Mutual Funds -Articals

8/8/2019 Mutual Funds -Articals

http://slidepdf.com/reader/full/mutual-funds-articals 1/30

E

ARTICALS ON MUTUAL FUNDS:

1.Ethical favors in mutual funds:

The concept of a socially responsible fund was hitherto unknown to Indian investors, it is apopular investment vehicle in the US mutual fund market. Ethical funds, as they arepopularly called, cater to the need of a population segment with personal ethical codes,which are not in line with normal investment practices. These funds consider environmental,social and animal cruelty issues before investing in a company. Thus, ethical funds willfollow a process of elimination while taking investment decisions and will not invest incompanies that are engaged in running abattoirs, meat processing and packaging,production of liquor, tobacco, leather goods pesticides, pisciculture and sericulture.

The first socially responsible fund, to be launched by JM Asset Management Company, ischristined JM Heritage Fund. The fund will to cater to the needs of investors with strong

personal ethic codes. The scheme, structured as a balanced fund, will invest in equity anddebt, would focus on ahimsa. The 'Ahimsa' fund would provide investors with two options -income and balanced. The second plan is a growth-cum-income plan that invests in bothequity and debt. A small percentage of the fund management fees is kept away for donationto charities involved in animal welfare. Typically, JM Heritage fund would invest in areas likepetrochemicals, auto, metals, banking and finance, engineering and technology. It mightalso consider FMCG and pharma companies, provided such outfits are above board withrespect to cruelty issues.

JM Mutual Fund roped in animal rights activists and organisations such as Beauty WithoutCruelty and People for the Ethical Treatment of Animals as advisors to its ethical fund. JMMF, during the process of shortlisting the companies in which the fund will invest, wrote to

about 1,000 companies, seeking response to questions on their operations. A number of interesting issues came to light. Dabur, for instance, does not experiment with animals; yet,it uses deer horn as an ingredient for Chyawanprash. The company, therefore, does not fitthe bill. It is also noted that advanced bio-tech companies are trying to replace animaltesting.

In the US, where there is a vibrant market for ethical funds, not all socially responsiblefunds embrace the same principles. Some leave all companies in the nuclear power andweapons industries, while others don't buy liquor, gambling, or tobacco stocks. Other fundspick up companies according to their worker relations, community involvement, or product-safety records. That apart, funds base their stock pickings on religious principles as well likeCatholic principles, Mennonite principles and conservative Christian principles.

For an investor just looking for performance, there's no reason to buy a socially responsiblefund. There is no guarantee of high returns since the performance, as in case of otherfunds, will depend only on the ability of the fund manager and the stocks he picks. But, foran investor, who is very religious and has ethical convictions, Ethical Funds are the rightfunds to invest in. S Suma



2.MUTUAL EXPECTATIONS AND BENEFITS:

Everyone expects the New year to usher an era of joy and prosperity and certainly looksforward to a windfall in terms of good things to come. Investor is no exception to this. Butbefore one rushes to celebrate with new investments, it would be appropriate to take a look

at how Y2K treated Mutual Funds (MFs) - the investment vehicle of the small investor.

A happy-go-lucky-man turned investor would have nothing to write home about, had heinvested in the Year 2000 and stayed invested throughout the year. Positive returns seemedlike a state of utopia in Y2K. What a transformation in an Industry that had witnessedalmost triple digit returns in 1999 when BSE sensex had generated returns of about 65percent.

What was common to MFs in Y2K was, the presence of technology, media & telecom sectorscrips in portfolios of most funds, especially equity growth funds. Birla Advantage Fund withand exposure of 67%, Alliance to the tune of 71% are just to name a few. While the bullphases did not raise any questions about the portfolio compositions, the bear phasescertainly did. NAVs of most of these funds plummeted raising questions on the extent of portfolio diversification.

When the bull phase came to an end and when most of the funds stood stripped with thedownslide of most of the TMT stocks, most fund managers moved to quality portfolio levelsand reduced their IT exposure to reasonable levels. Most equity diversified funds, today,maintain IT exposure at 20% to 37% while simultaneously picking up both old and neweconomy stocks. But fund managers still are willing to bet on TMT stocks despite thetumultuous experience they have had in Y2K. While accepting the possibility of a downwardrevision of their growth rate, they foresee no indications of a significant slowdown fromatleast India based companies. They concur that the fundamentals of IT sector are strongwith future growth, however, being at a modest pace. They are now of the view that amixture of old and new economy scrips would form an ideal portfolio.

While the crash in IT share prices has resulted in a re-balancing of portfolios, action on theold economy front would further narrow the gap between the so called µclick and mortar¶ and µ brick and mortar¶ companies-bring with it a greater diversification in MF portfolios.

MF Industry in India, like any other Industry, has had its nascent stage and is still trying tograpple with several inconsistencies. The Industry is now approaching a stage where a crosssection of investing community has begun to comprehend that MFs provide and idealinvestment vehicle to meet their varied investment objectives in the long run with adequateemphasis on portfolio diversification. All in all, MFs have had their share of lessons in Y2Kand are waiting for newer horizons in Y2K+1 with abated breath.

S S Prashanth



3.MF ANALYSIS THE CRISIL WAY:

Total returns has been the criteria for measuring the performance of Mutual Funds. Often in

this methodology, factors like volatility, liquidity and portfolio composition are ignored,which then may not give the right picture of performance. An answer to this drawback isCRISIL's Composite Performance Ranking (CPR), which measures performance for each of the open ended scheme types - equity, debt and balanced funds.

The approach of this exercise is very scientific. The schemes are separated into categorieslike all equity, balanced or debt funds. Then ranks are assigned to the schemes compared tothe performance of the competing schemes within the category. The basic criteria forqualifying for this kind of a ranking exercise is that the scheme should be at least two yearsold. Secondly, the scheme should disclose 100 percent of its portfolio.

If the above two criteria are met, there are four parameters considered - Risk-adjusted

returns of the scheme's NAVs, Diversification of the portfolio, Liquidity and Asset Size.Emphasis has been given to all these factors keeping in mind the fact that the mutual fundsmarket in India is still not mature. In mature markets, just a measure of volatility gives asufficient good picture of the performance.

The Risk-adjusted Return of a scheme is measured by adjusting the average weekly returnson NAV over the previous two years by the volatility over this period, using the Sharperatio. The assumption is that the dividend payouts are reinvested at NAVs for calculation of weekly returns. By this method, the ups and downs of any day is averaged out and thereturns thus generated are an average representative.

Next comes the diversification risk of the portfolio. This becomes more important in the case

of equity schemes. This factor is applied to all the equity portfolios. There are two pointsconsidered here. One, the exposure of a scheme to a particular industry vis-a-vis the S&PCNX 500. Two, the percentage share of a single equity in the total portfolio - for which theexcess of 10 percent is considered. This kind of a study gives a picture of where the risk isconcentrated in the portfolio.

Measurement of Liquidity risk is done in two ways : One, internal risk and two, external risk.Internal risk is a measure of the investment in a stock as compared to its turnover in themarket. The weighted average turnover of a scrip during the last four quarters is calculated.This is compared to the investment volume of the scheme in that security. For example, if the weighted average turnover of a scrip is 1000 and the scheme holds 200 shares, then itcan be considered highly liquid.

In the case of external risk, an equity's annual average turnover (in terms of value) ismeasured against its annual average market capitalization. For example, if the annualaverage turnover is Rs.1,00,000 and the annual average market capitalization isRs.1,50,000, then the influence of external factors on the price of the scrip can beconsidered to be less. In the case of debt portfolios, the current credit rating given by acredit rating agency is a measure of liquidity.



Finally comes the asset size. Since larger sized funds are more difficult to manage ascompared to smaller funds, a higher rank is given based on the same.

The methodology is no doubt very well structured. Based on the quarterly data of June 30,2000 of the 36 mutual funds that met the criteria, Birla Advantage, Zurich India Equity andKothari Pioneer Bluechip are the leaders among the equity funds. In the balanced funds

section, Alliance '95, Tata Balanced and Zurich India Prudence are the toppers. JardineFleming India Bond Fund, Sundaram Bond Saver and JM Liquid have led the Debt funds.These rankings will be updated quarterly.

Tanuja R Nemivant

4.TIPS OF MUTUAL FUND INVESTINGS:

Millions of investors have come to rely on mutual funds as their primary investments. Thegrowth of funds has been explosive, with individuals, retirement plans and others puttingwell over $1 trillion in the funds in the 90's. If you are thinking of investing in a mutualfund, you should remember that they are only one of the many types of investments andthat, as with any investment, you should know and understand the nature and risks of mutual funds and options available to you before you invest any of your money.

