What are Mutual Funds and different types of Mutual Funds

Mutual funds are a type of certified managed combined investment schemes that gathers money from many investors to buy securities.  There is no such accurate definition of mutual funds, however the term is most commonly used for collective investment schemes that are regulated and available to the general public and open-ended in nature. Hedge funds are not considered as any type of mutual funds.

Mutual funds are identified by their principal investments. They are the 4th largest category of funds that are also known as money market funds, bond or fixed income funds, stock or equity funds and hybrid funds. Funds are also categorized as index based or actively managed.

In a mutual fund, investors pay the fund’s expenditure. There is some element of doubt in these expenses. A single mutual fund may give investors a choice of various combinations of these expenses by offering various different types of share combinations.

The fund manager is also known as the fund sponsor or fund management company. The buying and selling of the fund’s investments in accordance with the fund’s investment is the objective.  A fund manager has to be a registered investment advisor. The same fund manager manages the funds and has the same brand name which is also known as a ‘fund family’ or ‘fund complex’.

As long as mutual comply with requirements that are established in the internal revenue code, they will not be taxed on their income. Clearly, they must expand their investments, limit the ownership of voting securities, disperse most of their income to their investors annually and earn most of their income by investing in securities and currencies.

Mutual funds can pass taxable income to their investors every year. The type of income that they earn remains unchanged as it gets transferred to the shareholders. For e.g., mutual fund distributors of dividend income are described as dividend income by the investor. There is an exception: net losses that are incurred by a mutual fund are not distributed or passed through fund investors.

Mutual funds invest in various kinds of securities. The various types of securities that a particular fund may invest in are mentioned in the fund’s prospectus, which explain the fund’s investment’s objective, its approach and the permitted investments. The objective of the investment describes the kind of income that the fund is looking for. For e.g., a “capital appreciation” fund generally looks to earn most of its returns from the increase in prices of the securities it holds rather than from a dividend or the interest income. The approach of the investment describes the criteria that the fund manager may have used to select the investments for the fund.

The investment portfolio of a mutual fund’s investment is continuously monitored by the fund’s portfolio manager or managers who are either employed by the fund’s manager or the sponsor.

Advantages of Mutual funds are:

1)         Increase in diversification.

2)         Liquidity on a daily basis.

3)         Professional investment management.

4)         Capacity to participate in investments that may be available only for larger investors.

5)         Convenience as well as service.

6)         Government oversight.

7)         Easier comparison

Like its advantages, the Mutual funds have disadvantages too. Here are some of them:

1)         High fees.

2)         Less control over timing of recognition of gains.

3)         Much lesser predictable income.

4)         No opportunity for customization.

There are different types of Mutual funds as well. Here are some of them.

Open-end funds

In open-end mutual funds, one must be willing to buy back their shares from investors at the end of every business day at the net asset value that is calculated for that day. Most of the open-end funds also sell shares to the public on every business day. These shares are also priced at a particular net asset value. A professional investment manager will oversee the portfolio, while buying or selling securities whichever is appropriate. The total investment in the funds will be variably based on share buying, share redemptions and fluctuation in the market variation. There are also no legal limits on the number of shares that can be issued.

Close-end funds

Close-end funds generally issue shares to the public just once, when they are created via an initial public offering. These shares are then listed for trading on a stock exchange. Investors, who don’t wish any longer to invest in the funds, cannot sell their shares back to the funds. Instead, they must sell their shares to another investor in the market as the price they may receive may be hugely different from its net asset value. It may be at a premium to net asset value (higher than the net asset value) or more commonly at a lesser to net asset value (lower than the net asset value). A professional investment manager will oversee the portfolio, in buying or selling securities whichever is appropriate.

Unit Investment Trusts

UIT or Unit Investment Trusts issue shares to the public just once when they are created.  The investors in turn can cash in on the shares directly with the fund or they may also sell their shares in the market. UIT’s do not have any professional investment managers. Their portfolio of securities is established by the creation of the UIT’s and does not undergo any changes. UIT’s in general having a limited life span, which is limited at their creation.

At Angel Broking, we provide insights into various aspects on Mutual Funds. You also can benefit by investing in Mutual Funds. For more details, please contact: Tel: (022) 3935 7600 or SMS EBRO to 5757587.

