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| Category of Funds |
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| Schemes I can Buy and ones I can't |
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Take any scheme, it is either open or closed.
Quite literally, schemes are either open for you to buy or just closed
for you.
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| Close-ended schemes: |
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These have fixed maturity periods (ranging
from 2 to 15 years). You can invest in the scheme at the time of the initial
issue. That�s because such schemes can not issue new units except in case
of bonus or rights issue. All is not lost if you missed out on units of
a closed scheme. After the initial issue, you can buy or sell units of
the scheme on the stock exchanges where they are listed (certain Mutual
Funds however, in order to provide investors with an exit route on a periodic
basis do repurchase units at NAV related prices). The market price of
the units could vary from the NAV of the scheme due to demand and supply
factors, investors� expectations and other market factors.
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| Open-ended schemes: |
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These do not have a fixed maturity period.
Investors can buy or sell units at NAV-related prices from and to the
mutual fund on any business day. Most people prefer open-ended mutual
funds because they offer liquidity. Such funds can issue and redeem units
any time during the life of a scheme. Hence, unit capital of open ended
funds can fluctuate on a daily basis.
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| Fund Category : Matching objectives |
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Let us get back
to the basic questions that brought us here. We are here to invest with
some objective of our own. And we are looking for investment options that
best fit our investment objective.
Much like for an
individual investor, a scheme�s objective is the result that a fund manager
desires out a scheme. While setting objective for a scheme the manager
asks the question: what are the kind of returns I expect the scheme to
deliver and to get assure such returns what are the securities and in
what proportion should I invest in?
So, now which are
those schemes that suit our objectives best? The obvious next step then
is to look all fund schemes and make a match between their and our investment
objectives, correct? Hmmm, that�s not as simply done as it sounds. Unless
you have all the time in the world, going through each of the 350 or so
schemes in the market today and reading their investment objectives is
a foolhardy job.
What makes life
easier is that based on their objectives schemes have been clubbed together
in categories. These are broad market classifications and help investors
narrow down their search for a scheme. After shortlisting schemes by their
common objectives one can further look into each scheme for more specific
differences in their objectives.
At Myiris we have
broadly grouped schemes by the following categories:
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| Equity schemes: Stock heavy |
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Equity schemes are those that invest predominantly
in equity shares of companies. An equity scheme seeks to provide returns
by way of capital appreciation. As a class of assets, equities are subject
to greater fluctuations. Hence, the NAVs of these schemes will also fluctuate
frequently. Equity schemes are more volatile, but offer better returns.
They are good for long-term investors who do not need to make a killing
in the next few years. Over the past few years it has been seen that over
a long term period equity schemes tend to give returns between 15-25%
per annum. Equity schemes can be further classified as:
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| Diversified Equity schemes: |
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The aim of diversified equity funds is to
provide the investor with capital appreciation over a medium to long period
(generally 2 � 5 years). The fund invests in equity shares of companies
from a diverse array of industries and balances (or tries to) the portfolio
so as to prevent any adverse impact on returns due to a downturn in one
or two sectors. Over the years these schemes have given returns between
15-25% annually. These schemes are less volatile compared to sectoral
equity schemes. Ideally the portfolio of such schemes should not have
more than 50% of the investment in one sector.
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| Sectoral Equity schemes: most eggs in one basket |
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These are schemes whose objective is to
invest only in the equity of those companies existing in a specific sector,
as laid down in the fund�s offer document. For example, an FMCG sectoral
fund shall invest in companies like HLL, Cadbury�s, Nestle etc., and not
in a software company like Infosys. Currently there exist approximately
four broad classification of basic sectors namely � technology, media
& telecom (TMT), fast moving consumer goods (FMCG), basic industry
(that invest in core industries like petrochemicals, cement, steel, etc.),
MNC (comprising of multinational companies in various sectors) and pharmaceuticals.
Sectoral Funds tend to have a very high risk-reward ratio and investors
should be careful of putting all their eggs in one basket. Investors generally
see such schemes to benefit them in the short term, usually one year.
Returns could be as high as 50% in a good year provided the investor chooses
the right sector.
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| Equity Linked Saving Schemes (ELSS): nothing taxing
about it |
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These schemes generally offer tax
rebates to the investor under section 88 of the Income Tax law. These
schemes generally diversify the equity risk by investing in a wider array
of stocks across sectors. ELSS is usually considered a variant of diversified
equity scheme but with a tax friendly offer. Typically returns for such
schemes have been found to be between 15-20%.
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| Index schemes: follow the market |
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Index funds are schemes that try to invest in those equity
shares which make up a particular index. For example, an Index fund which
is trying to mirror the BSE-30 (Sensex) will invest in only those 30 scrips
that constitute this particular index. Investment in these scrips is also
made in proportion to each stocks weight in the index. Fund managing an
index fund is usually called passive management because all a fund manager
has to do is to follow the index. Hence, who the portfolio manager or
what his style is does not really matter in such funds. Volatility of
such schemes are in sync with the index. A bull market could get you as
high as 40% returns over a period of one year. In a bad year (current
year) it could erode your principal by as much as 30%.
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| Debt schemes |
| These schemes invest mainly in income-bearing instruments
like bonds, debentures, government securities, commercial paper, etc. These
instruments are much less volatile than equity schemes. Their volatility
depends essentially on the health of the economy e.g., rupee depreciation,
fiscal deficit, inflationary pressure. Performance of such schemes also
depends on bond ratings. These schemes provide returns generally between
7 to 12% per annum.
Debt schemes are divided in four categories to meet different
investor requirements:
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| Liquid or Money market: hey, isn�t everything about money? |
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Money market schemes invest in short-term debt instruments
such as T-bills, certificates of deposits, commercial papers, call money
markets, etc. Their goal is to preserve the principal while yielding a
modest return. They are ideal for corporate and big investors looking
for avenues to park their short-term surplus funds. Why liquid? Since
they provide the investor to enter or exit within a short period of time
without any load. You can even invest for two working days. Normally,
you can get back your cash within 24 hours of redemption. All liquid schemes
are open-ended. Typical returns for liquid schemes have been between 7-8%
per annum.
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| Gilt schemes: the golden goose? |
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Gilt schemes invest in government bonds, money market
securities or some combination of these. They
tend to give a higher return than a liquid scheme at the same time retaining
the qualities of a liquid fund. They are slightly volatile because 95%
of the traded volume of fixed income instruments in India comprise of
gilts and therefore pricing of such schemes is done daily. In case the
fund manager needs to exit he can do so almost immediately at whatever
price the market is willing to pay. Gilt schemes generally give a return
of 8.5-10% per annum.
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| Income schemes: |
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Beside investing in Government of India securities and
money market instruments, they are slightly more overweighed on corporate
India. Approximately 50-60% of the portfolio would consist of fixed income
instruments issued by corporate India. They therefore provide a higher
return typically between 11-12% per annum. Ideally suited for investors
looking beyond a period of 1 year.
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| Monthly Income Plan (MIP): |
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A variant of the income scheme. They generally provide
investors an option to get monthly returns in the form of dividends. UTI
is the only fund house giving out assured returns on MIP (distributed
as post-dated cheques). Private sector mutual funds are not allowed to
give assured returns on MIPs. Usually, the returns from such schemes are
between 10.5 �11.5%.
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