You can earn money out of a fund in basically three ways. First, a fund may receive incomein the form of dividends and interest on the securities it owns which it pays to itsshareholders in the form of dividends. Second, the price of the securities a fund owns mayincrease. When a fund sells a security that has increased in price, the fund has a capitalgain. At the end of the year, most funds distribute these capital gains (minus any capitallosses) to investors. Third, if a fund does not sell but holds on to securities that haveincreased in price, the value of its shares (NAV) increases.

The higher NAV reflects the higher value of your investment. If you sell your shares, youmake a profit (this also is a capital gain). Today there is a bewildering array of funds onoffer. So how does one choose a well performing fund. There is one golden rule of Mutualfund investing- When small stocks do better than big ones, funds will beat the market.When big ones do better, the market will outperform the funds. If you think small stocks aredue for a run, then you would expect actively managed funds to beat the indexes.

But before you invest it is better to do some background work: KNOW YOURSELF. Beforeyou invest, decide whether the goals and risks of any fund you are considering are a goodfit for you. You take risks when you invest in any mutual fund. You may lose some or all of the money you invest (your principal), because the securities held by a fund go up and

down in value. What you earn on your investment also may go up or down.

A portfolio's asset allocation or 'mix of funds' should represent one's tolerance for risk andtime horizon. An investor should establish what percentage to invest in stocks, bonds, cash,etc. before choosing a portfolio of worthy funds. In fact, searching for funds withoutconsidering asset allocation may lead to a portfolio of funds that are all invested in the samething. A good portfolio diversifies into different assets to hedge against unforeseen marketdeclines. Which kind of fund is a good investment for you is trickier; the best answer is, afund whose manager is doing something you understand and are comfortable with as a



long-term investment. Read some annual reports; get a feel for the people who run thefund; see if they think the way you do. Or buy an index fund, which is run on autopilot.

ESTABLISH YOUR BENCHMARKS : Be clear in how you will measure the performance of thefund. If it is a dedicated fund like say pharma, FMCG etc. then its performance can bemeasured only against those particular indices. A small cap fund's performance cannot be

measured against the BSE Sensex performance. So be clear what is the profile of the fundand what will its performance be compared to. Post that, how much you want the fund toout perform that index is dependant on your risk profile and market conditions.

DO YOUR HOME WORK : There are sources of information that you should consult beforeyou invest in mutual funds. The most important of these is the prospectus of the fund youare considering. The prospectus is the fund's selling document and contains informationabout costs, risks, past performance, and the fund's investment goals. Request a prospectusfrom a fund, or from a financial professional if you are using one. Read the prospectusbefore you invest.

The Annual Report of the fund is another source of information. Look at "fee table," where

the fund shows what it's charging you. Any waivers or temporary fee reductions have to bedisclosed--but, of course, they're in the fine print, where you'll have to squint to read them.Read all official fund disclosure documents from back to front. All the stuff that can hurt youis buried in the back, where the people who run the fund hope you'll never see it. So readthe stuff at the back first, so you get the bad news on the table at the start.

Also once you invest in a fund track it. If you have not recently examined the prospectus fora fund you own, you should monitor your investment by obtaining and reading the mostrecent prospectus, SAI and financial statements--these may contain important changes.Careful reading of quarterly and annual reports is also necessary to keep up with changes inyour investment.

DON'T GET TAKEN IN BY PAST PERFORMANCE : A fund's past performance is not asimportant as you might think. Advertisements, rankings, and ratings tell you how well afund has performed in the past. But studies show that the future is often different. Thisyear's "number one" fund can easily become next year's below average fund. Although pastperformance is not a reliable indicator of future performance, volatility of past returns is agood indicator of a fund's future volatility.

COMPARE THE FUNDS ON TOTAL RETURN : Check the fund's total return. Included in thecomputation are distributions paid to investors, capital gains distributions and unrealizedcapital gains and losses. Since all fund activity which has an effect on net asset value isrepresented, this measure provides a picture of performance which is more complete thanyield. You will find it in the Financial Highlights, near the front of the prospectus. Totalreturn measures increases and decreases in the value of your investment over time, after

subtracting costs. See how total return has varied over the years. The Financial Highlights inthe prospectus show yearly total return for the most recent 10-year period. An impressive10-year total return may be based on one spectacular year followed by many averageyears. Looking at year-to-year changes in total return is a good way to see how stable thefund's returns have been.

YIELD : Yield is the income generated over a specified time period divided by the fund'scurrent price per share. This is a measure of mutual fund performance, which is figured bydividing the income generated (dividends, capital gains distribution, etc.) per share for a



specific time period by the fund's current price per share. For example if, during a year, asingle share of a fund had paid income totaling Re.1 and its share price was Re.10, theannual yield for that year would be figured by dividing 1 by 10, which equals one tenth, or ayield of 10%.

While yield is a measure of current performance-how much income an investment

generates--total return measures per share change in total value over a specified timeperiod. All fund activity that has an effect on net asset value (dividends, capital gains,unrealized capital gains and losses, etc.) is represented in this measure. It provides,therefore, a more complete picture of fund performance than the yield or net asset valuealone. The investor may approximate total return by using data that appears in the "PerShare Changes and Capital Income" section of the prospectus. Changes in yield do notreflect a corresponding increase or decrease in the fund's net asset value. A fund mayincrease yield by purchasing investments that are riskier but offer higher interest payments.But, the higher yield may be offset by a deteriorating capital position or a lower total return.

COSTS : Costs are important because they lower your returns. A fund that has a sales loadand high expenses will have to perform better than a low-cost fund, just to stay even with

the low-cost fund. Find the fee table near the front of the fund's prospectus, where thefund's costs are laid out. You can use the fee table to compare the costs of different funds.The fee table breaks costs into two main categories: 1. Sales loads and transaction fees(paid when you buy, sell, or exchange your shares), and 2.Ongoing expenses (paid whileyou remain invested in the fund).

Sales Loads : Sales charges on mutual funds are often referred to as the "load." Loads canbe classified as front-end and back-end. You pay the front-end load when you purchaseshares, as in the example cited above. You pay the back-end load when you redeem yourshares. No-load funds do not charge sales loads. They sell their shares to investors withouta direct sales charge. However even no-load funds have ongoing expenses, however, suchas management fees. When a mutual fund charges a sales load, it usually pays forcommissions to people who sell the fund's shares to you, as well as other marketing costs.

Sales loads buy you a broker's services and advice; they do not assure superiorperformance. In fact, funds that charge sales loads have not performed better on average(ignoring the loads) than those that do not charge sales loads.

Another fee that acts like a back-end load is the redemption fee. This fee can be as high as2% and is charged when you redeem your shares. Funds can have both a redemption feeand a back-end load. Prices for most mutual funds appear in the business or financialsections of newspapers. For a no-load fund, the sale price and net asset value are identical.For a load fund, the sale price is the "offer price" or "asked price." If you are investing inany fund with a load, make sure you know exactly how much the sales charges are. Thebroker dealer who sells you the shares is not required to disclose sales charges on theconfirmation slip that is provided after the sale is complete. You must ask for this

information.

Ongoing Expenses : These are expenses as a percentage of the fund's assets, generally forthe most recent fiscal year and basically include the management fee (which pays formanaging the fund's portfolio), along with any other fees and expenses. High expenses donot assure superior performance. Higher expense funds do not, on average, perform betterthan lower expense funds. However in case the fund provides special services, like toll-freetelephone numbers, check-writing and automatic investment programs, then the higherexpenses are justified. Note carefully any difference in expenses as even a small variation



can make a big difference in the value of your investment over time. Check the fee table tosee if any part of a fund's fees or expenses has been waived. If so, the fees and expensesmay increase suddenly when the waiver ends (the part of the prospectus after the fee tablewill tell you by how much). Many funds allow you to exchange your shares for shares of another fund managed by the same adviser. The first part of the fee table will tell you if there is any exchange fee.

RISK : It is quite difficult to compare a fund's risk adjusted return. But there are a couple of ways to do so. A fund's Sharpe ratio, named after its inventor, Nobel Prize winner William F.Sharpe, essentially shows you how much return the fund earned for each unit of risk that ittook, and it's easy to compare different funds against each other this way. Lots of websiteswill display a fund's Sharpe ratio, usually under a category called "Modern PortfolioStatistics." There's also Morningstar risk, which is a variation of the Sharpe measure basedon how often a fund underperformed Treasury bills. And there's beta, which shows howmuch the fund moves relative to the volatility of the market. But ultimately the real risk isyou: If your fund goes down a lot, will you sell? If it goes up, will you buy more then? Mostof the risk of investing isn't in your investments, it's in you.

