WHY MUTUAL FUNDS GIVE MORE RETURNS ?

If you have read my last article, you have probably learn a few things about the pros and cons of stocks and what necessary measures you need to take to avoid losing money and not knowing what to do next. In this article, I am going to introduce mutual funds and why they are perceived by many people to be safer than stocks. I am also going to walk through the steps and strategies which you need in order to enjoy maximum benefits. 

A mutual fund is basically a pool of money from investors from around the world in constructing a portfolio of bonds, real estate, securities and stocks. Below are 6 main reasons why mutual funds are much better than stocks on long-term investments. 

Automatic Reinvestment
With this, you can have capital gains and dividends reinvested into your mutual fund automatically and easily without having to pay sales load or extra fees. 

Can Be Diversified
Most investors buy more than just 1 stock. In order to grow their portfolio, they need to multiply and diversify their stocks. By diversifying, you reduce the risk without sacrificing your money. 

Easier To Manage 
When you buy mutual funds, you will not be on your own trying to figure out how to make money without losing money. Instead you will be provided with a professional fund manager who knows how to take care of your investments. 

Liquidity
What this basically means is that you can exchange them for cash quickly and easily without any hassles. 

Only 1 Investment Portfolio Required
This is much better than stocks whereby you need to come up with several different portfolios just to qualify as a long-term stockholder and investor. 

Transparency
Most mutual fund holdings are publicly available. This ensures that you as an investor are getting what you are paying for. 

Apart from buying, you can sell them too. Here are the reasons why. 

Meeting Your Goals

As with every investor, your objectives could be being debt free, enjoying a blessed and fruitful retirement, travelling around the world, providing for your family and kids in every way possible etc.

But along the way towards your goals, changes are inevitable. For example if your children intends to further their studies especially overseas, you certainly need to adjust your porfolio to reduce the risk of losing money and increase the possibility of earning more. 

In this case, you can sell some of your investments to buy fixed income types

Change Of Fund Manager Or Broker

When a fund manager or broker resigns and another takes over, you should consider selling even if you are being told that the replacement will do an equally excellent job. 

The truth is the new fund manager or broker may have a different mindset and philosophy of doing things and managing clients. 

These are all the reasons why you should choose mutual funds. However as with most investments, you require capital. The amount usually ranges from a couple of hundred to thousands of dollars. But overall, you do not to spend a lot to get started.




It's important to understand that each mutual fund has different risks and rewards. In general, the higher the potential return, the higher the risk of loss. Although some funds are less risky than others, all funds have some level of risk - it's never possible to diversify away all risk. This is a fact for all investments.

Each fund has a predetermined investment objective that tailors the fund's assets, regions of investments and investment strategies. At the fundamental level, there are three varieties of mutual funds:
1) Equity funds (stocks)
2) Fixed-income funds (bonds)
3) Money market funds

All mutual funds are variations of these three asset classes. For example, while equity funds that invest in fast-growing companies are known as growth funds, equity funds that invest only in companies of the same sector or region are known as specialty funds.

Let's go over the many different flavors of funds. We'll start with the safest and then work through to the more risky.

Money Market Funds The money market consists of short-term debt instruments, mostly Treasury bills. This is a safe place to park your money. You won't get great returns, but you won't have to worry about losing your principal. A typical return is twice the amount you would earn in a regular checking/savings account and a little less than the average certificate of deposit(CD).

Bond/Income Funds Income funds are named appropriately: their purpose is to provide current income on a steady basis. When referring to mutual funds, the terms "fixed-income," "bond," and "income" are synonymous. These terms denote funds that invest primarily in government and corporate debt. While fund holdings may appreciate in value, the primary objective of these funds is to provide a steady cashflow to investors. As such, the audience for these funds consists of conservative investors and retirees. (Learn more inIncome Funds 101.)

Bond funds are likely to pay higher returns than certificates of deposit and money market investments, but bond funds aren't without risk. Because there are many different types of bonds, bond funds can vary dramatically depending on where they invest. For example, a fund specializing in high-yield junk bonds is much more risky than a fund that invests in government securities. Furthermore, nearly all bond funds are subject to interest rate risk, which means that if rates go up the value of the fund goes down.

