Understanding Mutual Fund Terminologies

When talking about mutual funds, a lot of jargon is spewed.

Here's to understanding what all these terms mean.

Let's first start with the absolute basic: what a mutual fund is.

Mutual fund

Simply put, a mutual fund pools together money from a number of investors, uses professionals to manage and invest it with the aim of achieving a return.

The mutual funds industry is regulated by the Securities and Exchange Board of India (SEBI)

A different kind of mutual fund is AMC

An Asset Management Company is the fund house, or the company that manages the money.

The mutual fund itself is a trust registered under the Indian Trust Act, and is initiated by a sponsor. The sponsor is the person who acts alone or with another corporate to establish a mutual fund. The sponsor then appoints an AMC to manage the investment, marketing, accounting and other functions pertaining to the fund.

For instance, ABN AMRO Trustee (India) Private Limited is appointed as the trustee to the ABN AMRO mutual fund.

ABN AMRO Asset Management (India) Limited is appointed as its investment manager.

Various schemes or individual funds with different objectives can be floated under the umbrella of one parent.

So, ABN AMRO Equity Fund, ABN AMRO Opportunities Fund and ABN AMRO Flexi Debt Fund are all independent schemes of ABN AMRO Mutual Fund and are managed by the ABN AMRO AMC.

Fund investors: Check your tax implication

ELSS

Equity Linked Saving Schemes are diversified equity mutual funds (funds that invest in the shares of various companies of various sectors) with a tax benefit.

To avail of the tax benefit, your money must be locked up for at least three years.

The tax benefit for these schemes falls under Section 80C.

NFO

A New Fund Offering is the term given to a new mutual fund scheme. During the launch period, fund investors can buy units for Rs 10 each.

How to invest in a mutual fund

NAV

The Net Asset Value is the price of a unit of a fund. When a fund comes out with an NFO, it is priced Rs 10. Later, depending on the value of the investments, this price could rise or fall.

Load

This is a fee charged when you buy or sell the units of a fund.

When you buy the units of a fund, you pay a percentage of it as a fee. This is known as the entry load.

Let's say you are investing Rs 10,000 and the entry load is 2%. That means you pay Rs 200 as the entry load and Rs 9,800 is invested in the fund.

Now, let's assume you are selling the units of your fund. And the Rs 10,000 you invested initially is now Rs 15,000. Let's further assume that the exit load is 2%. So you pay Rs 300 and get back Rs 14,700.

Generally, if funds charge an entry load, they will not charge an exit load. Or vice versa. Only one of the loads is charged.

The load is a percentage of the NAV.

Will following a fund manager make me rich?

SIP

A Systematic Investment Plan refers to periodic investing in a mutual fund. Every month or every three months, the investor will have to commit to putting in a fixed amount. This will go towards the purchase of units.

Let's say that every month you commit to investing, say, Rs 1,000 in your fund. At the end of a year, you would have invested Rs 12,000 in your fund.

If the NAV on the day you invest in the first month is Rs 20, you will get 50 units.

The next month, the NAV is Rs 25. You will get 40 units.

The following month, the NAV is Rs 18. You will get 55.56 units.

So, after three months, you would have 145.56 units. On an average, you would have paid around Rs 21 per unit. This is because, when the NAV is high, you get fewer units per Rs 1,000. When the NAV falls, you get more units per Rs 1,000.

Best Example of staying long...

10 best Indian stocks over the last decade

Before you get all charged up on reading that we're about to talk about the 10 stocks that are the best in India, wait! How can we be talking of the 'best' stocks when we have seen the 'worst' all around us, for so many months now?

You know for a fact that the BSE-Sensex is still down 25 per cent since hitting its all time high in January 2008. But do you know that the index is still 259 per cent up since its levels 10 years back?

So just by staying invested in the markets, you would have multiplied your money 3.5 times over.

And this is just about the broader index, which is made up of large cap stocks that anyways do not rise in multiples. After all, it's difficult for companies with market capitalisation of $10 billion to double fast.

But what about a company that has a market capitalisation of just around $0.1 million, or at an exchange rate of 45 to the dollar, just about Rs 37 lakh?