INVESTMENT PHILOSOPHY : You can get a clearer picture of a fund's investment goals andpolicies by reading its annual and semi-annual reports to shareholders. Whether a fundbelieves in value investing, or is aggressive in its style of investing etc. all these have abearing on the performance of the fund.

SIZE OF THE FUND FAMILY : The size of a fund's family does matter. In large fund familiesmoving from one type of fund to another is easier. For example, the market is showingbearish signs and you want to get out of your stock fund and into a money market fund.This transaction would most likely be cheaper and easier within the same fund family. Alsofund families generally waive load fees when switching funds if you originally paid acomparable load. This policy of switching from one load fund to another has also been usedto reduce tax obligations. Large fund families can spread out their normal operating costs.For example, a large fund family can have a bigger research department than a smaller

ones at a lower cost. Economies of scale usually favor the 'big guys'.

SIZE OF THE FUND : Bigger is usually better. The bigger funds can diversify better, attractbetter talent and have access to more information. However, if the fund's investment stylefocuses on small-capitalization stocks, bigger isn't always better. The success of manysmall-cap stock funds often depends on their ability to move in and out of holdings quickly.Larger small-cap funds, especially those that have ballooned recently, can't always achievethe same gains. In fact, some small-cap funds are so large they drastically affect the stockprices of companies they buy and sell.

SOME POINTS TO CONSIDER : Mutual funds are not guaranteed or insured by any bank orgovernment agency. Even if you buy through a bank and the fund carries the bank's name,

there is no guarantee. Mutual funds always carry investment risks. Some types carry morerisk than others. The fund's portfolio has investment risk directly related to the securities itcontains as well as to general market and business conditions. For example, an aggressivegrowth fund, because the prices of securities in its portfolio are more volatile, is generallyriskier than an income fund, which may invest in conservative stocks and bonds whoseprices do not fluctuate greatly but that pay high dividends or interest. Regardless of theinvestment strategy or portfolio no fund can escape market risk. Understand that a higherrate of return typically involves a higher risk of loss. Past performance is not a reliable



indicator of future performance. Beware of dazzling performance claims. Shop around.Compare a mutual fund with others of the same type before you buy.

Golden rule of Mutual fund investing- When small stocks do better than big ones, funds willbeat the market. When big ones do better, the market will outperform the funds. If youthink small stocks are due for a run, then you would expect actively managed funds to beat

the indexes. Determine your financial objectives and how much money you have to invest.Make sure the fund's objectives coincide with your own. Don't change your objectives orexceed the amount set aside for investment unless you have good reason. Always obtain allavailable information before you invest. Request the prospectus, and the latest shareholderreport from each fund you are considering. Be on the alert for incorporation by reference.You will have "no excuse" for not knowing this information, if a problem arises. You may belegally presumed to know materials incorporated by reference in a prospectus or otherdocuments. Always determine all sales charges, fees and expenses before you invest. Shoparound among the many funds offered and compare the various fees and costs connectedwith funds that appeal to you. Learn the costs of redemption.

Sometimes investors are surprised to learn that they have to pay to get out of funds

through back-end loads or redemption fees. Find out the redemption costs before you investso you won't be unpleasantly surprised when you redeem your shares. Never treat the risksof investment in a fund lightly. Weigh the risks of the funds you want to buy against yourability to tolerate the ups and downs of the market and your investment goals. Be extracautious when considering investing in funds with high yield/high risk portfolios. Don't bemisled by the name of a fund. Some funds have been given names denoting safety, stabilityand low risk, despite the fact that the underlying investments in the portfolio are volatileand highly risky.

Aru Srivastava

5.MUTUAL STRATEGY:

There was mad rush to invest in Mutual fund schemes especially in sector oriented fundsduring January and February this year. The rush is still continuing not for the investing inthe mutual funds but for the redemption.

In this high market drama the players are the same, only the script of the play haschanged. Mutual funds which waxed eloquent about their professionalism in portfoliobuilding and investment savvy are suddenly faced with the embarrassing prospect of depleting NAVs. The redemption pressure was such that some mutual funds were forced toliquidate their shares at a loss and some funds have gone to the extent of puttingrestrictions on redemptions.

Indian stock markets started moving southwards ever since the Union Budget wasannounced. The reasons were manifold like a hike in the dividend tax, truncating of theSection 54EA and 54EB benefits for mutual funds, withdrawal of tax holidays to IT andPharma companies, fall of NASDAQ etc., leading to a loss of confidence in markets. Thisbecame a mutually precipitating cycle since falling markets led to falling mutual fund NAVswhich in turn created redemption pressure forcing the funds to divest holdings leading to afurther crash in the markets.



IT Sector funds which were the darlings of investors due to high dividends and NAVs wereworst hit by the sensex crash. A quick bird's eye view of the rise and fall of the marketmania.

Name of the fund NAV as on07.04.2000

NAV as on08.05.2000

% change

EQUITY FUNDS Alliance Equity fund (Dividend) 37.98 31.32 - 17.53 DSPML Equity fund 24.89 19.69 -20.89 ING Growth Portfolio (Dividend) 25.52 19.33 -24.25 Reliance Growth Fund (Growth) 36.12 29.72 -17.71 JM Equity Fund (Growth) 15.07 11.83 -21.49

SECTOR FUNDS

UTI Software Fund 31.95 24.64 -22.87 TATA IT Sector Fund 16.08 13.09 -18.59 Kothari Pioneer Infotech Fund(Div) 26.29 21.72 -17.38 Birla IT Fund Plan B (Growth) 25.85 22.98 -11.10

Alliance New Millennium Fund (Gr) 11.64 9.36 -19.58

And more chillingly the above depreciation of NAVs is for a period of just one month. It isanybody's guess what these asset depletion values will look like if these same figures areannualized. This has led many critics of the market boom to comment that NAV has virtuallytransformed into Negative Asset Value. But the question now is what is the way out for theinvestors.

First and foremost investors need to realize that in markets like in economics there is nofree lunch. Second when the markets are falling the answer is not to panic but to make astrategic switch. Thirdly, equity markets are not synonymous with IT and hence investorsneed not always make a beeline for IT funds. There are also core sector and balanced funds

which are highly underpriced and provide a cheap mechanism for entering the markets andparticipate in the next pickup. Last but not the least, never forget the debt route.Unfortunately people never remember the debt route unless they have to either save tax orwhen the equity markets are down. An exposure to debt funds also makes a lot of sense toinvestors. The moral of the story is that for investors this is perhaps the time to book thegains made and switch over to balanced funds. Panicking and booking losses is the lastthing an investor should be doing now.

C Sekhar

6.CHOOSING OF MUTUAL FUNDS:

The last few weeks saw one of the worst periods in the Indian Financial markets. Thesentiments in all the markets were bearish. Sensex went below the 4000 mark, the rupeetouched all time lows against the dollar and consequently the RBI was forced to take someliquidity tightening measures by increasing the interest rates. In fact, the high short termyields in the money markets produced a inverted yield curve last week, when the yield on90 day T-bill was fixed at a higher level than the 364 day T-bill by the RBI.



In such a scenario, a naive investor must be wondering where to put his hard earnedsavings. The equity market is clueless and the traditional avenues, although they arerelatively less risky, provide meager yields. So the only choice that comes to the minds of investors at large is the Mutual Funds (MFs). These MFs provide an advantage of diversification of risk and the professional expertise of Fund Managers.

Now the question is, in which category of MFs to invest, equity or debt or balanced. Equityfunds are relatively more risky because of the uncertainty and volatility in the equitymarkets. In today's scenario, when the interest rates are rising, most of the bond funds arefacing the brunt because the increased interest rates have pulled down the prices of most of the bonds and their portfolio has come down in value. There is no clear cut direction theinterest rates might take in the future. So even the bond funds have become more riskier insuch a scenario. This leaves only the balanced funds. Let us take a closer look at thesebalanced funds.

Balanced funds are those funds, which invest a certain percentage of their corpus in equityand rest in the bonds. This gives the benefits of both the equity investment and fixedincome investment. In today's scenario, it would be best to invest in a balanced scheme of a

MF. The reason being, investing in such a MF would give the benefits of diversificationacross the class of securities. After the introduction of index futures, it has become easierfor the MFs to hedge themselves against the market risk. But even that hedge works upto acertain point of time, so the exposure to the equities should be limited. Also, there arebalanced funds that takes more exposure to certain sectors, like some Indian MFs weredoing trying to ride the ICE boom. But such funds are again more riskier because thereturns from such funds depends upon the performance of a particular sector.

