme-ELSS

A mutual fund scheme that offer tax rebates to investors under specific provisions of the Income Tax Act. These schemes are growth oriented and invest pre-dominantly in equity. Their growth opportunities and risks are like those of any equity-oriented scheme.

Exchange-Traded Fund – ETF

A mutual fund that tracks an index, a commodity or basket of assets like an index fund, but trades like a stock on an exchange, thus experiencing price changes throughout the day as it is bought and sold.

Face Value

The nominal value of a security stated by the issuer. For stocks, it is the original cost of the stock shown on the certificate. For bonds, it is the amount paid to the holder at maturity. It is also known as par value.

Fund of Funds

A mutual fund that invests in other mutual funds. This method is also known as multi-management.

Gilts

These are risk-free bonds issued by the government and are safe investment options.

Growth fund

A diversified portfolio of stocks that has capital appreciation as its primary goal, and thereby invests in companies that reinvest their earnings in expansion, acquisitions, and/or research and development.

Hedge fund

An aggressively managed portfolio of investments that uses advanced investment strategies such as leverage, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark

Index fund

A portfolio of investments that is weighted the same as a stock-exchange index in order to mirror its performance. 

Inflation

The rate at which the general level of prices for goods and services is rising.

Liabilities

A financial obligation, or the cash outlay that must be made at a specific time to satisfy the contractual terms of such an obligation.

Liquidity

Easy conversion of an asset into cash. A market is liquid when it has a high level of trading activity, allowing buying and selling with minimum price disturbance.

Net asset value -NAV

For mutual funds, NAV is the total value of the fund's portfolio, less liabilities. The NAV is usually calculated on a daily basis. It is the rate at which a mutual fund unit is bought or sold. The net asset value per share usually represents the fund's market price, subject to a possible sales or redemption charge.

Open-Ended Fund

An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at net asset value (NAV) related prices which are declared on a daily basis.

Rate of Return

The gain or loss of an investment over a specified period, expressed as a percentage increase over the initial investment cost. Gains on investments are considered to be any income received from the security, plus the realised capital gains.

Real interest rate

The rate of interest excluding the effect of inflation.

Rebalancing

The process of realigning the weightage for one's portfolio of assets.

Registrar or Transfer Agent

The institution that maintains a registry of unit holders of a fund and their unit ownership. Normally, the registrar also distributes dividends and provides periodic statements to unit holders.

Risk-Adjusted Return

A measure of how much risk a fund or portfolio takes on to earn its returns. This is often represented by the Sharpe ratio. The greater the returns per unit of risk, the better it is for the fund or portfolio.

Risk-Free Rate of Return

The theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.

Risk tolerance 

The willingness of an investor to tolerate the risk of losing money for the potential to make money. 

Rupee-cost Averaging

It is an investment strategy based on investing equal amounts in a fund at regular intervals. As a result, investors can buy more units when the price is low and fewer units when the price is high, thus ensuring that the average costs per unit are low over time. 

Sector Fund

A mutual fund that makes investments solely in businesses that operate in a particular industry or sector of the economy.

Sharpe Ratio

It measures risk-adjusted performance. It is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. 

Standard Deviation

It describes how much the return on the fund has been deviating from the expected normal returns. 

Switching

The movement of investments from one scheme to another usually within the family of schemes. An investor may switch schemes because of market conditions.

Systematic Investment Plan -SIP

It allows an investor to periodically invest in units by issuing post-dated cheques. Investors, thus benefit from rupee cost averaging.

Systematic Risk

The risk inherent in the entire market. It is also known as market risk.

Systematic Withdrawal Plan – SWP

A service offered by a mutual fund that provides a payout to the shareholder at predetermined intervals.

Systematic Transfer Plan -STP

A plan that allows the investor to provide a mandate to the fund to periodically and systematically transfer a certain amount from one scheme to another.

Trustees

Trustees mean the Board of Trustees or the Trustee Company who hold the property of the Mutual Fund in trust for the benefit of the unitholders. 

Treynor Ratio

It measures returns earned in excess of that which could have been earned on a riskless investment per unit of market risk. 

The Treynor ratio is calculated as:

(Average return of the portfolio - average return of the risk-free rate) / Beta of the portfolio

Unit

The interest of investors in either of the schemes, which consists of each unit representing one undivided share in the assets of the schemes.

Volatility

It is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. The greater the volatility, the riskier the security is likely to be.

Yield

Yield is the annual rate of return for any investment and is expressed as a percentage. For stocks, yield can refer to the rate of income generated from a stock in the form of regular dividends. In the case of bonds, yield is the effective rate of interest paid on a bond, calculated by the coupon rate divided by the bond's market price:

Yield Curve

A graph depicting yield, vis-a-vis maturity. There are three main types of yield curve shapes: normal, inverted and flat (or humped). A normal yield curve is one in which longer maturity bonds have a higher yield compared to shorter-term bonds due to the risks associated with time. An inverted yield curve is one in which the shorter-term yields are higher than the longer-term yields, which can be a sign of imminent recession. A flat (or humped) yield curve is one in which the shorter- and longer-term yields are close to each other, indicating the likelihood of an economic transition.