It doesn't take much to double or triple, right?

Yes, it doesn't. Or what would justify the fact that while the Sensex has returned 259 per cent in the last 10 years, there are numerous stocks that have churned out returns of more than 10,000 per cent over this period.

Seeing the table below, you will know pretty rapidly that the best way to make money in the market is to invest for the long term.

What the table doesn't show is that all these stocks have been volatile like any other stock in the market, and you need to recognise that volatility is part of the ride.

Now, when you commit to the long term, you quickly discover that the stocks that offer the best returns today were not really the well-known, widely owned names of those times. How many of you had heard of Matrix Labs or Praj then? Or for that matter how many really took Unitech seriously?

So, the trait that sets these stocks apart is that they were small companies with very small market capitalisation. And although companies such as Unitech, Matrix Labs and Praj are much bigger in terms of size and market cap today, tracked and owned by big institutional investors, there are quite a few small cap stocks waiting in the wings, doing all they can to become the next multi baggers.

So you now know for the fact that finding small stocks like the ones mentioned above is a clear cut way to make tremendous wealth from the stock markets over the long term.

You just need to invest in small companies that enjoy rising demand for their products, have great business models, firm financial foundations, and straightforward and visionary management teams.

10 best performing stocks over the past 10 years

Company Name	Stock price (Jun '99)	Stock price (Jun '09)	Change	Market cap (Jun '99, Rs million)
Unitech Ltd [ Get Quote ].	0.3	93	30900%	3.7
Kotak Mahindra Bank Ltd [ Get Quote ].	3.1	660	21200%	113.9
Matrix Laboratories Ltd [ Get Quote ].	0.9	209	23128%	3.0
Gujarat N R E Coke Ltd.	0.2	54	26975%	2.0
Mercator Lines Ltd [ Get Quote ].	0.4	73	20206%	1.8
Praj Industries Ltd [ Get Quote ].	0.6	115	18225%	2.5
Anant Raj Inds. Ltd.	0.8	133	17009%	8.2
Aban Offshore Ltd [ Get Quote ].	6.0	956	15833%	37.7
K S Oils Ltd.	0.5	62	12220%	2.5
Era Infra Engg. Ltd.	1.01	119	11682%	3.5

Source: Prowess (BSE-500)

This is exactly what we do through our Hidden Treasure service. For instance, rather than tracking the $10/20/30 billion market cap companies, we follow the ones with market caps of $50/100/150 million.

So take this lesson from the market's 10 best stocks, and put it to work in your portfolio by buying small cap stocks.

Of course, you need to adhere to your risk profile (small caps are high risk stocks if your investment horizon is not long) before taking any such action.

Chapter 5 :- Thumb rules for equity investing

Thumb rules for equity investing
Thumb rule No। 1:

(100 minus your age)

If equity is the best bet for brisk growth of our savings, then the logical question is how much should we invest in them either directly or via mutual funds?
The standard rule of thumb to determine your ideal equity exposure is a simple formula that suggests you subtract your age from 100. For example, if you are 35, then 100-35 or 65 per cent of your portfolio should be exposed to equity.
While this can be taken as an indicative formula, it would not, of course, be applicable to everybody at every point in their lives. For example, if you are a 30-year-old and part of a double income family with one young child, you could put in 70 per cent of your investments into the market.
However, if due to a sudden turn of events, you also have to provide for dependent parents and siblings, you should change your allocation and tweak down your equity exposure।

Thumb rule No। 2:

Keep debt-equity proportion constant. If the age-based thumb rule does not apply to you, use a tactical allocation thumb rule. Here, you start off by investing, say, 60 per cent in equities and 40 per cent in debt, and continue keeping the ratio constant at all times.
If you find at the end of the year that equities have done well, you should trim your equity exposure in the next year, the assumption being that there is likelihood of a market downturn। However, in times of a long-running bull market, like the one we have been witnessing, this strategy may not be ideal.

Thumb rule No. 3: Factor in the trend। This thumb rule on trend-based asset allocation is the opposite of the previous one. The assumption in this one is that if the stockmarkets are going up, then that is the trend of the cycle, and you should enhance your equity exposure for the next year. Of course, trends could change and you might be trapped with a high equity exposure in a falling market.

