Thursday, April 28, 2011

Equity Funds

Equity fund is a mutual fund that invests principally in stocks. It can be actively or passively managed.  It is also known as a "stock fund". Equity mutual funds invest pooled amounts of money in the stocks of public companies. Stocks represent part ownership, or equity, in companies, and the aim of stock ownership is to see the value of the companies increase over time. Stocks are often categorized by their market capitalization, and can be classified in three basic sizes: small, medium, and large. Many mutual funds invest primarily in companies of one of these sizes and are thus classified as large-cap, mid-cap or small-cap funds.
Equity fund managers employ different styles of stock picking when they make investment decisions for their portfolios. Some fund managers use a value approach to stocks, searching for stocks that are undervalued when compared to other similar companies. Another approach to picking is to look primarily at growth, trying to find stocks that are growing faster than their competitors, or the market as a whole. Some managers buy both kinds of stocks, building a portfolio of both growth and value stocks. Since equity funds invest in stocks, they have the potential to generate more returns. On the other hand they carry greater risks too. Equity funds can be classified into diversified equity funds and sectoral equity funds.

Sunday, April 24, 2011

Exchange Traded Fund

An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index. An ETF combines the valuation feature of a mutual fund or unit investment trust, which can be bought or sold at the end of each trading day for its net asset value, with the tradability feature of a closed-end fund, which trades throughout the trading day at prices that may be more or less than its net asset value. Closed-end funds are not considered to be "ETFs", even though they are funds and are traded on an exchange. ETFs experience price changes throughout the day as they are bought and sold. Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated every day like a mutual fund does. By owning an ETF, you get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share. Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, you have to pay the same commission to your broker that you'd pay on any regular order.

Wednesday, April 20, 2011

Open Ended Fund

An open end fund is a collective investment scheme which can issue and redeem shares at any time. An investor will generally purchase shares in the fund directly from the fund itself rather than from the existing shareholders. It contrasts with a closed-end fund, which typically issues all the shares it will issue at the outset, with such shares usually being tradable between investors thereafter.
A type of mutual fund that does not have restrictions on the amount of shares the fund will issue. If demand is high enough, the fund will continue to issue shares no matter how many investors there are. Open-end funds also buy back shares when investors wish to sell. The majority of mutual funds are open-end. By continuously selling and buying back fund shares, these funds provide investors with a very useful and convenient investing vehicle. It should be noted that when a fund's investment manager(s) determine that a fund's total assets have become too large to effectively execute its stated objective, the fund will be closed to new investors and in extreme cases, be closed to new investment by existing fund investors.

Saturday, April 16, 2011

Close Ended Fund

A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.
A closed-end fund is a collective investment scheme with a limited number of shares. It is called a closed-end fund because new shares are rarely issued once the fund has launched, and because shares are not normally redeemable for cash or securities until the fund liquidates. Typically an investor can acquire shares in a closed-end fund by buying shares on a secondary market from a broker, market maker, or other investor as opposed to an open-end fund where all transactions eventually involve the fund company creating new shares on the fly. The price of a share in a closed-end fund is determined partially by the value of the investments in the fund, and partially by the premium placed on it by the market. The total value of all the securities in the fund divided by the number of shares in the fund is called the net asset value (NAV) per share. The market price of a fund share is often higher or lower than the per share NAV: when the fund's share price is higher than per share NAV it is said to be selling at a premium; when it is lower, at a discount to the per share NAV.

Wednesday, April 13, 2011

Balanced Fund

Balanced mutual funds are one of the types of various mutual funds available in the market. A mutual fund that buys a combination of common stock, preferred stock, bonds, and short-term bonds, to provide both income and capital appreciation while avoiding excessive risk. The purpose of balanced funds is to provide investors with a single mutual fund that combines both growth and income objectives, by investing in both stocks (for growth) and bonds (for income). Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss; the flip side, of course, is that balanced funds will usually increase less than an all-stock fund during a bull market. It is also sometimes called hybrid funds. The proportion in which the balanced mutual funds allocate their assets is usually 60 % to 65 % in stocks and the balance in bonds. The proportion is not disturbed while managing the fund as it is to remain within the pre set minimum and maximum limits.
One can draw some similarity of balanced funds with well diversified funds. Asset allocated for stocks are diversified into different sectors which are performing with high returns. Fund allocation weightage is determined by the stocks' return potentials. The top stock, for example may get an allocation of say 10% and the lesser the potential the lesser is the percentage allocation of funds. The same pattern is then repeated for another sector of stocks. Sectors are chosen subject to various parameters. The allocation to bonds is distributed among bonds issued by governments and banks. This investment provides guaranteed returns at a steady rate over a period. This gives the stability to the entire fund cushioning the violent fluctuations of aggressive stock investment.

