If you plan to invest your money in mutual funds or have already plunged into the market with little research, you must read this. To begin with, you must understand the concept of mutual funds. Mutual funds collect money from investors and invest these funds in different avenues in order to earn money. Since the volume of transaction is high, mutual funds enjoy the benefit of lower transaction costs. Further, investors automatically get a diversified portfolio with mutual fund investments. This is because fund houses invest money in different sectors, different companies and different types of investments. So, if you are a novice to the stock markets, mutual funds are a better option for you.
How well a mutual fund does largely depends upon the performance of companies in which its funds have been invested. So, before choosing a mutual fund you have to understand the companies that these funds are investing in. Mutual funds are basically categorized into three: Small Cap, Mid Cap and Large Cap. Most fund houses offer products in all three categories.
Cap stands for capitalization. It is the market value of the total shares of a company. So, you can get the market cap of a company by multiplying the total number of shares by its current market price. As the name suggests, small cap funds invest in companies that have small market capitalization. Small, mid and large are relative terms and each fund house decides the limit for themselves. Some fund houses relate their cap with BSE cap index. For example, a small cap fund invests a majority of its funds( 65 - 100 percent) in companies whose market cap are lower than or equal to the market capitalization of the stock in BSE Cap Small Cap Index with the largest capitalization.
What you should know though is which funds are good for you? The answer to that question depends upon your appetite for risk and the current market situation. Small cap and mid cap funds are generally considered to be riskier than large cap funds. This is because the former invest in startups and smaller, less established companies while the latter mostly invest in blue chip, reputed companies.
Small and mid cap companies have a larger potential to grow hence they promise greater returns on your investment. Start ups generally fall in this category and offer the opportunity of greater capital appreciation. Here there is potential for high returns but they are unpredictable too. Large cap companies have generally established their growth and have stable, predictable pattern of returns.
Small and mid cap companies have the ability to instantly react to market situations. Large companies with tiered management may not have that ability built into their system. Hence, small and mid cap funds can react faster to market opportunities. However, they are more volatile too compared to large cap funds.
The advantage of large cap funds is that they invest in reputed companies with large profits. Hence the probability of regular returns is high! However, since these companies are giants in their sector, they are also priced higher. Further, they have a greater ability to stand thick in bad economic times.
Sundaram BNP Paribas Select Midcap, Kotak Indian Mid Cap Fund and HSBC Midcap Equity Fund are some of the popular mid cap funds in India. HDFC Top 200, Kotak 30, Reliance Growth Fund and UTI Large Cap Fund are some of the large cap funds. BNP Sundaram Paribas, HSBC Small Cap Fund etc are some of the notable small cap funds in India.
The keys to successful investing
A trust that pools the savings of a number of investors sharing a common financial goal: that is the simple definition of a mutual fund. And those who manage these funds know money is made only in the long term.
Does that contradict economist John Maynard Keynes who said: "The long run is a misleading guide to current affairs. In the long run we are all dead"? Take the case of Reliance Growth Fund, an open-ended equity fund where investments grew 46 times in 15 years. Sunil Singhania, Head of Equities at Reliance Mutual, advocates long-term investing as a key to wealth creation.
What does one do when the external environment is choppy? Stay put and not get swayed by fear or greed, says Singhania, winner of Best Fund Manager award under Equity India category.
Take the great fall of 2008. From its peak of 21,206.77 in January 2008, the Sensex tanked to 8,000 levels by October. There was wholesale withdrawal of funds and mutual funds were no exception. But those who stayed put ultimately benefitted. Indeed fund managers believe that such slumps should not be seen as threats, but as opportunities.
"Every sharp fall is an opportunity to pick up quality stocks," says Singhania. The key to successful investing is picking the right stocks and ensuring they continue to add value. The secret of beating the markets, says Chirag Setalvad, Senior Fund Manager at HDFC Mutual fund, is: "Stay within acceptable risk levels and invest in quality companies." Setalvad is winner of Best Fund Manager award under Mixed Asset INR Balanced category.
HDFC MF's Prashant Jain, winner of Best Fund Manager award under Mixed Asset INR Aggressive category, is an advocate of long-term investing as well. Markets can move away from fundamentals in the short-to-medium term. "But in the long run, prices come to where they deserve to be," says Jain. Hot and volatile sectors should either be avoided or their stock movements watched very closely. In the bull run of 2007, for instance, Jain did not venture into realty, power utilities or select non-banking financial service companies. But neither did he panic during the downturn. "We did not go in cash when the markets bottomed out," he says. His fund stayed fully invested when the Sensex dropped sharply.
Life is simpler for a balanced fund manager than it is for those of pure equity or debt funds. A balanced fund has a cushion with its equity-debt blend, which others do not. A hike in interest rate by one per cent will have a five per cent impact on the portfolio, says Jain. During the 2008 crisis, even government securities showed four to five per cent intraday volatility.
"That was a cumulative of two years' volatility with the entire capital at risk," recalls Abhishek Bisen, Fund Manager at Kotak Mutual Fund, who won the Best Fund Manager award under the Bond Indian Rupee category along with Deepak Agrawal.
For bond funds, explains Agrawal, the fund size increases with a decline in interest rates and maintaining liquidity during such a situation is critical. For Kotak Bond Fund, the split between corporate bonds and government securities is 50:50. In the aftermath of the crisis, the fund opted to buy corporate and public sector bonds with a residual maturity of five and 10 years, respectively.
"Government securities add alpha while corporate bonds contribute to accrual," says Agrawal. Alpha refers to returns adjusted for risk. The last few years have also blown the old hypothesis that there is low degree of correlation between asset classes. "We have to deal with linkages of asset classes," says Amandeep Singh Chopra, Head of Fixed Income at UTI Mutual Fund and winner of Best Fund Manager award under the Mixed Asset INR Conservative category. "The job of a fund manager is to beat the markets," sums up Jain of HDFC MF. And that comes from the long term.