Balanced Funds
The objective of these funds is to provide a balanced mixture of safety, income and capital appreciation. The strategy of balanced funds is to invest in a combination of fixed income and equities. A typical balanced fund might have a weighting of 60% equity and 40% fixed income. The weighting might also be restricted to a specified maximum or minimum for each asset class.

A similar type of fund is known as an asset allocation fund. Objectives are similar to those of a balanced fund, but these kinds of funds typically do not have to hold a specified percentage of any asset class. The portfolio manager is therefore given freedom to switch the ratio of asset classes as the economy moves through the business cycle.

Equity Funds Funds that invest in stocks represent the largest category of mutual funds. Generally, the investment objective of this class of funds is long-term capital growth with some income. There are, however, many different types of equity funds because there are many different types of equities. A great way to understand the universe of equity funds is to use astyle box, an example of which is below. 




The idea is to classify funds based on both the size of the companies invested in and the investment style of the manager. The term value refers to a style of investing that looks for high quality companies that are out of favor with the market. These companies are characterized by low P/E and price-to-book ratios and high dividend yields. The opposite of value is growth, which refers to companies that have had (and are expected to continue to have) strong growth in earnings, sales and cash flow. A compromise between value and growth is blend, which simply refers to companies that are neither value nor growth stocks and are classified as being somewhere in the middle.

For example, a mutual fund that invests in large-cap companies that are in strong financial shape but have recently seen their share prices fall would be placed in the upper left quadrant of the style box (large and value). The opposite of this would be a fund that invests in startup technology companies with excellent growth prospects. Such a mutual fund would reside in the bottom right quadrant (small and growth). (For further reading, check out Understanding The Mutual Fund Style Box.)

Global/International Funds
An international fund (or foreign fund) invests only outside your home country. Global funds invest anywhere around the world, including your home country.

It's tough to classify these funds as either riskier or safer than domestic investments. They do tend to be more volatile and have unique country and/or political risks. But, on the flip side, they can, as part of a well-balanced portfolio, actually reduce risk by increasing diversification. Although the world's economies are becoming more inter-related, it is likely that another economy somewhere is outperforming the economy of your home country.

Specialty Funds
This classification of mutual funds is more of an all-encompassing category that consists of funds that have proved to be popular but don't necessarily belong to the categories we've described so far. This type of mutual fund forgoes broad diversification to concentrate on a certain segment of the economy.

Sector funds are targeted at specific sectors of the economy such as financial, technology, health, etc. Sector funds are extremely volatile. There is a greater possibility of big gains, but you have to accept that your sector may tank.

Regional funds make it easier to focus on a specific area of the world. This may mean focusing on a region (say Latin America) or an individual country (for example, only Brazil). An advantage of these funds is that they make it easier to buy stock in foreign countries, which is otherwise difficult and expensive. Just like for sector funds, you have to accept the high risk of loss, which occurs if the region goes into a bad recession.

Socially-responsible funds (or ethical funds) invest only in companies that meet the criteria of certain guidelines or beliefs. Most socially responsible funds don't invest in industries such as tobacco, alcoholic beverages, weapons or nuclear power. The idea is to get a competitive performance while still maintaining a healthy conscience.

Index Funds The last but certainly not the least important are index funds. This type of mutual fund replicates the performance of a broad market index such as the S&P 500 or Dow Jones Industrial Average (DJIA). An investor in an index fund figures that most managers can't beat the market. An index fund merely replicates the market return and benefits investors in the form of low fees.