The investment in bonds assures a steady stream of income without taking the entire riskinherent in the bond funds. Again, in today's scenario, where the direction of interest ratesis clueless, one should not take excessive exposure to bonds market. Thats why a balancedfund is an ideal investment in today's scenario. A quick look at the returns from theschemes of two of the MFs would put the things in a better perspective.

The three month return from DSP Balanced Fund works out to be 6.47%, where as thereturn on DSP Equity Fund works out to be 5.85% over the same period and for DSP BondFund, it works out to be 0.20%. So, one can see that the balanced fund has provided themaximum return over the last three months. Similarly, the 3 month return on MagnumBalanced Fund is 9.34% whereas the return on Magnum Equity Fund is 8.50% over thesame period. And this is true for most of the funds.

Usually, in rising markets, the returns on equities tend to be higher than other investmentsbut they also carry the maximum risk. And now that the SEBI has put a 16% circuit filter,they have become all the more riskier. A Balanced Fund provides the benefits of equityinvestments with limited risk and also a steady stream of income.

Therefore, in today's market scenario, one should invest in a Balanced Mutual Fund which isnot having considerable exposure to any particular sector. But an investor needs to keepcertain basic rules in mind while selecting balanced funds. Firstly, avoid funds where theequity component is heavily skewed in favor of limited sectors. Secondly, avoid funds wherethe debt component of balanced funds has an average maturity of beyond 2 years. Thirdly,timing is very important. Currently, the equity markets are substantially corrected and thedebt markets hold good promise due to higher interest rates which virtually diminishes the



prospects of bond value depreciation. So go ahead and invest in balanced funds, but doyour homework well in advance.

Rajneesh Mittal

7.ADVANTAGES OF MUTUAL FUNDS:

FEB 2000. Stock Markets reach dizzy heights of about 6000 mark. Investors go ga-ga overthe benefits of stock market investing, especially the Mutual Funds. A case in example, BirlaAdvantage Fund¶s NAV reaches Rs 80. Investors queue up at investor service centers to buymore Mutual Fund units in the euphoric expectation of the NAV reaching the Rs 100 mark.

FEB 2001. An µevent¶ful year has passed by. Stock markets are on a roller coaster ride withthe Sensex reaching the nadir of about 3000 mark. Investors shun the very concept of Mutual Fund investing. They are back to the good old days of saving their money in theform of fixed deposits.

Doesn¶t this sound like a typical answer to a typical examination question, which says ±"What are the differences between the stock market conditions in 2000 and 2001? Relateyour answer to Mutual funds"!!! It's time for introspection.

If the markets crash, it must be the time to indulge in Mutual Fund bashing. If the marketsare on a swan song, it's time to shower heaps of praises on the virtues of Mutual Funds.Unfortunately, of late, this ominous tendency has become the order of the day. And, so,once again we have been having investors and casual observers commenting on the bleakand the unsteady future of Mutual Funds. Is this domino effect justified? Are Mutual Fundsreally in for a sun-set?

Criticisms and concerns are however mostly a reaction to the falling SHORT TERM returnsand an IMPROPER understanding of the funds. Investors fail to understand that fundmanagers are not demi-gods and that Mutual fund are also susceptible to market conditionsand remain invested in the market. As a consequence of this, the NAVs will, more thanobviously, respond to the market movements. If an investor were to expect that the declinein the NAV of his investment be put to a halt, then the fund manager would have to exitvalue investing, which is what he is paid for, and move into cash. If he were to do that,there is no reason why the fund managers have to be paid for and why investors need tobear the asset management fees!

The fall in the NAVs is a perfectly natural occurrence. The below par NAV of over 100schemes today certainly disheartens the investors. A closer look at these Mutual Funds andtheir schemes would unfold the truth that most of these schemes are dividend options of afund, where dividend pay out has been made. It is a universal truth that once dividend has

been paid out, the NAV falls reflecting the payout which should be factored into whileanalyzing why most of these schemes have acquired a µbelow par¶ status. Thus, inclusion of such schemes in this category and terming them µpoor performers¶ is really incompatible.

Secondly, funds whose NAV has remained above par for months or have given reasonablereturns should not be counted with those funds whose NAV never crossed the par value.Fundamentally speaking, the below par NAVs show that the current value is less than thevalue at which one entered. This is no different from buying a fund at an NAV of Rs 14 andthen seeing it fall below this level.



Another alleged µsin¶ of a mutual fund is being overweight in technology. When the fund wasperforming with the same µoverweight¶ in technology stocks, that did not attract anycomplaints as the investor was getting high returns. If technology still is believed to be thebusiness driver in the near future, it is all the more natural that the funds will commit alarger part of its portfolio to such stocks, albeit with the required realignment in theassigned weightages from time to time.

Mutual Funds are still and would continue to be the unique financial tools, in the country.One has to appreciate the fact that every aspect of life has its periods of highs and lows.This has been the case with the stock markets. Why not apply the same logic to MutualFunds? Mutual Funds have not failed in any country where they work within a regulatoryframework. Their future is bright.

S S Prashanth

8.ELSS-A GOOD TAX PLANNING INSTRUMENTS:

Many believe that two months into the new financial year is perhaps too early to worryabout tax planning. This belief can be harmful, particularly for those planning to invest inEquity Linked Saving (ELS) Schemes of Mutual Funds. ELS schemes offer tax rebate underSection 88 for an investment upto a maximum of Rs 10,000. These schemes typically investatleast 80 per cent of their corpus in equities and carry a three-year lock-in period. Theunitholder is free to redeem his holdings once this lock-in expires at a price based on theNet Asset Value (NAV).

Timing can be advantageous. Since ELS Schemes invest primarily in the equity markets,timing can be a distinct advantage for any investor. At a time when equity markets aredown, exposure can be made to these schemes to lower holding cost. Thus, an investor can

put in money in these schemes even at the beginning of the financial year if, in his opinion,the equity markets at that moment present a good investment opportunity.

For instance, many analysts feel that the current downtrend in the equity markets presentsa good opportunity for those intending to use ELSS for tax saving purposes. The firstadvantage of ELSS is that these carry a lock in of just three years compared to a muchhigher lock in other options like PPF, NSC and Life Insurance Policies among others.Moreover, in ELS Schemes the lock in period commences from the very day the money isinvested on. So, for money invested on 10 April 2001, the lock in period will come to an endon April 9, 2004. The lock-in is, therefore, independent of financial year squabbles.

The situation turns even more advantageous when the concerned ELS schemes decides to

distribute a dividend or bonus during the lock in period. Dividends distributed and the unitscredited in the event of a bonus declaration are not covered by the lock in clause. Thus, aninvestor can, in these schemes, get back a portion of his money invested even during theoperation of the lock in period.

There is however a catch to this. Claiming dividends in these schemes is extremelybeneficial presently as all dividend distributions from open-end equity funds are not chargedwith any distribution tax. This advantage will be mitigated once dividends from these funds



are taxed. As per the existing provisions the 'no distribution tax' status of such funds willcontinue only till the end of this financial year.

The third advantage is that this investment comes with greater transparency. Mutual Fundsare, by law, required to disclose their portfolio to their unitholders. It is therefore easy forthe investor to monitor how his investment is doing. Another advantage is that these

schemes carry an upside potential as they invest in equities. Most other tax savingalternatives carry a fixed rate of return. Also, like other tax saving instruments this routetoo offers the flexibility of investing regularly in small amounts. This can be done throughsystematic investment plans of these mutual fund schemes.

However there are drawbacks too. One of the most important drawbacks of ELS Schemes isthat there is no assurance of even any base level of returns. This is because these fundsinvest in the equity markets which, as we all know, can fluctuate wildly. However, the long-term investment horizon of this fund does help in lowering the risk on this front.

But a smart investor can choose well keeping in mind the following parameters. ScrutinisePast Performance: While past performance is no assurance that a scheme will do well in the

future, it is a good indicator of its future potential. Choose the correct option: Many ELSSchemes offer a choice between dividend and growth options. Choosing the dividend optionwill make an investor eligible to receive dividends from the scheme which, if declared duringthe lock in period, serve to reduce the total capital locked in. However, once dividends fromthese funds are made taxable, one will need to re-examine the relative benefits of thedividend-growth options of the fund. Potential to declare dividends & bonus: For investorsnot very eager to put in their money for a three year period it makes sense to choose ascheme that can potentially declare a dividend or a bonus. Schemes with their NAV muchabove par value are good candidates for such distributions.

Aru Srivastava

9.MF¶NAV¶IGATION BEYOND NAV:

Mutual Funds (MFs) have come a long way in India. But not really when it comes tounderstanding the performance of various Mutual Fund schemes that are existent in thecountry today. A lay investor, today, would mainly look at the NAV movement of a schemeto decipher its performance before going ahead with an investment decision. While NAV andits movements can be considered as ONE of the yardsticks to measure the performance anyMF scheme, it cannot, per se, be the only parameter for judgement to invest in MFs.

