Monday, November 27, 2006

…On to Operational Classification…(3)

…On to Operational Classification

By Trading Strategy

Active Funds are constantly active in the market. They buy and sell the securities in their portfolio very frequently.

Passive Funds normally follow a buy and hold strategy and do not trade their holdings very frequently.

Balanced Funds are those that follow the middle path between the active and passive funds.

By Security Selection

Top Down Funds are those that select stocks using the top down approach, where the fund manager first identifies the sector in which he would like to invest and then the potential scrips within the sector.

Bottom Up Funds use the bottom up approach to investing, where the fund manager focuses on the scrips, irrespective of what sector they come under.

Technical Funds are those that use technical analysis to select scrips.

By Market Capitalisation

Small Cap Funds focus on small cap stocks (companies with a market capitalization of up to Rs 500 crore) for their investment portfolio. Mid-Cap Funds invest in mid cap scrips (companies that have a market capitalization between Rs 500 crore and Rs 1,000 crore). Small/mid cap companies tend to be under researched. Thus they present an opportunity to invest in a company that is yet to be identified by the market. Such companies offer higher growth potential going forward and therefore an opportunity to benefit from higher than average valuations. But mid cap funds are very volatile and tend to fall like a pack of cards in bad times. So, caution should be exercised while investing in mid cap mutual funds.

Large Cap Funds are those that invest in large cap scrips (companies with a market capitalisation in excess of Rs 1000 crore). Large cap funds are those mutual funds, which seek capital appreciation by investing primarily in stocks of large blue chip companies with above-average prospects for earnings growth. Investing in large caps is a lower risk-lower return proposition, because such companies are usually widely researched and information is widely available.

…On to Operational Classification…( Cont,,)

…On to Operational Classification…

By Trading Strategy

Active Funds are constantly active in the market. They buy and sell the securities in their portfolio very frequently.

Passive Funds normally follow a buy and hold strategy and do not trade their holdings very frequently.

Balanced Funds are those that follow the middle path between the active and passive funds.

By Security Selection

Top Down Funds are those that select stocks using the top down approach, where the fund manager first identifies the sector in which he would like to invest and then the potential scrips within the sector.
Bottom Up Funds use the bottom up approach to investing, where the fund manager focuses on the scrips, irrespective of what sector they come under.

Technical Funds are those that use technical analysis to select scrips.

By Market Capitalisation

Small Cap Funds focus on small cap stocks (companies with a market capitalization of up to Rs 500 crore) for their investment portfolio. Mid-Cap Funds invest in mid cap scrips (companies that have a market capitalization between Rs 500 crore and Rs 1,000 crore). Small/mid cap companies tend to be under researched. Thus they present an opportunity to invest in a company that is yet to be identified by the market. Such companies offer higher growth potential going forward and therefore an opportunity to benefit from higher than average valuations. But mid cap funds are very volatile and tend to fall like a pack of cards in bad times. So, caution should be exercised while investing in mid cap mutual funds.

Large Cap Funds are those that invest in large cap scrips (companies with a market capitalisation in excess of Rs 1000 crore). Large cap funds are those mutual funds, which seek capital appreciation by investing primarily in stocks of large blue chip companies with above-average prospects for earnings growth. Investing in large caps is a lower risk-lower return proposition, because such companies are usually widely researched and information is widely available.

Monday, November 20, 2006

…On to Operational Classification…

…On to Operational Classification…

By Liquidity

Open-end Funds are like bank accounts. Such funds enable you to invest and redeem your money any time! Units are continuously offered for sale and continuously bought back. They do not have a set number of shares. Units are bought and sold at their current net asset value disclosed on a daily basis. Open-end funds keep some portion of their assets in short-term and money market securities to provide available funds for redemptions. They offer better liquidity due to continuous repurchase.

Closed-end Funds have a set number of shares issued to the public through an initial public offering. The corpus normally does not change throughout the year. These funds have a stipulated maturity period generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. The market price of closed-end funds is determined by supply and demand and not by net-asset value (NAV), as is the case in open-end funds. Usually closed mutual funds trade at discounts to their underlying asset value. These mutual fund schemes disclose NAV generally on a weekly basis.

SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor – listing on Stock Exchanges or giving an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices.
Interval Funds combine the features of open-end and closed-end schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices. So, basically it is a closed-end scheme with a peculiar feature that every year for a specified period (interval) it is made open.

By Investment Strategy

A number of mutual fund families use the word Growth Funds to describe their equity funds. But growth funds are funds that invest in companies which are growing at a rate faster than the rest of the economy and industry. The goal is to capitalize on the increase in stock prices. The risk is that many growth companies are not very big and may not be able to absorb bad news as easily as blue chip companies.