Saturday, April 9, 2011

Sector Funds

Sectoral funds are those mutual funds which invest in a particular sector or industry of the market, e.g. infrastructure, banking, pharma, information technology etc. They are also known as the thematic funds where investment is concentrated on only one industry or a group of industry. Sector funds are riskier than equity diversified funds since they invest in shares belonging to a particular sector which gives them fewer diversification opportunities. The idea is to allow investors to place bets on specific industries or sectors, which have strong growth potential.

These funds tend to be more volatile than funds holding a diversified portfolio of securities in many industries. Such concentrated portfolios can produce tremendous gains or losses, depending on whether the chosen sector is in or out of favor. Sectoral mutual funds come in the high risk high reward category and are not suitable for investors having low risk appetite.

Generally, mutual fund houses avoid launching sectoral funds as they are seasonal in nature and do well only in cycles. Since these funds focus on just one sector of the economy, they limit diversification and the fund manager’s ability to capitalize on other sectors, if the specific sectors aren’t doing well. Unless a particular sector is doing very well and its long term growth prospects look bright, it advisable not to trade in sector funds.
Sector mutual funds sometimes give 100% or even more return than the traditional mutual funds because at first business seem to gain huge profits and they also declare huge dividends to its share holders. As the business cycle works on the growth reaches its optimum and finally they start to bend down and that is when there is some amount of risk involved in it.These funds are concentrated in nature and they can produce tremendous amount of gain or loss depending on the sector in which the money is invested or according to the prevailing market conditions. A low profiled investor will not prefer this type of fund since there is a danger or huge losses. Few points that are to be kept in mind while in trading in sector funds are that the investment manager should have a very vivid knowledge about the industry in which he is going to invest.

Tuesday, April 5, 2011

Income Fund

Income Fund is a type of mutual fund that emphasizes current income, either on a monthly or quarterly basis, as opposed to capital appreciation. Such funds hold a variety of government, municipal and corporate debt obligations, preferred stock, money market instruments, and dividend-paying stocks. Share prices of income funds are not fixed; they tend to fall when interest rates are rising and to increase when interest rates are falling. Generally, the bonds included in the portfolios of these funds are of investment grade. The other securities are of sufficient credit quality to assure a preservation of capital. There are two popular high-risk funds that also focus mainly on income: high-yield bond funds and bank loan funds. The former invests primarily in corporate "junk" bonds and the latter in floating-rate loans issued by banks or other financial institutions.
Income Funds in India provide to the investors regular income and also stability of capital. Income Funds in India usually invest their principal in securities of fixed income such as government securities, bonds, and corporate debentures. There are many mutual funds houses that have launched Income Funds in India. Income Funds in India usually invest their principal in companies that give high payouts of dividends and also in securities of fixed income such as corporate debentures, government securities, and bonds. The advantage of Income Funds in India is that it provides regular income to the investor either on a monthly or quarterly basis. Further the advantage of Income Funds in India is that it also provides stability of capital to the investor. Income Funds share prices are not fixed for they have a tendency to grow with the fall in interest rates and fall with the rise of the interest rates. The bonds that are there in Income Funds are usually of the investment grade. The other bonds are of such credit quality that they assure the protection of the capital.
Mutual fund companies that have launched Income Funds in India are:
  • Prudential ICICI Mutual Fund
  • HDFC Mutual Fund
  • Reliance Mutual Fund
  • Birla Sun Life Mutual Fund
  • Franklin Templeton India Mutual Fund
  • Tata Mutual Fund