A discerning investor would do well to take a look at other factors that may affect hisinvestment decisions:

First, before an investor burns his hands by investing in a non-performing scheme, heshould identify as to what his investment objectives are, namely - short term gains, longterm capital gains, continual income generation etc.

Second, the performance of a scheme over its lifetime would be another key criterion. Thisanalysis should be relative to the performance of the scheme vis-à-vis the market vagaries.Windfall gains in times of bull phases and abysmal returns in times of bear phases onlyindicate the susceptibility/vulnerability of the Mutual fund scheme and its underlyingportfolio to the market conditions.



Third, the income generating capability of the fund by means of declaration of dividendsetc. True to the financial adage, maximization of wealth and minimization of risk, thedividend history of a fund would certainly be a reckoning benchmark while assessing itsperformance.

Fourth, the underlying portfolio of a particular scheme would certainly be a decisive factor.

A fund that is closely following the market conditions/changes would do well to be in syncwith the ever-changing global market trends and change its portfolio structure to be in tunewith investor expectations.

Fifth, a fund¶s adherence to its investment objectives, as stated in the offer document,would do a whole world of good to the investing fraternity.

Last but not the least, a peep into the fund manager¶s credentials (like hisexperience/expertise etc) would certainly add pep to an investment decision.

While taking into consideration the aforementioned points, discussing the performance of the fund/scheme in questions over the past year would be a point in order. To put it in a

nutshell, a fund¶s investment philosophy, consistency, levels of diversification, returns overmarket cycles are sine qua non of any mutual Fund investment.

S S Prashanth

Mutual Fund Class B Shares: Good Buy or

Goodbye?

Should You Buy B Shares?

From Lee McGowan, former About.com Guide

Most mutual funds offer various classes of shares for purchase (the differences are in the mutualfund fees and expenses of each share class). Several common mutual fund share classes include:Class A, Class B and Class C mutual fund shares. Each share class requires a management andoperating fee and many share classes also include a 12b-1 fee.

Mutual fund B shares do not require front-end sales charges, but carry a contingent deferred salescharge (CDSC) and have a higher 12b-1 fee (a 1% 12b-1 fee is common) than other mutual fundshare classes. CDSCs are charges imposed on shareholders who sell their shares in the fund

during the surrender period. These CDSCs are not paid to advisors, but to the fund company tocover various costs, including the upfront commissions the fund pays to advisors (often as highas 4%). Investors do not see these upfront commissions charged by funds that are paid to theadvisors who offer the fund shares for purchase.

Specific CDSCs are outlined in the mutual fund¶s prospectus and the cost depends on how longthe investor holds his/her shares. Many mutual fund B shares have a CDSC that is reduced to 0%



by year six, while in year seven, the mutual fund Class B shares convert to Class A shares (whichcarry no surrender charges and have lower 12b-1 fees).

Are B Shares a Good Buy?

In some cases, if you compare various mutual fund share classes, you might be given a set of scenarios whereby mutual fund B shares look more attractive than other share classes of thesame fund. For instance, if you use FINRA¶s Fund Analyzer software, you might find that givena longer timeframe, and less than $100,000 to invest in one fund family, then mutual fund Bshares are, often times, more appropriate than Class A shares (which include upfront salescommissions and breakpoints) and C shares (which incur ongoing 12b-1 fees). But, as with anyinvestment²the devil can often be found in the details. You would be wise to remain cautiouswhen using hypothetical scenarios to determine the best investment for your portfolio.

For example, FINRA¶s Fund Analyzer scenario, and similar ones, may be accurate when simplycomparing the fee structures of Class A, Class B and Class C shares, but does that mean you

should purchase mutual fund B shares? What happens if your mutual fund manager leaves? Whathappens if the mutual fund becomes bloated with assets? What happens if the mutual fund¶s styledrifts from growth to value? In other words, what happens if you want to sell your mutual fund Bshares?

If you need to sell a particular mutual fund¶s B shares for any of these reasons, or to satisfy acash crunch, you might be able to easily switch from one fund to another within the same fundfamily without incurring surrender penalties (but, you still may incur capital gains). So, does thefund family in which you purchased the original mutual fund B shares have another adequatemutual fund, or will you be forced to settle with a mediocre fund in order to avoid surrender charges? Tread carefully before purchasing mutual fund B shares that you have not carefully

researched before purchase and carefully plan your exit strategy. What happens if/when you needto sell?

More Problems with B Shares

There will always be advisors, and maybe even investors, who want to debate whether choosingmutual fund B shares is a poor decision -- arguing that they are suitable for investors in certaincircumstances. Unfortunately, the way B shares are explained and the way they are sold is amajor problem facing investors today. In fact, an interesting blog, the About Broker Fraud Blog outlines several cases where FINRA has fined and censored brokerage firms for improperlyrecommending B shares. Millions of dollars in restitution has been paid to investors for

suitability issues over the years, while numerous brokerage firms have been fined and censored,and some brokers have even been disciplined and suspended after recommending this particular class of mutual fund shares to investors for whom they are not suitable.

Along this line, mutual fund B shares are often mischaracterized as no-load funds, a particular class of mutual funds that do not charge sales loads, but can incur other fees. If you are subjectedto this ³mischaracterization´ of mutual fund B shares by an advisor, hold on to your wallet whileyou walk out the door.



Saying Goodbye to B Shares

Despite their potential for profitability to advisors, the trend over the past several years has beenfor mutual funds to eliminate Class B shares from fund company line-ups. In a September 2009 press release, Allianze (the parent company of PIMCO Funds) stated that their policy of

suspending sales of B shares was ³consistent with the industry-wide trends toward lower sales of Class B shares and greater interest in fee-based advisory services.´ This trend toward fewer salesof Class B shares -- as mentioned by Allianze -- might well be due to better-informed mutualfund investors and more scrupulous brokerage firm compliance departments who are no longer recommending mutual fund B shares to unsuspecting investors not for suitability reasons, butdue to their high commission structure to advisors.

3 Pitfalls of Mutual Funds

How You Can Avoid the Pitfalls of Mutual Funds


Whether you have made a thoughtful decision to invest in mutual funds or you are all but forcedto invest in mutual funds (401k, 403b, or other retirement plans), you are bound to read about,hear about, and/or experience the pitfalls of mutual funds.

So, let¶s take a look at several pitfalls of mutual funds and what we can do to avoid them.

Pitfalls of Mutual Funds #1 -- There Is a Tax Drag on Mutual Funds

Mutual fund shareholders face the possibility of receiving capital gains distributions from their mutual funds. These capital gains distributions are the result of a mutual fund selling securitiesowned by the fund (such as a large cap mutual fund selling shares of GE above the cost of purchase). This mutual fund tax liability is known as ³tax drag.´

What do you do about this tax drag? For starters, if you own mutual funds in a tax-deferredretirement plan (401k, 403b,IRA, etc.), you will not be taxed on the distribution. If you have ataxable account, you may want to focus on low-turnover funds, which include index funds andtax-efficient mutual funds (even some actively managed funds have low turnover). Otherwise,you should consider visiting your fund company¶s website beginning in October of each year todetermine if and when there will be capital gains distributions.

If the distributions are anticipated to be large, you should weigh the advantages anddisadvantages of owning the fund. Indeed, you may want to sell the fund in order to avoid thedistribution. If you sell the fund to avoid the distribution, be aware that if you buy the fund back within 30 days (either in your taxable account or in your IRA), you will run afoul of IRS washsales rules.



Pitfalls of Mutual Funds #2 -- Past Performance of Mutual Funds Is Unreliable

The disclosure, ³Past performance is not indicative of future performance,´ is a common themethat appears throughout mutual fund prospectuses and advertisements. The disclosure resonateswith many mutual fund investors that buy last year¶s top performing funds hoping for a repeat

year.

Srikant Dash, Index Strategist at Standard & Poor¶s, says, ³Very few funds repeat a top-quartile performance. Furthermore, Standard & Poor¶s research shows that a healthy percentage, and inmost cases a majority, of top-quartile funds in the future will most likely come from the ranks of prior period second and third quartiles.´

The unreliable nature of the past performance of mutual funds is indeed a pitfall of mutual funds.Unfortunately, the past performance matter is an issue that most investments (ETFs, closed-endfunds, UITs) share. So, what can you do about this pitfall of mutual funds?

Setting realistic expectations, educating one ¶s self on the markets, and diversifying amongstvarious investments will help overcome this pitfall. If you are choosing mutual funds for your 401(k), IRA or taxable account, there are many online resources to help you avoid this pitfall of mutual funds and not fall into the performance chasing trap.

