22-09-2012, 03:12 PM
PORTFOLIO MANAGEMENT IN MUTUAL FUNDS
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INTRODUCTION
Economic liberalization and globalization of the Indian markets began in 1991.
This meant that the Indian consumers had access to imported goods which
resulted in fall of prices of domestic goods due to high competition. This also
meant that lower interest rates and more importantly transfer of risk from
government to the individuals, forcing them to protect their investments them
self.
Investors have variety of options for investments. Some of them are providing
fixed rate of returns are some of them provide variable rate of returns. Many
had investments with UTI, Company fixed deposits, and Bank fixed deposits
that were offering high returns that now they are starting falling after
globalization and liberalization.
There are some investors who are active. They are the ones who act promptly
and make educated, informed decisions about market. They done their own
research and understand the factors which may have effect on their
investments in future. On the other hand some investors who are
apprehensive and will take action only when they can see tangible merits on
the change.
As every individual is different, their objectives behind investments also differ
from person to person. Their objectives can for fixed return, capital
appreciation, tax planning or current income. The investment decision will
mainly depend upon the objective of investor. He or she needs to design their
portfolio according to their risk and return profile. The individual should start
by specifying investment goals. Once these goals are established, the
individual should be aware of the mechanics of investing and the environment
in which investment decision are made. These include the process by which
securities are issued and subsequently bought and sold, the regulations and
tax laws that have been enacted by various levels of government, and the
sources of information concerning investment that are available to the
individuals.
What is an Investment?
An investment is the use of capital to create more money through the
acquisition of a security that promise the safety of the principal and generate a
reasonable return.
Various Investment Options
Savings form an important part of the economy of any nation. With the saving
invested in various options available to the people, the money acts as the
driver for growth of the country. Indian financial scene too presents a plethora
of avenue to the investors. Though certainly not the best or deepest of
markets in the world, it has reasonable options for an ordinary man to invest
his savings.
There are basically two kinds of investments. One that gives returns at fixed
rate and other where the rate of return is depending upon the certain factors
of the economy.
Other Post Office Scheme
Kisan Vikas Patra:
Money can be doubled in 8 years and 7 months. There is no upper limit on
the amount that you invest. There are no tax benefits for the investments
made under this scheme. The rate of interest works out to a compounded
annual return of about 8.4%. There are no tax deductions at source and
banks loans are available against Kisan Vikas Patra. Interest is paid at
maturity and cannot be claimed prior to maturity.
Senior Citizen Savings Scheme (2004):
As per the 2004-2005 budgets, the Government has announced a new
Senior Citizen Savings Scheme. It has been launched only through
designated Post Offices from the 2nd August, 2004. it for the individuals who
have attained the age of 60 years or above on the date of opening of an
account or who have attained the age of 55 years or more but less than 60
years, and who have retired under Voluntary Retirement scheme or a Special
Voluntary Retirement scheme on the date of opening of an account. The main
feature of the scheme is that is carries an interest of 9% p.a. (taxable) on the
deposits. Deposits can be a minimum of Rs. 1000 and maximum of Rs. 15
lakhs, to be held for a period of 5 years and extendable for further 3 years. It
can also be prematurely withdrawn after one year with some deductions.
Interest qualifies for deduction u/s 80L.
Bank Fixed Deposits:
Bank fixed deposits yield will vary from bank to bank but they are more or less
streamlined. The yields are currently in the region of 5.5% to 6.5% per annum
for deposits ranging from 30 days to five years. All the schedule banks are
covered by DICGC (Deposit Insurance and Credit Guarantee Corporation)
which means that up to 1 lakh deposited in a bank per person is absolutely
safe and insured even if the bank collapse.
Company Fixed Deposits:
Company fixed deposits was a highly popular investment vehicle in the past.
In today’s changing scenario where the corporate world has access to
cheaper funds from sources all over the world, the rate of interest offered by
good companies make this a less attractive investment vehicle.
i. Infrastructure Bonds:
An infrastructure bond is a tax saving bond that was innovated in order to
provide funds for the development of the key infrastructure projects. Thus,
investors in these bonds apart from the material benefits in term of tax saving,
have the higher satisfaction of having contributed to the development of the
country’s infrastructure. The rate of return on such bonds is between 5 to
5.5%. The bonds have lock in period of 3 years.
CONCEPT OF MUTUAL FUNDS
A Mutual Fund is a body corporate that pools the savings of a number of
investors and invests the same in a variety of different financial instruments,
or securities. The income earned through these investments and the capital
appreciations realized by the scheme are shared by its unit holders in
proportion to the number of units owned by them. Mutual funds can thus be
considered as financial intermediaries in the investment business that collect
Portfolio Management In Mutual Funds
funds from the public and invest on behalf of the investors. The losses and
gains accrue to the investors only. The Investment objectives outlined by a
Mutual Fund in its prospectus are binding on the Mutual Fund scheme. The
investment objectives specify the class of securities a Mutual Fund can invest
in. Mutual Funds invest in various asset classes like equity, bonds,
debentures, commercial paper and government securities.