What are Derivatives and their need in the Indian Share Market

Derivative instrument is a contract between two parties that emphasizes conditions ( including dates that result in values of the underlying variables and notional amounts) under which payments can be made between both the parties.

Derivatives are used by investors for the following reasons:

1)            It provides leverage with a small movement in the underlying value that causes a large difference in the value of the derivative.

2)            One can often speculate and make a profit, if the value of the underlying asset goes in the way they expect.

3)            It mitigates the risk in the underlying, by making an entry in the derivative contract whose value moves in the opposite direction, stays in or out of a specific range and may reach a certain level.

4)            It can obtain exposure to the underlying where it may not be possible to trade in the underlying derivatives.

5)            It has the ability to create options, where the value of the derivative is linked to a specific condition or event.

When Derivatives allow risk related to the prices of the underlying asset to be transferred from one party to another, it is known as Hedging. Both the parties have a reduction in a future risk, however there is still a risk of the non-availability of the resource that may back-track because of the events unspecified by the contract such as natural damage, may cause problems on the contract.

Although a third party, which is also known as a clearing house, it insures a futures contract, not all derivatives can or will be insured against a counter-party risk.

Derivatives are also used to acquire risk, rather than hedging the risk. Thus, some investors or institutions can enter in a derivative contract to speculate on the value of the underlying asset.

These speculations look to purchase an asset in the future at a really low price which according to the derivative contract maybe a high price to sell the asset in the future when the market price is low.

An OTC or over-the-counter derivative is a contract that is privately traded and negotiated between two parties without going through an exchange.

Exchange-traded derivative contracts are those derivatives that can be traded via specialized derivative exchange or other exchanges. There is a market where derivatives exchange acts as an intermediary to all transactions and takes an initial margin from both the sides of the trade to act as a guarantee.

Online share trading in India, open demat account in Angel Broking for stock market trading

What are the advantages and disadvantages of Online Trading?

Due to the problems that arose during paper shares, there was a need of a system that would make share transfer, buying/selling of shares, etc. an easier affair.

Therefore in 1996, the Indian parliament passed the Derivatives act, which allowed online transaction of shares, thus making it much easier for the broker and investor.

In the new online Trading system, an investor must open a demat account with one of the Stock Brokers to start trading online.

A demat account is a must for an investor to trade online.

Mentioned below are some of the advantages of trading online:

1)            Easier and convenient way to own shares

2)            Immediate transfer

3)            Zero stamp duty on transfer of shares

4)            Safer than paper shares, e.g., fake signatures, delay, thefts, etc.

5)            Lesser paperwork for transfer of securities

6)            Less transaction cost

7)            No “odd” problems. Even a single share can be sold.

8)            DP registers a change in address with all companies. No need for the investor to contact the companies immediately.

9)            DP transmission of securities, thus eliminating the need of notifying the companies.

10)          Automatic credit in demat accounts

11)          Both equity and debt instruments can be held by a demat account

The depository system aids in reducing the expenditure of new issues due to lesser printing and distribution costs. It increases the efficiency of the registrars and transfer agents and the secretarial department of a company. It provides better facilities for communication and timely service to shareholders and investors.

The disadvantages of online trading are mentioned below:

1)            Investors, who are trading for the first time, go with the flow and get immersed in technology and actually temporarily forget that they are actually using their real money. 

2)            There is no relationship that of a mentor between a professional broker and an online trading account holder, thus leaving the investor on his own to make choices of the right shares.

3)            Users who are not familiar with the ins and outs of the basics of brokerage software can make mistakes which can prove to be a costly affair.

4)            This is like any other financial strategy, where your commitment to online trading takes research and dedication to make sure by yourself that everything is up to par. You have to take time out to do your own research where you will have to overcome a great learning curve to make some money from online trading a possibility.