Pitfalls of Mutual Funds #3 Mutual Funds Are Expensive

There is no doubt that mutual funds are loaded with fees. Some mutual funds have sales charges,management fees, 12b-1 fees, and more. These expenses can be a pitfall of mutual funds.

The key is to research the expense of each mutual fund prior to buying. Are you buying a mutual

fund with a front-end, or even back-end, sales load? Are you buying a fund with a 12b-1 fee?Are you buying a fund with a high expense ratio? Finally, ask yourself if you are getting whatyou pay for or if you can buy a similar fund with fewer charges and a lower expense ratio.

The fees are disclosed in the mutual fund prospectus and can be found on the mutual funds¶websites. There are many mutual funds that do not have sales charges, that do not have 12b-1fees, and that have reasonable expense ratios. The competition within the mutual fund industrymakes this pitfall of mutual funds the easiest to avoid.

Choosing a Mutual Fund Advisor: Part One

Fancy Letters and Titles of Mutual Fund Advisors




If you have decided that you prefer to spend your time on other things than sifting throughthousands of mutual funds, then it¶s time to look for a mutual fund advisor. There are manythings to consider before choosing a mutual fund advisor. In this segment, we¶ll take a look atthe fancy letters and titles that you will run across when searching for an advisor.

Alphabet Soup and the Mutual Fund Advisor

When you are looking for a mutual fund advisor, inevitably you will run across fancy letters after the mutual fund advisors¶ names.

The letters are professional designations that are earned by the mutual fund advisor. There¶s theCFP®, ChFC and the CFA. There¶s the CMFC, CFS, CIC, and the CIMA. There¶s the, well youget the picture. What do all of these letters have anything in common besides starting with theletter C?

In many cases, professional designations show a commitment to education by the mutual fund

advisor. There are several highly regarded designations in which the advisor must meetrequirements such as industry experience, educational coursework, ethics guidelines, and arigorous exam. In some cases, a designation simply shows a commitment to marketing by theadvisor. The advisor merely takes a simple exam (sometimes with an open book) and pays anannual fee to the organization who crafted the marks.

The moral of the story is that an advisor who has a professional designation is not necessarilymore qualified than an advisor who has letters after his/her name. Get to know the mutual fundadvisor, ask for references and do your homework on the designation, prior to signing up withthe advisor.

Prestigious Titles and the Mutual Fund Advisor

How about the prestigious titles of the mutual fund advisors? Senior vice president, managingdirector and wealth management guru are a few popular titles (replace guru with advisor,consultant, specialist, etc.). On the face of it, these titles seem to denote success in the investmentmanagement industry. Don¶t be fooled.

Many large banks and brokerage firms hand out titles based on what the advisor does for theorganization, not the investor. In many cases, advisors earn a fancy title if they sell a lot of products. There¶s not necessarily a positive relationship between selling products and deliveringexcellent service to clients.



Must-Read Mutual Fund News

By Amanda B. Kish, CFA | More Articles November 29, 2010 | Comments (0)

There's a lot going on in the mutual fund world, and if you miss something, it could end upcosting you money. To keep you up to date, we scope out some of the happenings in the industryduring the past week and how they may affect your portfolio.

Targeting retirementInvestors haven't exactly been enamored of actively managed mutual funds in recent years, butthere is one area of the market that has been on an upswing: target-date funds. These funds offer

a one-stop shop for investors looking to create a diversified portfolio all at once, by investing inseveral underlying funds from the same fund family. And according to a new study by theEmployee Benefit Research Institute and the Investment Company Institute, investors areincreasing their use of these funds to meet their retirement goals. Nearly 10% of assets in 401(k) plans tracked in the companies' database are now invested in target-date funds, while fully one-third of plan participants hold such a fund.

While target-date funds aren't for everyone, investors who want a little bit of help with their assetallocation decisions should take a second look. And if your 401(k) or other retirement plan doesn't have a lot of good asset class-based options, a target-date fund may make more sense.

However, there are a few things to keep in mind when considering these investments. First andforemost, make sure you understand how your fund is investing and how aggressive your equityallocation is. Equity exposure varies widely across fund families, even for funds with the sametarget retirement date. Secondly, make sure your fund shop isn't "double-dipping" with respect tofees. In other words, make sure you're not paying fees on both the target-date fund itself and onthe underlying mutual funds. While many fund companies do charge two layers of fees, there aresome notable exceptions including Vanguard, Fidelity, and T. Rowe Price, so put these fundfamilies at the top of your list when shopping for target-date funds.

Investigation under wayIt seems that mutual fund investors were barely able to recover from the market timing andillegal late-trading scandals of 2003 before the bear market of 2008 hit. And just when wethought we were getting our bearings again, it looks like another insider trading investigation isunder way. The FBI recently searched the offices of several hedge funds during the investigation,and last week, the mutual fund world was drawn into the fray. A number of fund companiesreceived informational requests from federal investigators last week, including big-name shopsJanus Capital Group (NYSE: JNS) and Wellington Management. It's too soon to tell whether these initial requests will lead to further scrutiny for Janus and Wellington or whether other fundfirms will be added to the list of affected companies.



While no investors want to hear that their fund company may be even peripherally involved in aninsider trading investigation, make sure you don't jump the gun here. Just because a fund shophas been contacted by authorities in the course of an investigation doesn't mean that the companyis guilty of wrongdoing. So if you own any funds that are directly managed or subadvised byJanus or Wellington, don't panic and jump ship. The situation definitely bears closer watching,

but it's too early to make any definitive calls. Sit tight for now and pay close attention to how theinvestigation unfolds before taking any action.

Signaling value aheadIn more positive fund news, Vanguard continues to lead industry efforts to cut mutual fund feesfor retail clients. Vanguard recently announced that it would eliminate the high investmentminimums for its Signal Share class, which is used most often by financial advisors andinstitutional investors. The Signal Shares, available for roughly 25 of Vanguard's index funds,offer very low annual expenses, but the $1 million to $5 million minimum kept many out of thefunds. With the elimination of these minimums, many new investors will now be able to takeadvantage of this low-cost share class, which runs as low as 0.07% in some instances.

If you're an index fund advocate, this move should be music to your ears. Be sure to look out for freshly discounted Signal Shares in places like a retirement plan. And keep in mind thatVanguard also offers an ETF version of many of its index funds, so you've got some optionshere. For example, the Vanguard Emerging Markets Stock Index Signal Shares (VERSX)comes with a low 0.27% price tag, but you can also buy Vanguard Emerging Markets Stock

ETF (NYSE: VWO) for the same price. Other highly recommended Signal Share funds that areavailable for the same cost in an ETF format include Vanguard Total Stock Market ETF (NYSE: VTI), Vanguard Total Bond Market ETF (NYSE: BND), Vanguard European ETF (NYSE: VGK ), and Vanguard Small-Cap Index (NYSE: VB). Whether you prefer index fundsor exchange-traded funds, Vanguard's got the goods for investors who want to track the marketat the lowest possible cost.

Closing Mutual Funds: Investment

Protection Or Trap?

by Shauna Carther (Contact Author | Biography) Closed Funds vs. Closed-End FundsIt is important for us to differentiate between a closed fund and a closed-end fund. Closed-endfunds are mutual funds that, at their initial creation, issue a fixed number of shares to the public,which thereafter are structured as stock (actually, a basket of stocks or bonds) that can only be bought or sold through an exchange. (To learn more, read Open Your Eyes To Clo sed-End Fund s and U ncovering Clo sed-End Fund s.)

Closed funds are open-end funds that will no longer accept money from new investors (investorswho do not currently own any shares in the fund). For closing funds performing a "soft close",existing shareholders can still buy shares of the fund after its doors have closed to the public. In a"hard close", which is more rare, a fund does not accept new money from new or existing



shareholders.

Why Funds Close The biggest reason why a mutual fund company will decide to close its fund's doors is that thefund's strategy is being threatened by the fund's size. Funds that tend to outgrow themselves the

most are small cap funds or focused funds. When a fund performs well, many new investors arewilling to invest their money into it, but because small cap funds deal with low-volume stocksand focused funds prefer portfolios containing only about 20 shares, large amounts of assets willhinder the strategy of either type of fund.

Furthermore, a large influx of cash may compromise the manager's ease in performing trades; itis much easier for a fund manager to shuffle $500,000 worth of stock than it is to shuffle $10million worth. The decision to close a fund's doors to new investors could be to protect existingshareholders from stagnant or declining fund performance. (For more on how funds grow andwhen their size becomes damaging to their performance, see Ar e Bigg er Fund s Alway s Better?)

Open-end funds could also choose to close if they are planning a reorganization.