How to follow the thumb rules. :-Since the thumb rules tend to contradict each other, you can adopt the following approach। Use the '100 minus age' formula if there is nothing exceptionally different in your profile and the assumptions fit you।

Keep that as the guiding number, and tweak it upwards or downwards depending on your specific circumstances. If you are in your mid-30s and single, you could invest more than 70 per cent in equities. If you are 60 and do not see yourself retiring for another eight years, you could invest more than 40 per cent.

Chapter 4 : Intraday Trading

GYAN :- For the uninitiated, Intraday trading is the buying and selling of shares on a particular day. The delivery of shares does not happen. Now the interesting thing in intraday trading is that you can make money in a falling market too (its called shorting). Another interesting thing about intraday trading is that you get high leverage, up to 15 times depending on your depository participants.

There has been lots told about Intraday trading. Most(infact nearly every one) say its a gamble and it only makes your broker richer. Having done significant amount of research about intra day trading, i decided its time to take the next step and try it out. I chose to defy others belief that its a gamble. After all there is a thin line that separates intelligence from stupidity. ( You get to see this especially in cricket. In case the batsman steps down the track and hits the bowler for a SIX, he is considered an attacking batsman with a lot of courage. And in case he misses the ball and gets stumped, people would say that it was a reckless shot and that it was stupid on his part ) Even so, the other day in my tax class when the teacher was talking about Capital gains tax, a student asked her,"Ma'am what about intraday traders ?". And then with a sarcastic smile she replied,"They make money and lose it too, and in the end they dont pay any tax as they dont make any profits ?". This irked me even more, and increased my resolve to prove that intraday trading was not a gamble if you know how to go about it.

After class, I ran back to my room to prove my point. The pick above is graph of the nifty index today. So based on all the information i gathered for the day(about weakness in global indexes) and the familiar pattern that the nifty was charting, I took a short position in 2 scrips at around 12:30. And as expected the market began to slide down and my profits shoot up. With a smile on my face, I was just thinking - "Wish i could show people that Intra-day was not all about gambling". And so me waited and waited for the markets to slide further so that i could maximize my profits.

It was around 14:20 and as i was waiting for the markets to bottom out, the unexpected happened. The market started bouncing back up. And i saw my pot of gold shrink. It shrunk and shrunk and shrunk, till it actually vanished. Infact it ended sligtly in the red. I dont know what made it go up, probably heavy buying by FIIs or MF houses or the unwinding of short positions. But there i was sitting blankly in front of my laptop. The smile of achievement turned into a frown of disgust. And then those voices started playng in my head. I was getting back images of my teachers sarci smile and her comments on intraday trading.

Uff.....In disgust i just shut down my laptop. My mind was forced to accept that its a gamble, but my heart said NO. Well, I guess its because thats how i have been brought up or its just me being me - To question perceptions or beliefs..!! Having said all this, I would be staying way from Intraday and probably even the market itself. Would look more into MFs as a means of investing and just crush those dreams of being the next Warren Buffett. To be more precise, I will be just another drop in the ocean...

Chapter 3: Speculations ,rumours at Stock Market

How Stock Market works

This short story is doing the rounds on the Internet.

It was autumn, and the Red Indians on the remote reservation asked their New Chief if the winter was going to be cold or mild. Since he was a Red Indian chief in a modern society, he couldn’t tell what the weather was going to be. Nevertheless, to be on the safe side, he replied to his tribe that the winter was indeed going to be cold and that the members of the village should collect wood to be prepared.

But also being a practical leader, after several days he got an idea. He went to the phone booth, called the Weather Bureau and asked, “Is the coming winter going to be cold?”

“It looks like this winter is going to be quite cold indeed,” the meteorologist responded. So the chief went back to his people and told them to collect even more wood. A week later, he called the weather bureau again. “Is it going to be a very cold winter?” “Yes,” the man replied, “it’s definitely going to be a very cold winter.”