What is ELSS (Equity Linked Saving Scheme)? ELSS, popularly known as Tax Saving Mutual Fund, is a category of Mutual Fund where a major portion is invested in Equity & Equity related instruments. An investment up to 1 lakh is exempted from income under section 80C, but there is a lock in of 3 years before you can withdraw. However, there is no upper limit on investments and long term capital appreciations are tax free. Dividends received are also tax free in the hands of the investor.     ELSS is a great instrument for tax planning which also ensures good returns. But investment should be carefully planned and you should devote sufficient time in selecting the right fund.                         Types of ELSS 1. Growth: Investor does not get any income during the tenure of the investment. He will get a lump sum amount at the time of redemption or on maturity.                       2. Dividend: Investor gets a dividend from the fund house. He has two options: He can cash on the dividends. He can opt for dividend re-investment option. In most funds you have Growth as well as Dividend options which you can choose depending upon your priorities. Best Funds We present the top 7 funds based on last 5 years’ performance: Figure 1. Source: Value Research How to choose a fund for investing? A good track record is no guarantee for future performance. You should also look at some quantitative measures to evaluate which fund is good for you.    Expense Ratio: Denotes the annual expenses of the funds, including the management fee, and administrative cost. Lower expense ratio is better. Sharpe Ratio: An indicator of whether an investment's return is due to smart investing decisions or a result of excess risk. Higher Sharpe Ratio is better. Alpha Ratio: Measures risk relative to the market or benchmark index. For investors, the more positive an alpha is, the better it is. R-squared: Measures the percentage of an investment's movement that are attributable to movements in its benchmark index. A mutual fund should have a balance in R-square and ideally it should not be more than 90 and less than 80. Figure 2. Source: Value Research Which fund is best for you? Choice depends upon your risk profile and priorities. You should make an investment decision based on overall financial planning.    Large Cap Funds: These funds mostly invest in the large cap companies. While this may mean muted returns when the markets are rising, it also may mean a limited downside when the going gets tough. Franklin India Tax shield and SBI Magnum Tax gain are a few examples of this type of fund.    Growth Funds: These Funds have about 30% exposure to mid-caps, 10% to small-caps & the rest in large caps in its portfolio. Hence, it may give a higher return in rising markets. Sundaram BNP Paribas Tax saver is a good option in this category. Mid-cap Funds: No pain, no gain. These funds have a sizeable exposure to mid-caps and small-caps. This aggressive investment style can pay rich rewards. Sahara Tax Gain and HDFC Taxsaver are good examples of a fund in this class. Small Cap Funds: Small-cap stocks can act like performance enhancing drugs. In the above discussed types, the maximum allocation to small-caps is 12%. However, Taurus Tax shield has invested almost 30% in this high-risk zone. This can be very rewarding when the going is good, but a dream run can easily become a nightmare. Taurus Tax shield has given 98.01% returns in last 1 year. Conclusion You should do sufficient analysis before taking investment decisions. It should be guided by your overall financial situation, goals and risk profile. A Financial Plan is recommended before making investment decisions. SIP (Systematic Investment Plan) for a long time horizon is the most recommended way to invest in equity funds. You should avoid lump sum investments especially when the market is on a high.                  CLICK THIS LINK TO VIEW DETAILED SIP INVESTMENT PLAN IN TAMIL

SYSTEMATIC INVESTMENT PLANING

Reliance Systematic Investment Plan Invest as little as Rs. 100 per month.