Performance of Funds After Closure What effect does closure have on the fund's performance? Well, it's hard to say, but investorsshould be aware that some closed funds tend to have less attractive performance after closure."Morningstar's Guide to Mutual Funds", published in 2003, cites a study in which Morningstar tracks the performance of a group of open-end funds that closed their doors to new investors.The funds in the study were of the top 20% of the funds within their categories prior to closing, but for three years after their closure, 75% of the funds dropped to an average performance.

The lower returns may not necessarily be a direct result of the closure itself, but may instead be aresult of the problems the fund was experiencing already before it closed its doors. Let's look atwhen a fund's closure is an indication of problems and when the closure is actually a signal of prudent management.

y When I t's Bad N ew s

Many funds do not decide to close their doors to new investors until the fund's performance has already been damaged by its growth. The agency problem, a conflict of interest that can arise between creditors, shareholders and management because of differing goals, is the main reason many funds do not close their doors sooner. Becausefund companies bring in more money (in fees) by attracting investors, a fund's drive toincrease its profitability may keep it open too long. Also, some fund managers'compensation is tied to the size of the fund, so these managers have the incentive tomanage increasing amounts of portfolio assets. (To read more about management, seeWh y Fund Manag er s Ri sk Too Much and W ord s From T he W i se On Act ive Manag ement .)

It is important for investors to realize that some closed funds do not perform as wellsimply because of the normal/overall market conditions. A fund that consistentlyoutperforms the market is a rare find, and over the long run, funds tend to converge to an



average rate. (For more details on the odds of picking winning funds, see Can You Pick t he W inner s at t he Mut ual Fund Track ?)

y When I t's Good N ew s The large influx of funds from investors, on the other hand, sometimes indicates the fund

manager's superior skill in picking assets for the portfolio. Some funds, when they arefirst created, set a limit on the maximum amount of assets they can handle. The closure of this kind of fund is a sign that the fund manager is working to maintain the fund's originalinvestment goals and the efficiency with which he or she moves the fund's assets. Thisfund would see a higher chance of performing well after closure.

The Door Is Shut, but Not Locked Forever Open-end funds can choose to open and close their doors as they see fit. Consider the HartfordMidcap Fund, which initially closed its doors in September of 2001. Its net asset value at that

time was around $15 a unit, a significant drop from the fund's peak of $23, which occurred atend of the previous year. The downward slope from the $23 peak indicates that the fund manager was starting to have extreme difficulty in maintaining the fund's mid cap strategy.

Figure 1Source: BarChart.com

The fund's performance regained ground over the next year as a closed fund, only to be reopenedagain in the summer of 2002, when performance began to drop again. The fund closed its doorsagain to investors in the summer of 2003.

Stay In or Get Out? If you currently hold units of a fund that has announced it will be closing its doors to newinvestors, do you want to squeeze out through that door, or should you stay? Just because your



fund is closing its doors to new investors doesn't necessarily mean that you should expect to losemoney in the future, especially if the closure is a prudent and timely decision.

Conclusion When your fund or prospective fund is closing, knowing the positive and negative implications

of the closure is important for deciding what to do, especially because you'll usually have a short period of time to act. Determining whether the fund is already damaged or whether it'smaintaining its strategy, and therefore saving itself from compromising its goals, should be keywhen you're evaluating a fund's closure.

Introduction To Money Market Mutual

Funds

by Investopedia Staff, (Investopedia.com) (Contact Author | Biography) Filed Under: Mutual Funds

Investors interested in the money market can access it most easily through money market mutualfunds, but these vehicles do not let smaller investors off the hook when it comes to havinga rudimentary understanding of the Treasury bills, commercial paper , bankers acceptances,repurchase agreements and certificates of deposit (CDs) that make up the bulk of money marketmutual fund portfolios. In this article, we'll show you how money market funds work and howthey can benefit you.

Purpose of Money Market Mutual Funds for Investors

There are three instances when money market mutual funds, because of their liquidity, are particularly suitable investments.

1. Money market mutual funds offer a convenient parking place for cash reserves when aninvestor is not quite ready to make an investment or is anticipating a near-term cashoutlay for a non-investment purpose. Money market mutual funds offer ultimate safetyand liquidity. This means that investors will have an expected sum of cash at the verymoment that they need it. (For more on this, read Get A S hor t -T erm Advant ag e In T he Mone y Mar ket .)

2. An investor holding a basket of mutual funds from a single fund company mayoccasionally want to transfer assets from one fund to another. If, however, the investor

wants to sell a fund before deciding on another fund to purchase, a money market mutualfund offered by the same fund company may be a good place to park the proceeds of sale.Then, at the appropriate time, the investor may exchange his or her money market mutualfund holdings for shares of the other funds in the fund family.

3. To benefit their clients, brokerage firms regularly use money market mutual funds to provide cash management services. Putting a client's dormant cash into money marketmutual funds will earn the client an extra percentage point (or two) in annual returns



above those earned by other possible investments. (To read more about the moneymarket, check out T he Mone y Mar ket tutorial.)

Operational Details of Money Market Mutual Funds Money market mutual funds are designed to offer features that are particularly suited to the

needs of small investors. Minimum initial investments generally range from $500 to $5,000.

You can purchase money market mutual funds directly from brokerage companies or mutualfund firms, just as you would purchase a stock or equity mutual. As investment advisors, some banks also sell money market funds and some even have their own proprietary funds that offer money market investment opportunities. These should not be confused with money marketaccounts, which are interest-earning savings accounts.

Money market mutual funds also offer some simplified withdrawal features that are moretypically associated with bank or trust accounts. For example, money market funds allowinvestors to withdraw assets by writing checks, usually of a minimum amount around $500 per

check. If the investor does not want to write a check as a means of withdrawing funds, he or shecan easily redeem shares by requesting payment by mail or by remittance through a wire transfer to his or her bank account.

Categories of Money Market Mutual Funds Money market mutual funds may contain a specific type of money market security or acombination of securities across a wide spectrum:

y One particular type of fund limits its asset purchases to U.S. Treasury securities.y Another class of money market funds purchases both U.S. government securities and

investments in various government-sponsored enterprises (GSEs).y The third and largest class of money market mutual funds invests in a variety of money

market securities that offer the highest degree of security.

Another important categorization for money market mutual funds relates to their taxable or tax-exempt status. Taxable funds invest in securities such as Treasury bills and commercial paper,whose interest income is subject to federal taxation. Tax-exempt funds invest exclusively insecurities that are issued by state and local governments and are exempt from federal taxation.Tax-exempt funds generally appeal to investors in higher federal tax brackets who are seekingtax savings on the overall interest income generated by their portfolios.

Tax-exempt money market mutual funds have the potential to offer a triple-whammy taxreprieve for some investors! Some tax-exempt funds purchase only securities issued bygovernments within a particular state. If an investor can find such a fund for his or her homestate, that investor can earn interest income that is exempt from federal, state and perhaps evenlocal income taxes.

Conclusion Just as equity and fixed-income mutual funds have greatly simplified the world of investing,money market mutual funds have made money market investing accessible to individual retail



investors. Money market mutual funds are among the safest and most liquid financialinstruments widely available. Moreover, money market funds offer modest initial investmentrequirements and provide simple procedures for withdrawing funds by check or transfer to a bank account. Finally, if they choose carefully, purchasers of certain tax-exempt money marketfunds may also enjoy relief from federal, state and even local taxation.

Mutual Fund Tune-Up Delivers High-

Powered Performance

by Shauna Carther (Contact Author | Biography)

So you've established an asset allocation strategy that is right for you, but at the end of the year,you find that the weighting of each fund in your portfolio has changed. What happened? Over the course of the year, the market value of each fund within your portfolio earned a differentreturn, resulting in a weighting change. Mutual fund rebalancing is like a tune-up for your car: itallows you to keep your risk level in check and minimize catastrophe.

What Is Rebalancing? Rebalancing is the process of buying and selling portions of your portfolio in order to set theweight of each fund in your overall investment back to its original state. In addition, if your investment strategy or tolerance for risk has changed, you can use rebalancing to readjust theweightings of each fund in the portfolio to fulfill a newly devised asset allocation.

Blown Out of Proportion The asset mix originally created by an investor inevitably changes as a result of differing returnsamong various funds. As a result, the percentage that you've allocated to different funds (andsectors) will change. This change may increase or decrease the risk of your portfolio, so let'scompare a rebalanced portfolio to one in which changes were ignored, and then we'll look at the potential consequences of neglected allocations in a portfolio.

Let us run through a simple example. Bob has $100,000 to invest. He decides to invest 50% in a bond fund, 10% in a Treasury fund and 40% in an equity fund.