The chief again went back to his people and ordered them to collect every scrap of wood they could find.
Two weeks later, he called the weather bureau again. “Are you absolutely sure that the winter is going to be very cold?” “Absolutely,” the man replied. “It’s going to be one of the coldest winters ever.” “How can you be so sure?” the chief asked. The weatherman replied, “The Red Indians are collecting wood like crazy.”

This is how stock markets work!

Chatper 2 : Risks involved if you invest your money in Stock Market

People say that Stock Markets are the most risky type of Investment. People fear a lot when there is a market crash . They feel that their hard earned money will be lost and they feel that FDs , PPFs , etc are the safest when it comes to investment.

Well if you ask my view on the above I have totally different view. The word "RISK" differs from people to people and money .

Let me elaborate it in detail.

Risk can be divided into 3 major categories :

• High Risk.
  

• Medium Risk.

• Low Risk.

High Risk :-

High risk involves investing your money which gives you very good returns in short time or long time.Investments which yield upto OR more than 100% returns. But the risk is very HIGH and there is no assurance that you will get the returns. There are instances where the money you invested becomes half instead of appreciating . Looks scary right ? I am not trying to scare you but keeping you informed about the worst case scenario. This investment mainly involves investing in Stock Market . People cannot predict stock market and fall prey and loose their money. There are many other investments which are very risky. But I always believe in the rule "HIGH RISK HIGH RETURNS" . No pain , no gain.

Now not everyone can take these types of risk. But I never say that people should avoid investing in stock market completely. I totally disagree with that. Let me tell you why I feel that.
One need not invest lot of money in stock market. They can invest their savings partially.

Now the big question will be how much ?? How much depends on how much you save and how much risk you are willing to take.

Risk taking depends on many factors. Like if you don't have any dependency , no major commitments . Usually bachelors fall in this category. As they are not married they usually dont have major commitments . ofcourse there can be exceptions. But in general bachelors can take lot of risk and try to invest aggressively. Aggressive I don't say that one has to invest 100% of the savings into Stock market. You can divide it proportionally .
Say 40% of Savings in Stock Market . ( High Risk )
40% of Savings in Mutual funds , ULIPs etc. ( Medium Risk)
20% of Savings in FDs, PPFs , Post office etc . ( LOW or no Risk)

There is also an option of going for a really good investment which is Real Estate . This is the best possible investment. esp. in bangalore its best !! But not all people can afford , LOT of Capital is needed. Ofcourse people can take loans etc. But it involves lot of risk , time , knowing the right people,contacts, lot of research about the real estate , whether it will grow , whether it will be worth taking a loan for this investment . etc etc . its a big big topic to discuss. Let me not deviate from my topic of Stock Market .

Now coming to division of the savings , I have divided the savings proportionally so that the RISK is averaged out. 100% in STOCK Market is really really risky. Because all your hard earned money will be at risk.


Medium Risk:-

Medium risk involves investing your savings into investments which yield moderate returns and varies from time to time. But the risk involved is medium. Most of the people prefer this type of investment. As most of them are scared to enter stock market, they feel that this is the best approach to invest their money. It depends from people to people again.

Usually medium risk involves people who are married , have some commitments OR people who are not married but have lot of commitments and hence feel this approach is the best.

This approach I would say to divide the risk proportionally based on the above category.
Hence your savings can be divided into 3 zones :
33% in Stocks ( The blue chip stocks and for long term only !! )
33% in Mutual Funds , ULIPS
33% in FDs, PPFs , Post Office etc etc.

Hence this type of division is called Medium Risk Investment.


LOW Risk :-

We can say almost no RISK at all. This investment is the safest possible type of investment which give you very LOW returns and your money is really SAFE here. 100% assurance . FDs , PPFs will always give you assured returns. This investment the division is very simple where majority portion goes to FDs, PPFs .

The people who belong to this category are NOT prepared to take any RISK at all because of their dependency , commitments , etc . There are many who have always want to be on the safest side and even dont try to learn about stock markets , Mutual Funds etc because they are always in the wrong conception that these investments will loose their hard earned money.

I feel really bad at times when people say STOCK Market is like GAMBLING !!! Its the worst thing to hear .. GAMBLING and stock market are no where related. Its a total misconception. If one plays with stock market every minute then he might be addict but not a gambler !! Its that he is risking his time and money .