Welcome to Reliance Mutual Fund Just as drops of water make an ocean, small but regular investments can go a long way in building wealth over time. This way you grow step by step. It's always prudent to invest with a long term horizon in mind. Small but regular investments go a long way in creating wealth over time. Reliance Systematic Investment Plan (SIP) helps you achieve just that. It is an investment technique where you deposit as little as Rs. 100 regularly every month into the mutual fund scheme at the then prevailing NAV (Net Asset Value), subject to applicable load. No need to time the markets Imagine, if you could always pick the right time to buy and sell. However, timing the market is a time-consuming and risky task. Through disciplined, regular investments you can stop worrying about when and how much to invest. In short, it eliminates the need to actively track the markets. Lower cost per unit Since your investments are spread regularly over a period of time, buying fewer units during rising markets and buying more units during falling markets reduces the average cost per unit of your investments - this concept is known as Rupee Cost Averaging. Illustration - Rupee Cost Averaging Say you have opted for Reliance Systematic Investment Plan, investing Rs. 1000 every month from March 2009 to Feb 2010 in a diversified equity fund. Now check the average purchase cost per unit of your investments. It would be lower than the average NAV of your investment over 12 months.   Date NAV (Rs.) Units Amount (Rs.) 2/03/09 190.47 5.25 1000.00 13/04/09 233.32 4.29 1000.00 11/05/09 252.50 3.96 1000.00 10/06/09 339.27 2.95 1000.00 10/07/09 307.21 3.26 1000.00 10/08/09 343.02 2.92 1000.00 10/09/09 375.56 2.66 1000.00 12/10/09 392.46 2.55 1000.00 10/11/09 392.76 2.55 1000.00 10/12/09 416.48 2.40 1000.00 11/01/10 439.79 2.27 1000.00 10/02/10 412.21 2.43 1000.00 Total 4095.04 37.47 12000.00 Average Cost = Total Cash Outflow / Total Number of units = Rs. 12000/ 37.47 = Rs. 320.24 Average Price = sum of all NAVs at which you have invested/Number of months of investment = Rs. 4095.04/12 = Rs. 341.25 Average Cost < Average Price Note: The above table considers the actual NAV of Reliance Growth Fund to explain the concept of Rupee Cost Averaging. The NAV do not in any manner indicate the future NAVs of the any of the schemes of Reliance Mutual Fund Past performance may or may not be sustained in future. Achieve your financial goals Reliance Systematic Investment Plan is an effective tool for financial planning. Be it your child’s education, marriage or buying a home. With Reliance SIP, you can choose a pertinent regime and achieve your goals, systematically. To see how you can achieve your goals see the Reliance Vision Fund and Reliance Growth Fund table along side.                          SIP Return as on Aug 31, 2010  (Vision Fund) Period                  1 Year 3 Year 5 Year Since inception SIP Start Date 40057 39326 38596 34980 Current NAV (As on 31/08/2010) 272.68 272.68 272.68 272.68 Total No. of units accumulated 48.69 180.98 339.25 7269.96 Total Amount Invested in Rs. 12000 36000 60000 179000 Market Value if invested in  Scheme in Rs. 13276.93 49349.33 92506.63 1982357.62 Market Value if invested in Benchmark in Rs. 12764.39 46074.44 85533.46 705013.60 Return on SIP in Scheme 0.212812334 0.219514364 0.175064725 0.285267609 Return on SIP in Benchmark (BSE 100) 0.13 0.17 0.14 0.17 Past performance may or may not be sustained in future.                          SIP Return as on Aug 31, 2010 (Growth Fund) Period                  1 Year 3 Year 5 Year Since inception SIP Start Date 40057 39326 38596 34980 Current NAV (As on 31/08/2010) 476.39 476.39 476.39 476.39 Total No. of units accumulated 28.19 110.76 216.99 6208.70 Total Amount Invested in Rs. 12000 36000 60000 179000 Market Value if invested in  Scheme in Rs. 13428.12 52764.89 103370.57 2957750.41 Market Value if invested in Benchmark in Rs. 12764.39 46074.44 85533.46 705013.60 Return on SIP in Scheme 0.238846987 0.269133049 0.221120936 0.330830258 Return on SIP in Benchmark (BSE 100) 0.13 0.17 0.14 0.17 Past performance may or may not be sustained in future.   Returns on SIP and Benchmark are annualized and cumulative investment return for cash flows resulting out of uniform and regular monthly subscriptions have been worked out on “Excel” spreadsheet function known as XIRR. Calculations assume that all payouts during the period have been reinvested in the units of the scheme at then prevailing NAV. It is assumed that a SIP of Rs. 1000/- each executed on 10th of every month has been taken into consideration including the first installment. It may please be noted that load has not been taken into consideration. SIP Disclaimer: The amounts invested in SIP and the market values of such investments at respective periodic intervals thereof are simulated for illustrative purposes for understanding the concept of SIP. This illustration should not be construed as a promise, guarantee on or a forecast of any minimum returns. The Mutual Fund or the Investment Manager does not assure any safeguard of capital and the illustrated returns are not necessarily indicative of future results and may not necessarily provide a basis for comparison with other investments. SIP does not guarantee or assure any protection against losses in declining market conditions.   