At the end of the year, Bob finds that the equity portion of his portfolio dramaticallyoutperformed the bond and Treasury portions. This has caused a change in his allocation of assets, increasing the percentage that he has in the equity fund while decreasing the amountinvested in the Treasury and bond funds.

More specifically, the above chart shows that Bob's $40,000 investment in the equity fund hasgrown to $55,000, an increase of 37%! Conversely, the bond fund suffered, realizing a loss of 5%, but the Treasury fund realized a modest increase of 4%. The overall return on Bob's portfolio was 12.9%, but now there is more weight on equities than on bonds. Bob might bewilling to leave the asset mix as is for the time being, but leaving it too long could result in anoverweighting in the equity fund, which is riskier than the bond and Treasury funds. (For relatedreading, check out 4 S teps To Building A Profit abl e Por t folio.)

Consequences of Ignoring Disproportion A popular misconception among many investors is that if an investment has performed well over

the last year, it should perform well over the next year. Unfortunately, past performance is notalways an indication of future performance - this is a fact many mutual funds disclose. Manyinvestors, however, remain heavily invested in last year's "winning" fund and may drop their portfolio weighting in last year's "losing" fixed-income fund. Remember, equities are morevolatile than fixed-income securities, so last year's large gains may translate into horrible lossesover the next year.

Let's continue with Bob's portfolio and compare the portfolio values of his rebalanced fund with



the funds left unchanged.

At the end of the second year, the equity fund performs poorly, losing 7%. At the same time the bond fund performs well, appreciating 15%, and Treasuries remain relatively stable with a 2%increase. If Bob rebalanced his portfolio the previous year, his total portfolio value would be

$118,500, an increase of 5%. If Bob left his portfolio alone with the skewed weightings, his total portfolio value would be $116,858, an increase of only 3.5%. In this case, rebalancing is theoptimal strategy.

However, if the stock market rallies again throughout the second year, the equity fund willappreciate more and the ignored portfolio may realize a greater appreciation in value than the bond fund. Just as with many hedging strategies, upside potential may be limited, but byrebalancing you are nevertheless adhering to your risk-return tolerance level. Risk-lovinginvestors are able to tolerate the gains and losses associated with a heavy weighting in an equityfund, and risk-averse investors, who choose the safety offered in Treasury and fixed-incomefunds, are willing to accept limited upside potential in exchange for greater investment security.

How to Rebalance Your Portfolio

The optimal frequency of portfolio rebalancing depends on your transaction costs, taxconsiderations and personal preferences. Usually, rebalancing about once a year is sufficient; if some assets in your portfolio haven't experienced a large appreciation within the year, longer time periods may also be appropriate. Additionally, changes in your lifestyle may warrant achange to your asset allocation strategy. Whatever your preference, the basic steps for rebalancing your portfolio are as follows:



1. Record - If you have recently decided on an asset allocation strategy that's perfect for you and purchased the appropriate mutual funds, keep a record of the total cost of eachfund at that time, as well as the total cost of your portfolio. These numbers will provideyou with historical data for your portfolio, so at a future date you can compare them tocurrent values.

2.

Compare - On a chosen future date, review the current value of your portfolio and of each individual fund. Calculate the weightings of each fund in your portfolio by dividingthe current value of each fund by the total current portfolio value. Compare these figuresto the original weightings. Are there any significant changes? If not, and if you have noneed to liquidate your portfolio in the short term, it may be better to remain passive.

3. Adjust - If you find that changes in the fund weightings have distorted your portfolio'sexposure to risk, take the current total value of your portfolio and multiply it by each of the (percentage) weightings originally assigned to each fund. The figures you calculatewill be the amounts you should have invested in each fund in order to maintain your original asset allocation. Sell portions of mutual funds whose weights are too high and purchase additional units of mutual funds whose weights have declined.

Conclusion

Rebalancing your portfolio will help you maintain your original asset allocation strategy or

implement any changes you make to your investing style. Essentially, rebalancing will help you

stick to your investing plan regardless of what the market does.

5 Ways To Measure Mutual Fund Risk

by Richard Loth

There are five main indicators of investment risk that apply to the analysis of stocks, bonds andmutual fund portfolios. They are alpha, beta, r-squared, standard deviation and the Sharpe ratio.These statistical measures are historical predictors of investment risk/volatility and are all major components of modern portfolio theory (MPT). The MPT is a standard financial and academicmethodology used for assessing the performance of equity, fixed-income and mutual fundinvestments by comparing them to market benchmarks.

All of these risk measurements are intended to help investors determine the risk-reward

parameters of their investments. In this article, we'll give a brief explanation of each of thesecommonly used indicators.

1. Alpha

Alpha is a measure of an investment's performance on a risk-adjusted basis. It takes the volatility(price risk) of a security or fund portfolio and compares its risk-adjusted performance to a benchmark index. The excess return of the investment relative to the return of the benchmark index is its "alpha".



Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio's return. A positive alpha of 1.0 means the fund has outperformedits benchmark index by 1%. Correspondingly, a similar negative alpha would indicate anunderperformance of 1%. For investors, the more positive an alpha is, the better it is. (To learn

more, see A

dding A

l ph

aW

it hout

Adding Ri sk .)

2. Beta

Beta, also known as the "beta coefficient," is a measure of the volatility, or systematic risk , of asecurity or a portfolio in comparison to the market as a whole. Beta is calculated using regression analysis, and you can think of it as the tendency of an investment's return to respond to swings inthe market. By definition, the market has a beta of 1.0. Individual security and portfolio valuesare measured according to how they deviate from the market.

A beta of 1.0 indicates that the investment's price will move in lock-step with the market. A betaof less than 1.0 indicates that the investment will be less volatile than the market, and,

correspondingly, a beta of more than 1.0 indicates that the investment's price will be morevolatile than the market. For example, if a fund portfolio's beta is 1.2, it's theoretically 20% morevolatile than the market.

Conservative investors looking to preserve capital should focus on securities and fund portfolioswith low betas, whereas those investors willing to take on more risk in search of higher returnsshould look for high beta investments. (Keep reading about beta in Bet a: Know t he Ri sk .)

3. R-SquaredR-Squared is a statistical measure that represents the percentage of a fund portfolio's or security'smovements that can be explained by movements in a benchmark index. For fixed-incomesecurities and their corresponding mutual funds, the benchmark is the U.S. Treasury Bill and,likewise with equities and equity funds, the benchmark is the S&P 500 Index.

R-squared values range from 0 to 100. According to Morningstar , a mutual fund with an R-squared value between 85 and 100 has a performance record that is closely correlated to theindex. A fund rated 70 or less would not perform like the index.

Mutual fund investors should avoid actively managed funds with high R-squared ratios, whichare generally criticized by analysts as being "closet" index funds. In these cases, why pay thehigher fees for so-called professional management when you can get the same or better resultsfrom an index fund? (To learn more, read U nd er st anding Volat ilit y M ea sur ements, T he

Lowdown On Ind ex Fund s and Benchmar k Your Ret urn s W it h Ind exes.)

4. Standard DeviationStandard deviation measures the dispersion of data from its mean. In plain English, the more thatdata is spread apart, the higher the difference is from the norm. In finance, standard deviation isapplied to the annual rate of return of an investment to measure its volatility (risk). A volatilestock would have a high standard deviation. With mutual funds, the standard deviation tells ushow much the return on a fund is deviating from the expected returns based on its historical



performance.

5. Sharpe RatioDeveloped by Nobel laureate economist William Sharpe, this ratio measures risk-adjusted performance. It is calculated by subtracting the risk-free rate of return (U.S. Treasury Bond)

from the rate of return for an investment and dividing the result by the investment's standarddeviation of its return.

The Sharpe ratio tells investors whether an investment's returns are due to smart investmentdecisions or the result of excess risk. This measurement is very useful because although one portfolio or security can reap higher returns than its peers, it is only a good investment if thosehigher returns do not come with too much additional risk. The greater an investment's Sharperatio, the better its risk-adjusted performance. (Keep reading about this subject in U nd er st anding T he S har pe Rat io and T he S har pe Rat io Can Over sim plify Ri sk .)

Conclusion

Many investors tend to focus exclusively on investment return, with little concern for investmentrisk. The five risk measures we have just discussed can provide some balance to the risk-returnequation. The good news for investors is that these indicators are calculated for them and areavailable on several financial websites, as well as being incorporated into many investmentresearch reports. As useful as these measurements are, keep in mind that when considering astock, bond, or mutual fund investment, volatility risk is just one of the factors you should beconsidering that can affect the quality of an investment.

Mutual Funds -Articals

Documents

Transcript of Mutual Funds -Articals