A Smart Investor should know when to buy the stocks , when to enter into stock market , whether the stock is at the right price to buy, whether the stock will rise in future etc. If he follows this approach I am 100% sure that he/she will never be under loss !!
This is a big topic which I will cover in next chapters.

Hence I want to summarize that the people who are afraid to enter stock market thinking that STOCK MARKET is not always about losing money, then they are totally wrong . RISK is there but if we divide our risk proportionally then one get better returns in future.

I always believe in Investing now ... because we cannot predict our future, when money need will arise. Save now or Never ... Invest with the right approach and not simply dump your money into FDs. Think how much risk can you take, which category you belong to.. I am confident that this approach will make wonders because it is the most widely accepted approach .

I may not be 100% correct in the approach I mentioned. But these are my analysis after 5 years of study i.e. after reading 1000s of articles on investment, reading books , listening to lectures of Investment freaks etc etc.

Chapter 1 : Basic Terms for Beginners

People always hear a lot about Stock market.





" They hear that Stock market crashed 1000 points .. It was bloodbath . Lacs and crores of Investor's money is lost. "



" People also hear that the bull run has made many rich in just a week !! Mukesh Ambani becomes the richest man in the world because of this stock market!! "



In general people want to enter the stockmarket to make some money .But people fear a lot . They never want to risk their hard earned money !! Hence very few daring people enter stockmarket .
But I am totally against this view. One has to be smart investor. He should know which share to pick when, when to sell it . If he can make the smart picks then surely he can become Warren Buffet one day !!



But not all are as smart as him. Not all have the time in the world to actively watch this stock market. But believe me stock market is not that difficult as it looks. Its not that scary as it looks. Yes , I agree it is risky !! Stock market crash , up and downs, no one predict with 100% accuracy. There are 1000s of factors which makes the Sensex go up and down.

I have tried to explain the fundamentals and my understandings of Stock market . For beginners who have no knowledge about stock market this would be the best place to learn from basics.
Chapter 1 :-
INVESTING IN STOCKS
Many of us would like to try our luck in the Stock markets. Yes, Why Not ? Trading stocks is one of the most lucrative methods of making money.Here's Why : (Advantages)
1. You do not need a lot of money to start making money, unlike buying property and paying a monthly mortgage.
2. It requires very minimal time to trade - unlike building a conventional business.
3. It's 'fast' cash and allows for quick liquidation (You can convert it to cash easily, unlike selling a property or a business).
4. It's easy to learn how to profit from the stock market.

But before you enter into Stock market you should have some knowledge about some terms and risks involved. Let me tell you about the terms first and later the risk.

Some basic basic terms that you must know :

What is a Share or Stock ?
share or stock is a document issued by a company, which entitles its holder to be one of the owners of the company. A share is issued by a company or can be purchased from the stock market.

Here the stock is just like the monkeys in my previous post. They prices go up and down based on the same principle which was discussed in the pervious post. Ofcourse there are other factors too. Will discuss that in future.

Quick Facts on Stocks and Shares
Owning a stock or a share means you are a partial owner of the company, and you get voting rights in certain company issues
Over the long run, stocks have historically averaged about 10% annual returns However, stocks offer noguarantee of any returns and can lose value, even in the long run
Investments in stocks can generate returns through dividends even if the stock price is falling down.

Demat refers to a dematerialised account.
Just as you have to open an account with a bank if you want to save your money, make cheque payments etc, Nowadays, you need to open a demat account if you want to buy or sell stocks.
So it is just like a bank account where actual money is replaced by shares. You have to approach the DPs (remember (depository participant) DPs are like bank branches), to open your demat account. Let's say your portfolio of shares looks like this: 150 of Infosys, 50 of Wipro, 200 of HLL and 100 of ACC. All these will show in your demat account. So you don't have to possess any physical certificates showing that you own these shares. They are all held electronically in your account. As you buy and sell the shares, they are adjusted in your account. Just like a bank passbook or statement, the DP will provide you with periodic statements of holdings and transactions.
demat account is a must for trading and investing.