Value Funds are those mutual funds that tend to focus on safety rather than growth, and often choose investments providing dividends as well as capital appreciation. They invest in companies that the market has overlooked, and stocks that have fallen out of favour with mainstream investors, either due to changing investor preferences, a poor quarterly earnings report, or hard times in a particular industry. Value stocks are often mature companies that have stopped growing and that use their earnings to pay dividends. Thus value funds produce current income (from the dividends) as well as long-term growth (from capital appreciation once the stocks become popular again). They tend to have more conservative and less volatile returns than growth funds.

Value cum Growth Funds follow a mix of the growth and value approaches.

Sunday, November 12, 2006

Portfolio Classification… (Cont.)

Passing through the portals of Portfolio Classification…

Index Funds

Index funds are equity funds that invest in exactly the same stocks (and in the same proportion) that make up the market indices like the BSE Sensex or the NSE Nifty Index. So what's the advantage of an index fund? The fund manager can programme a computer to just follow the index and pick stocks without putting in hours of his time in research and stock picking. So, the cost to the mutual fund for managing an index fund is low. It benefits investors in the form of low fees. The other advantage is that you cannot do worse than the BSE Sensex or the NSE Nifty. Simply because the index fund is replicating the movements of the index, NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.

Sector Funds

Sector Mutual Funds are those mutual funds that restrict their investments to a particular segment or sector of the economy. There are a host of sector specific funds like FMCG, MNC, IT, New Technologies, Services, PSUs, Infrastructure, Pharma, e-commerce, Petroleum, Contra etc. These funds concentrate on only one industry. 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 favour. If the sector performs well, sector funds yield higher returns when compared to other funds. Diversified Equity Funds might not profit much from windfall gains in one sector, as they will be neutralised by bad performance results in other sectors.
The basic disadvantage of Sector Funds is that the portfolio manager has to confine his investment to one area. Even if the manager knows that the performance of the sector may not be good, he is forced to do so and is limited because of the scope of the fund.

Hedge Funds

Hedge Funds employ speculative trading principles - buy rising shares and sell shares whose prices are likely to fall. They hedge risks in order to increase the value of the portfolio. Hedge funds typically charge a fee greater than 1%, plus a "performance fee" of 20% of a hedge fund's profits. There may be a "lock-up" period, during which an investor cannot cash in shares. They are not common in India

Leveraged Funds

Leveraged Funds make speculative and risky investments, like short sales to take advantage of declining market. The main objective of the fund is to increase the value of the portfolio and benefit the shareholders by gains exceeding the cost of borrowed funds. They are not common in India

Sunday, November 05, 2006

Portfolio Classification…

Passing through the portals of Portfolio Classification…

Equity/Growth Funds

Equity/Growth Funds normally invest a majority of their corpus in equities. They provide capital appreciation over the medium to long term. They have comparatively high risks.

Blue chip funds invest in stocks of very well respected companies. The purpose is to build a stock portfolio of conservative stocks so that it does not do worse than the stock market indices. Such funds return less than funds that invest in growth oriented companies.

Debt/Income Funds

Debt/Income Funds invest in fixed income assets such as corporate debentures, government securities, bonds and other debt related instruments .They provide capital stability and regular income to the investors. Such funds are less risky compared to equity funds. However, opportunities of capital appreciation are also limited . The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa.

Floating-Rate Debt Fund comprises of bonds for which the interest rate is adjusted periodically according to a predetermined formula, usually linked to an index.

Monthly Income Plan aims at providing regular income (not necessarily monthly, don't get misled by the name) to the unitholder, usually by way of dividend, with investments predominantly in debt securities (upto 95%) of corporates and the government, to ensure regularity of returns, and having a smaller component of equity investments (5% to 15%) to ensure higher return.

Marginal Equity Funds are funds which have investment of atleast 75% in debt instruments & the balance in equities. These funds offer the security of debt with the flavour of equities.

Balanced Funds

Also known as Hybrid Funds, Balanced Funds invest in a mix of equity and debt (a minimum of 65 percent in equity is mandatory). Hence, they are less risky than equity funds, but at the same time provide commensurately lower returns. Balanced funds are ideal for diversifying investments without spending time on the process. NAVs of such funds are likely to be less volatile compared to pure equity funds.

A similar type of fund is known as an Asset Allocation Fund. The 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 given freedom to switch the ratio of asset classes as the economy moves through the business cycles.
Money Market Mutual Funds

A Money Market Fund is a mutual fund that invests solely in money market instruments. Money market instruments are forms of debt that mature in less than one year and are very liquid. It is also known as Liquid Fund. It invests only in safe short term instruments such as T-Bills, Certificate of deposits (CDs), Corporate Commercial Papers, and inter-bank call money market. The investment will remain intact because this is the overriding concern the fund has and it sacrifices greater returns by picking absolutely safe short term investments.

Gilt Funds

Gilt Funds invest in Government of India and State Government securities and bonds that are guaranteed by the Central and State Governments. These mutual funds are the safest type of debt funds available since they invest in bonds backed by the full faith of the government. The original investment is as safe as it can be though the returns may be lower than what you can get in a debt mutual fund that invests in corporate debt.