Mutual Funds

The idea behind a mutual fund is simple: Many pool their money in a fund, which invests in many securities. Each investor shares a proportionin the fund's investment returns. Every mutual fund has a manager, also called an investment adviser, who directs the fund's investments according to the fund's objective, such as long-term growth, high current income, or stability of principal. Depending on its objective, a fund can invest in stocks, bonds, cash investments, or a combination of these financial assets.

The magic of compound interest is a combination of time and rate of return.

Analyzing a Fund:

Structural Characteristics: Too many investors select common stock funding based on its past performance record. The record provided by the fund sponsor is usually a chronicle of championship results for one or more funds, carefully selected and accompanied by bragging about being the top performing fund for some particular period. Reports by the financial press typically lionize the portfolio managers who had the best records during the previous quarter or year or even longer. This myopic focus on past performance is not helpful. It is a flawed and counterproductive way to select a mutual fund.
Size of Fund: As a rule, avoid funds with assets of less than $50 million simply because higher expenses associated with small funds, along with the possibility a small fund may not survive or undergo a change in objectives in the search for greater acceptance in the marketplace. However, you might make an exception for a small fund that is part of a larger complex - say, $500 million or more in aggregate assets - or is managed by as large advisory firm. In both cases, the management should have the resources to manage the fund's affairs with reasonable efficiency.
Age of Fund: A fund should prove merit over a period of at least 5 to 10 years. There are exceptions. A new fund introduced by an established investment management firm and modeled on its traditional investment philosophy should be considered. Another exception may be a new fund with specific investment objectives and characteristics that is part of a large complex.
Reign of Portfolio Manager: Find out whether a portfolio manager has run a fund for a few months, years, or decades, and give this information whatever weight you deem appropriate. That said, many fine equity funds are run by teams of managers, with the advisory firm as an organization putting its corporate stamp on the funds' strategies and their implementation. Because of this diversity, such funds tend to be classic mainstream funds, and the tenure of a single manager should be relatively inconsequential.
Cash position. What % of the portfolio is held in cash reserve? Has the % varied? Has cash position been effective in adding stability during market declines while not unduly retarding growth during market rises? Since there is no evidence stock managers have had any success in raising cash at market tops, nor in investing cash at market bottoms, with rare exceptions cash reserves should play only a limited role in an equity fund. It does not seem sensible to pay high advisory fees for the privilege of owning the residual cash reserves held by most stock funds.
Portfolio Turnover: Turnover - the purchase and sale of securities in a fund's portfolio - is often ignored by investors. But it is a key indicator of a fund's fundamental investment strategy. Low turnover tends to indicate a longer-term investment orientation, high turnover the reverse. Turnover has a significant influence on two aspects of investment performance: (1) the cost of managing the fund and (2) the realization of capital gains. Other things being equal, the higher the portfolio turnover, the higher the fund's transaction costs, and the higher the proportion of total return represented by realized (and thus taxable) capital gains.
Beta: A measure of risk, when applied to investment portfolios, provides useful statistical information. It indicates a fund's past price volatility relative to a particular stock market index. The term Beta, widely used by professional investors and academics, may seem esoteric. But I believe it will gain gradual, if grudging, acceptance by individual investors. Most mainstream equity funds have Betas in the range of .85 to 1.05. Especially conservative stock funds may register Betas as low as .75, meaning that in a -10 per cent market decline, their values might be expected to fall -7.5 per centAggressive funds with Betas of 1.25 might see their values fall by -12.5 per cent. The same general dimension of relative volatility also prevails in rising markets. Conditions in each market cycle differ markedly, and Beta should be regarded only as a rough proxy for your volatility expectations.

The most widely accepted measure of risk in any financial asset class is the volatility of total returns. Volatility risk, quite simply, refers to the fact that a diversified portfolio will fluctuate in value and may show a loss during any interim period. Yet if a diversified portfolio that is held for, say, five years achieves a satisfactory increase in value (even though it may have decreased in value during the interim), it may be said in retrospect that the investment was, for all practical purposes, safe. The distinction, then, between a safe investment program and a volatile investment program lies in the time horizon of the investor.

Gross Dividend Yield: A significant indicator of mutual fund investment characteristics. Among stock funds, gross yields tend to be higher, for example, in value-oriented funds and lower in growth funds, hardly an unexpected result. However, most fund statistical services present yield improperly for comparative purposes. The reported net yield is after fund expenses, while a fund's investment characteristics are reflected by its gross yield before expenses.

In 2001 Indian stock markets have tumbled following an unprecedented decision by the country's largest mutual fund to ban the sale and redemption of its units. The markets fell by nearly 3.5% as jittery investors dumped shares following the move by Unit Trust of India (UTI) under its flagship US-64 scheme. Small investors got hurt by the move.

The decision has come as a shock to millions of investors - UTI is the largest mutual fund in the country with an investor base of more than 20 million and the US-64 scheme has had a 37-year track record of liquidity, safety and growing returns.

In 2001 the dot. com bubble disaster caused huge losses in the mututal fund industry/

In 2003 The USA markets watchdog backed tough new rules aimed at stamping out abuses in the mutual funds industry. The Securities and Exchange Commission (SEC) voted unanimously in favour of a total ban on trading in mutual fund shares after 4 p.m. The move was designed to stop investors from buying and selling mutual fund shares overnight at a previous day's price. The practice, known as late trading, erodes returns for ordinary savers. The 4 p.m. cut-off point comes in response to revelations that many mutual funds have allowed Wall Street insiders to trade after hours, even though the practice is already illegal.
In 2003 Putnam Investments, the fifth biggest mutual fund in the US, has been accused of improper trading by federal and Massachusetts regulators.
The charges were brought by the US Securities and Exchange Commission (SEC) and Massachusetts securities regulators. The SEC has also brought charges against two former Putnam managers. In a statement, Putnam said it believed it had not acted fraudulently, and that it was working with regulators to "resolve these issues in an appropriate and expeditious manner".

The Massachusetts Investors Trust was founded in 1924, and after one year had 200 shareholders and almosy $400,000 in assets, making it the innovator of the industry.

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