Yield To Maturity – YTM

The rate of return anticipated on a bond if it is held until the maturity date. YTM is considered a long-term bond yield, expressed as an annual rate. The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupons are reinvested at the same rate.

Capital Protection Oriented Schemes (CPOS) are close ended schemes. Typically, CPOS are hybrid schemes with majority of the portfolio invested in debt/ money market instruments and balance in equity and equity related instruments. CPOS generally has tenure of 3 to 5 years.

In CPOS, the allocation to debt instruments is done in such a way that at the end of the term of CPOS, the value of debt investment grows to the original investment in the fund. The equity portion aims to add to the returns of CPOS at maturity.

Let's assume that the Scheme invests 83% in highest rated Debt and Money market instruments. The 83% of the debt portfolio will grow over the tenure of the Scheme to 100% (net of annual recurring expenses) thereby protecting your capital. Rest 17% will be invested in equities and equity related instruments which may provide the upside return to portfolio.

Who should consider investment in CPOS?

• Risk averse investors who have safety first in mind
• Who do not want to take interest rate risk and want to earn prevailing yields over the tenure
• Who desire to participate in equities with the stability in the portfolio being provided by the debt portion of the portfolio
• Investors seeking tax efficient returns when compared to fixed income deposits as investors of CPOS can take benefit of indexation.

FMPs are close-ended debt funds offered by mutual funds investing in debt instruments with a specific date of maturity that is less than or equal to maturity date of the scheme. The units of these funds are available for trading on stock exchanges. The investments in FMPs are done in such a way so as to orient the maturity period of the instruments with that of the scheme. The portfolio tenure of FMPs is less than or equal to maturity date of the scheme.

FMPs generally invest in various kinds of debt instruments like Certificates of Deposit (CDs), Commercial Papers (CPs), corporate bonds and Non-Convertible Debentures (NCDs).

FMPs are subject to credit risk. Credit risk implies analysing the risk of default. The credit risk is reduced in FMPs as they invest in well-rated debt instruments. FMPs do not carry any interest rate risk provided the investor stays invested until the maturity of the Scheme.

Who should consider investment in FMPs?

• Risk averse investors who have safety first in mind.
• Who do not want to take interest rate risk and want to earn prevailing yields over the tenure.
• Investors seeking tax efficient returns when compared to fixed income deposits as investors of FMPs can take benefit of indexation.

Arbitrage Mutual Fund

Arbitrage mutual funds aim to generate gains which can be achieved by taking advantage of the mispricing that exists between the cash and the derivatives market. An example will help understand this concept. Let us assume that the stock of ABC Company is trading at Rs. 200. Let us also consider that the stock is traded in derivatives segment as well (all scrips are not traded in the derivative segment), where its future price is Rs. 210. In such a situation, an investor will be able to make a risk-free profit by selling a futures contract of ABC Company at Rs. 210 and buy an equivalent number of shares in the cash market at Rs. 200. The two transactions which take place are -

1) Buying stocks (at Rs 200),

2) Selling futures (at Rs 210),

On settlement day (i.e. the day of expiry of the future contract), the prices in the stock and futures markets tend to converge. And the above two transactions are reversed to make a risk-free profit. Three scenarios can emerge-

1) Price of stock ABC in spot market could have moved to Rs 220. In such a case the investor will make a Rs 20 profit on the cash segment by selling the stock. While he will make a Rs 10 loss on buying futures. The net gain will be Rs 10.

2) The price of stock ABC is Rs 200. No gain or loss in the cash market, but a Rs 10 gain in the futures market.

3) The price of stock ABC falls to Rs 190. Loss of Rs 10 in the cash market and gain of Rs 20 in the futures market. Net gain will be Rs 10. In this way, an investor earns the spread of Rs. 10 between the purchase price of the equity shares and the sale price of futures contract, irrespective of the share price on the settlement day.

Different arbitrage opportunities

The arbitrage opportunity mainly arrives when there is bull market or when there is more volatility in the markets. Moreover, when a company merges with or is taken over by another company, arbitrage opportunities may arise due to mispricing of the scrip. Also if the company announces a buy-back of its own shares, there could be arbitrage opportunities due to difference in buy-back price and traded price. During declaration of dividend, the stock futures/options market can also provide an arbitrage opportunity as the stock price normally drops by the dividend amount when the stock goes ex-dividend. The mispricing across various indices can lead to arbitrage opportunities.

But exploiting most of these arbitrage opportunities entails some amount of risk. Only, the buy cash and sell futures trade provides a risk free arbitrage opportunity.