How well a mutual fund does largely depends upon the performance of companies in which its funds have been invested. So, before choosing a mutual fund you have to understand the companies that these funds are investing in. Mutual funds are basically categorized into three: Small Cap, Mid Cap and Large Cap. Most fund houses offer products in all three categories.
Cap stands for capitalization. It is the market value of the total shares of a company. So, you can get the market cap of a company by multiplying the total number of shares by its current market price. As the name suggests, small cap funds invest in companies that have small market capitalization. Small, mid and large are relative terms and each fund house decides the limit for themselves. Some fund houses relate their cap with BSE cap index. For example, a small cap fund invests a majority of its funds( 65 - 100 percent) in companies whose market cap are lower than or equal to the market capitalization of the stock in BSE Cap Small Cap Index with the largest capitalization.
What you should know though is which funds are good for you? The answer to that question depends upon your appetite for risk and the current market situation. Small cap and mid cap funds are generally considered to be riskier than large cap funds. This is because the former invest in startups and smaller, less established companies while the latter mostly invest in blue chip, reputed companies.
Small and mid cap companies have a larger potential to grow hence they promise greater returns on your investment. Start ups generally fall in this category and offer the opportunity of greater capital appreciation. Here there is potential for high returns but they are unpredictable too. Large cap companies have generally established their growth and have stable, predictable pattern of returns.
Small and mid cap companies have the ability to instantly react to market situations. Large companies with tiered management may not have that ability built into their system. Hence, small and mid cap funds can react faster to market opportunities. However, they are more volatile too compared to large cap funds.
The advantage of large cap funds is that they invest in reputed companies with large profits. Hence the probability of regular returns is high! However, since these companies are giants in their sector, they are also priced higher. Further, they have a greater ability to stand thick in bad economic times.
Sundaram BNP Paribas Select Midcap, Kotak Indian Mid Cap Fund and HSBC Midcap Equity Fund are some of the popular mid cap funds in India. HDFC Top 200, Kotak 30, Reliance Growth Fund and UTI Large Cap Fund are some of the large cap funds. BNP Sundaram Paribas, HSBC Small Cap Fund etc are some of the notable small cap funds in India.
The keys to successful investing
A trust that pools the savings of a number of investors sharing a common financial goal: that is the simple definition of a mutual fund. And those who manage these funds know money is made only in the long term.
Does that contradict economist John Maynard Keynes who said: "The long run is a misleading guide to current affairs. In the long run we are all dead"? Take the case of Reliance Growth Fund, an open-ended equity fund where investments grew 46 times in 15 years. Sunil Singhania, Head of Equities at Reliance Mutual, advocates long-term investing as a key to wealth creation.
What does one do when the external environment is choppy? Stay put and not get swayed by fear or greed, says Singhania, winner of Best Fund Manager award under Equity India category.
Take the great fall of 2008. From its peak of 21,206.77 in January 2008, the Sensex tanked to 8,000 levels by October. There was wholesale withdrawal of funds and mutual funds were no exception. But those who stayed put ultimately benefitted. Indeed fund managers believe that such slumps should not be seen as threats, but as opportunities.
"Every sharp fall is an opportunity to pick up quality stocks," says Singhania. The key to successful investing is picking the right stocks and ensuring they continue to add value. The secret of beating the markets, says Chirag Setalvad, Senior Fund Manager at HDFC Mutual fund, is: "Stay within acceptable risk levels and invest in quality companies." Setalvad is winner of Best Fund Manager award under Mixed Asset INR Balanced category.
HDFC MF's Prashant Jain, winner of Best Fund Manager award under Mixed Asset INR Aggressive category, is an advocate of long-term investing as well. Markets can move away from fundamentals in the short-to-medium term. "But in the long run, prices come to where they deserve to be," says Jain. Hot and volatile sectors should either be avoided or their stock movements watched very closely. In the bull run of 2007, for instance, Jain did not venture into realty, power utilities or select non-banking financial service companies. But neither did he panic during the downturn. "We did not go in cash when the markets bottomed out," he says. His fund stayed fully invested when the Sensex dropped sharply.
Life is simpler for a balanced fund manager than it is for those of pure equity or debt funds. A balanced fund has a cushion with its equity-debt blend, which others do not. A hike in interest rate by one per cent will have a five per cent impact on the portfolio, says Jain. During the 2008 crisis, even government securities showed four to five per cent intraday volatility.
"That was a cumulative of two years' volatility with the entire capital at risk," recalls Abhishek Bisen, Fund Manager at Kotak Mutual Fund, who won the Best Fund Manager award under the Bond Indian Rupee category along with Deepak Agrawal.
For bond funds, explains Agrawal, the fund size increases with a decline in interest rates and maintaining liquidity during such a situation is critical. For Kotak Bond Fund, the split between corporate bonds and government securities is 50:50. In the aftermath of the crisis, the fund opted to buy corporate and public sector bonds with a residual maturity of five and 10 years, respectively.
"Government securities add alpha while corporate bonds contribute to accrual," says Agrawal. Alpha refers to returns adjusted for risk. The last few years have also blown the old hypothesis that there is low degree of correlation between asset classes. "We have to deal with linkages of asset classes," says Amandeep Singh Chopra, Head of Fixed Income at UTI Mutual Fund and winner of Best Fund Manager award under the Mixed Asset INR Conservative category. "The job of a fund manager is to beat the markets," sums up Jain of HDFC MF. And that comes from the long term.
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