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Stock Exchanges in India – Growth of Stock Exchanges in India
- 1. Mutual Fund
- 2. What are the benefits of purchasing a mutual fund? 1 Professional Management: The fund company hires talented money managers who have many resources behind them (including a team of people dedicated to researching, tracking, determining trends, and doing thorough analysis), and who work full time on your behalf. 2 Diversification: Lowers the risk because, regardless of the size of your investment, each unit purchased is made up of many different investments. 3 Liquidity: Mutual funds can be sold anytime, and easily 4 Flexibility: Mutual funds allow you to purchase as much or as little as you want, and offer a variety of purchase plans.
- 3. What types of funds can I buy? Major Asset Classes: 1 Money Market Funds 2 Bond Funds 3 Balanced Funds 4 Dividend 5 Equity Funds 6 Specialty Funds
- 4. What is a Bond Fund? • This type of fund's main objective is to provide a steady stream of income, and holds bonds issued by either governments or corporations. • The risk level of this type of fund will be determined by the guidelines in the prospectus, which will, in turn, determine what type of "rating" and term (years to maturity) of bond the manager is allowed to purchase.
- 5. What is a Balanced Fund? • This type of fund's main objective is to hold an optimal mix of investments among cash, equities, and income-producing securities. • This type of fund usually has several managers who specialize in a specific area. • This type of investment is ideal for someone who wants a better return than a fixed income, but also wants less risk than equity.
- 6. What is an Equity Fund? • This type of fund's main objective is to provide long-term growth through equity/stock investments. Different types of equity funds: 1 Diversified Equity Funds 2. Sector specific Funds 3. Index Funds 4. Middle Capitalization Funds 5. International Equity Funds 6. Others
- 7. What is a Specialty Fund? • This type of fund's main objective is to concentrate its holdings in one particular sector, geographic region, or in one capital market. • Examples: telecommunications, health care, technology, financial services, European markets or Japan. * As you specialize, you minimize diversification, and that results in increased risk.
- 8. What are the three different investment styles for equity investing? • Fund managers have different styles of investing. Their style affects the type of stocks they will purchase, and the price they are willing to pay. This, in turn, affects your future returns. 1 Value: A manager purchases stocks that offer value at a time when the price of the stock is low, relative to the actual book value. In other words, the company is selling for less than it is worth. * Note: This is the most conservative approach.
- 9. What are the three different investment styles for equity investing? 2 Growth: A manager purchases stocks that are deemed to have growth potential, which, in turn, could generate above average returns in the future. * Note: Growth investments are usually small- to medium-sized companies, thereby increasing the risk exposure.
- 12. Some facts for the growth of mutual funds in India • Huge growth in the last 6 years. • Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required. • 'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities. • SEBI allowing the MF's to launch commodity mutual funds. • Emphasis on better corporate governance. • Introduction of Financial Planners who can provide need based advice
- 14. Performance Measure • The Treynor Measure • The Sharpe Measure • Jenson Model • Fama Model
- 15. Fama Model • Required return can be calculated as: Ri = Rf + Si/Sm*(Rm - Rf) Where, Sm is standard deviation of market returns. The net selectivity is then calculated by subtracting this required return from the actual return of the fund.
Editor's Notes
- #11: Sponsors: The sponsors initiate the idea to set up a mutual fund. It could be a registered company, scheduled bank or financial institution. A sponsor has to satisfy certain conditions, such as capital, record (at least five years’ operation in financial services), de-fault free dealings and general reputation of fairness. The sponsors appoint the Trustee, AMC and Custodian. Once the AMC is formed, the sponsor is just a stakeholder. Trust/ Board of Trustees: Trustees hold a fiduciary responsibility towards unit holders by protecting their interests. Trustees float and market schemes, and secure necessary approvals. They check if the AMC’s investments are within well-defined limits, whether the fund’s assets are protected, and also ensure that unit holders get their due returns. They also review any due diligence by the AMC. For major decisions concerning the fund, they have to take the unit holders consent. They submit reports every six months to SEBI; investors get an annual report. Trustees are paid annually out of the fund’s assets – 0.5 percent of the weekly net asset value. Fund Managers/ AMC: They are the ones who manage money of the investors. An AMC takes decisions, compensates investors through dividends, maintains proper accounting and information for pricing of units, calculates the NAV, and provides information on listed schemes. It also exercises due diligence on investments, and submits quarterly reports to the trustees. A fund’s AMC can neither act for any other fund nor undertake any business other than asset management. Its net worth should not fall below Rs. 10 crore. And, its fee should not exceed 1.25 percent if collections are below Rs. 100 crore and 1 percent if collections are above Rs. 100 crore. SEBI can pull up an AMC if it deviates from its prescribed role. Custodian: Often an independent organisation, it takes custody of securities and other assets of mutual fund. Its responsibilities include receipt and delivery of securities, collecting income-distributing dividends, safekeeping of the units and segregating assets and settlements between schemes. Their charges range between 0.15-0.2 percent of the net value of the holding. Custodians can service more than one fund.
- #15: The Eugene Fama model is an extension of Jenson model. This model compares the performance, measured in terms of returns, of a fund with the required return commensurate with the total risk associated with it. The difference between these two is taken as a measure of the performance of the fund and is called net selectivity.