How to invest?   Select Reliance Mutual Fund schemes of your choice. Under the Reliance Systematic Investment Plan, you can choose from a range of equity and debt schemes which offer SIP. Investment periodicity - You can choose to make your investment on a monthly or quarterly basis. Minimum investment amount - Monthly SIP Option - 60 installments of Rs. 100/- each or 12 installments of Rs. 500/- each or 6 installments of Rs. 1,000/- each and in multiples of Re. 1/- thereafter. Quarterly SIP Option - 12 installments of Rs. 500/- each or 4 installments of Rs.1,500/- each and in multiples of Re. 1/- thereafter. The first SIP installments could be submitted on any working day. However, the subsequent installments can be dated 2nd, 10th, 18th or 28th of every month/quarter. You can choose a day convenient for you. However, only one SIP transaction per month/quarter per folio is permitted. Investment method - The SIP facility can be availed by : a) Electronic Clearing Service (ECS) or Direct Debit mandate, wherein the investor will have to give a debit mandate along with one signed cheque from his Savings Bank account. b) Issuing Post-Dated Cheques (PDCs). (Rs.100 SIP can be processed only through Electronic Clearing Service (ECS) or Direct Debit).   Disclaimer: Statutory Details: Reliance Mutual Fund has been constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882. Sponsor: Reliance Capital Limited. Trustee: Reliance Capital Trustee Company Limited. Investment Manager: Reliance Capital Asset Management Limited (Registered Office of Trustee & Investment Manager: "Reliance House" Nr. Mardia Plaza, Off. C.G. Road, Ahmedabad 380 006). The Sponsor, the Trustee and the Investment Manager are incorporated under the Companies Act 1956. The Sponsor is not responsible or liable for any loss resulting from the operation of the Scheme beyond their initial contribution of Rs.1 lakh towards the setting up of the Mutual Fund and such other accretions and additions to the corpus. Reliance Growth Fund (An Open-ended Equity Growth Scheme): The primary investment objective of the scheme is to achieve long term growth of capital by investing in equity and equity related securities through a research based investment approach. Asset Allocation: Equity and Equity related Instruments: 100 to 65%, Debt Instruments & Money Market Instruments: 35 to 0%, Entry Load - Nil, Exit Load - 1%, if redeemed or switched out on or before completion of 1 year from the date of allotment of units, Nil thereafter. Reliance Vision Fund (An Open-ended Equity Growth Scheme): The primary investment objective of the scheme is to achieve long-term growth of capital by investment in equity and equity related securities through a research based investment approach. Asset Allocation: Equity and Equity related Instruments: 100 to 60%, Debt Instruments: 30 to 0%, Money Market Instruments: 10 to 0%. Entry Load –Nil, Exit Load - 1%, if redeemed or switched out on or before completion of 1 year from the date of allotment of units, Nil thereafter. Terms of issue: The NAV of the Schemes will be calculated and declared on every Working Day. The Schemes provide sale / switch – in & repurchase /switch - out facility on all Business Days at NAV based prices. Risk Factors: Mutual Funds and securities investments are subject to market risks and there is no assurance or guarantee that the objectives of the Scheme will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on the factors and forces affecting the capital markets. Reliance Growth Fund and Reliance Vision Fund are the names of the Schemes and do not in any manner indicates either the quality of the Scheme; its future prospects or returns. Past performance of the Sponsor/AMC/Mutual Fund is not indicative of the future performance of the Scheme. The NAV of the Scheme may be affected, interalia, by changes in the market conditions, interest rates, trading volumes, settlement periods and transfer procedures. The Mutual Fund is not assuring that it will make periodical dividend distributions, though it has every intention of doing so. All dividend distributions are subject to the availability of distributable surplus in the Scheme. Please read the Scheme Information Document (SID) and Statement of Additional Information (SAI) carefully before investing. Copies of SID and SAI is available at all the DISC, Distributors and www.reliancemutual.com.