Online share trading in India, open demat account for stock market

Equity and Equity Investments in India

In accounting and finance, Equity means the residual claim or interest of the junior level of investors in assets, after all the liabilities have been paid for.
If liability is more than the amount of assets, it becomes negative equity.
In the context of accounting, shareholder’s equity (or stockholder’s equity, shareholder’s funds, shareholder’s capital or any such similar terms) is represented by the remaining interest in assets of a company which is spread amongst individual shareholders of common or the preferred stock.
In the beginning of a business, the owners invest some funding into the business to the finance operations. This forms a liability on the business in the form of a capital as the business becomes a separate entity from its owners. Businesses can also be considered, for accounting purposes, sums of liabilities and assets; thus this is the accounting equation.

After the liabilities have been accounted for any positive remainder, it deems the owner’s interest in the business. This definition is helpful for understanding the liquidation process in case bankruptcy occurs. Initially, all the secured creditors must be paid against the proceeds from various assets. Afterwards, the series of creditors, who are ranked in terms of priority sequence, have the next claim or right on these residual proceeds.

Ownership equity is the last or residual claim against these assets, which is paid only after all other creditors are paid. In such a scenario, even the creditors who do not get enough money to pay their bills, there is nothing over to reimburse the owner’s equity. Thus, this makes the owner’s equity to zero. The ownership equity also becomes known as the risk capital or liable capital.

An equity investment is generally referred to as the buying and holding of shares in a share market by various individuals and companies in anticipation of an additional income from dividends and/or capital gains as they expect the value of the stock to rise.  When the equity holder receives the right to vote, it means that he can vote for the candidates for a majority of the board of directors as well as some major transactions and residual rights, which means that they share some portion of company’s profits as well as may help in recovering some of the company’s assets in the event of bankruptcy or any untoward incident that might harm the company’s liquidity. This is possible despite they having the lowest priority in recovering their investments.
It might also refer to the acquisition of ownership or participation in a private or a startup company. These equities which are held by private individuals are often known as mutual funds or other forms of collective investment scheme. Many of these have quoted prices that might be listed in financial magazines or newspapers.
The mutual funds are managed by prominent fund management firms that allow such holdings in the hands of private investors and pension funds, who are subjected to hold shares directly. In such institutional environment, many clients who hold their own portfolios have what we know as segregated funds. As opposed or in addition to the pooled mutual fund alternatives.
A calculation made can be made to assess whether equity is overpriced or underpriced, in comparison to a long term government bond. This is known as the yield gap or the yield ratio. It is the ratio of the dividend yield of equity and that of the long term bond.
Online share trading in India, open demat account in Angel Broking for Stock market

Factors influencing Stock Prices in India

A stock price or share price is the price of a single stock or a number of stocks that are saleable of a particular company. Once the stock or stocks have been purchased, the owner becomes a shareholder of the company that has issued the particular stock.

Analysts use random walk techniques in economics and financial history to model the behavior of asset prices in particular share prices on stock markets, currency exchange rates and various commodity prices.

This practice is ritual and has its basis on the presumption that the investors will act rationally and without any biasness and any moment they can estimate the value of an asset based on future expectations.

Under these conditions, all the current information affects the price of the stock which changes only when any new information comes out. The asset price is randomly affected when new information appears randomly.

It has been demonstrated by empirical studies that prices do not completely follow the random walk.

Low serial correlations may exist in short term and have slightly stronger correlations over the long term. Their sign and strength also depends on a variety of factors.

It has been found by the researchers that some of the biggest price deviations are from random walks that result basically from seasonable and temporal patterns. Particularly, the returns in January normally exceed those in other months and on Mondays, stock prices may go down more probably more than on any other day.

It has been observed that these effects in various markets since last 50 years or so.

But there has been no satisfactory explanation for their persistence.

Most of the technical data is used by the anomalies to gather and extract information on future price movements via historical data. However, some economists’ follow the Eugene Fama as a result patterns occurs most frequently. This results in an irrational or insufficient behavior of many investors. The large amount of data that is available for researchers for an analysis that can literally cause fluctuations.

Another school of thought, i.e. behavioral finance is attributed by non-randomness to investigations, cognitive and emotional biases. Thus, this can cause a contrast with the main fundamental analysis.

When this is viewed over longer periods, the stock price may or may not be directly related to the earnings and dividends of the firm. Over short periods of time, more so for the younger or smaller firms, the relationship between a stock price and dividends are mostly unmatched.

open demat account for online share trading