MUTUAL FUNDS & TRADING TYPES IN STOCK MARKET
Mutual Fund is defined as trust that pools the savings of investors who share common financial objective. Collected money then invested by professional Fund Manager in different type of securities such as Equity, Debt, Gold according to investment objective. Income earned through these investments & capital appreciations realized by the schemes then shared by its unit holders in proportion to number of units owned by them.
So, to simply put, a mutual fund is the money pooled in by a large number of investors and offers an opportunity to invest in a diversified and professionally managed basket of securities at a relatively lower cost.
A mutual fund is nothing more than a collection of stocks and / or bonds. Mutual funds are financial intermediaries that pool the financial resources of investors and invest those resources in diversified portfolios of assets. Initially a Mutual fund collect the funds from small investors, and when sufficient funds are gathered, then they are invested into the securities. The fund is divided into the units and each holder is entitled to a proportionate share of the fund. Major fund disclosure document is called prospectus. Enjoy economies of scale by incurring lower transaction costs and commissions.
WHY TO SELECT MUTUAL FUNDS?
The risk return trade-off indicates that if investor is willing to take higher risk, then correspondingly he can expect higher returns and vice versa if he pertains to lower risk instruments, which would be satisfied by lower returns. For example, if investors opt for bank FD, which provide moderate return with minimal risk. But as he moves ahead to invest in capital protected funds and the profit-bonds that give out more return which is slightly higher as compared to the bank deposits but the risk involved also increases in the same proportion.
Thus, investors choose mutual funds as their primary means of investing, as Mutual funds provide professional management, diversification, convenience and liquidity. That doesn’t mean mutual fund investments risk free.
This is because the money that is pooled in are not invested only in debts funds which are less risky but are also invested in the stock markets which involves a higher risk but can expect higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives market which is considered very volatile.
ADVANTAGES OF MUTUAL FUNDS.
If mutual funds are emerging as the favorite investment vehicle, it is because of the many advantages they have over other forms and the avenues of investing, particularly for the investor
who has limited resources available in terms of capital and the ability to carry out detailed research and market monitoring? The following are the major advantages offered by mutual funds to all investors:
1. Portfolio Diversification:
Each investor in the fund is a part owner of all the fund’s assets, thus enabling him to hold a diversified investment portfolio even with a small amount of investment that would otherwise require big capital.
2. Professional Management:
Even if an investor has a big amount of capital available to him, he benefits from the professional management skills brought in by the fund in the management of the investor’s portfolio. The investment management skills, along with the needed research into available investment options, ensure a much better return than what an investor can manage on his own. Few investors have the skill and resources of their own to succeed in today’s fast moving, global and sophisticated markets.
3. Reduction/Diversification of Risk:
When an investor invests directly, all the risk of potential loss is his own, whether he places a deposit with a company or a bank, or he buys a share or debenture on his own or in any other from. While investing in the pool of funds with investors, the potential losses are also shared with other investors. The risk reduction is one of the most important benefits of a collective investment vehicle like the mutual fund.
4. Reduction of Transaction Costs:
What is true of risk as also true of the transaction costs. The investor bears all the costs of investing such as brokerage or custody of securities. When going through a fund, he has the benefit of economies of scale; the funds pay lesser costs because of larger volumes, a benefit passed on to its investors.
5. Liquidity:
Often, investors hold shares or bonds they cannot directly, easily and quickly sell. When they invest in the units of a fund, they can generally cash their investments any time, by selling their units to the fund if open-ended, or selling them in the market if the fund is close-end. Liquidity of investment is clearly a big benefit.
6. Convenience and Flexibility:
Mutual fund management companies offer many investor services that a direct market investor cannot get. Investors can easily transfer their holding from one scheme to the other, get updated market information and so on.
7. Tax Benefits:
Any income distributed after March 31, 2002 will be subject to tax in the assessment of all Unit holders. However, as a measure of concession to Unit holders of open-ended equity- oriented funds, income distributions for the year ending March 31, 2003, will be taxed at a concessional rate of 10.5%. In case of Individuals and Hindu Undivided Families a deduction upto Rs. 9,000 from the Total Income will be admissible in respect of income from investments specified in Section 80L, including income from Units of the Mutual Fund. Units of the schemes are not subject to Wealth-Tax and Gift-Tax.
8. Choice of Schemes:
Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.
DISADVANTAGES OF INVESTING THROUGH MUTUAL
FUNDS:
1. No Control Over Costs:
An investor in a mutual fund has no control of the overall costs of investing. The investor pays investment management fees as long as he remains with the fund, albeit in return for the professional management and research. Fees are payable even if the value of his investments is declining. A mutual fund investor also pays fund distribution costs, which he would not incur in direct investing. However, this shortcoming only means that there is a cost to obtain the mutual fund services.
2. No Tailor-Made Portfolio:
Investors who invest on their own can build their own portfolios of shares and bonds and other securities. Investing through fund means he delegates this decision to the fund managers. The very-high-net-worth individuals or large corporate investors may find this to be a constraint in achieving their objectives. However, most mutual fund managers help investors overcome this constraint by offering families of funds- a large number of different schemes- within their own management company. An investor can choose from different investment plans and constructs a portfolio to his choice.
3. Managing A Portfolio of Funds:
Availability of a large number of funds can actually mean too much choice for the investor. He may again need advice on how to select a fund to achieve his objectives, quite similar to the situation when he has individual shares or bonds to select.
4. The Wisdom of Professional Management:
That’s right, this is not an advantage. The average mutual fund manager is no better at picking stocks than the average nonprofessional, but charges fees.
5. No Control:
Unlike picking your own individual stocks, a mutual fund puts you in the passenger seat of somebody else’s car
6. Dilution:
Mutual funds generally have such small holdings of so many different stocks that insanely great performance by a fund’s top holdings still doesn’t make much of a difference in a mutual fund’s total performance.
7. Buried Costs:
Many mutual funds specialize in burying their costs and in hiring salesmen who do not make those costs clear to their clients.
TYPES OF MUTUAL FUNDS SCHEMES IN INDIA
Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned below.
Schemes according to Maturity Period: -
A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.
Open-ended Fund: -
An open-ended Mutual fund is one that is available for subscription and repurchase on a continuous basis. These Funds do not have a fixed maturity period.
close-ended Fund: -
A close-ended Mutual fund has a stipulated maturity period e.g., 5–7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme.
Fund according to Investment Objective: -
A scheme can also be classified as growth fund, income fund, or balanced fund considering its investment objective.
Growth / Equity Oriented Scheme: -
The aim of growth funds is to provide capital appreciation over the medium to long-term.
Such funds have comparatively high risks.
These schemes provide different options to the investors like dividend option, capital appreciation, etc.
Income / Debt Oriented Scheme: -The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes
Balanced Fund: -
The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth.
Gilt Funds: -
These funds invest exclusively in government securities. Government securities have no default risk.
Index Funds: -
These schemes invest in the securities in the same weightage comprising of an index. These schemes would rise or fall in accordance with the rise or fall in the index.
Various Mutual Funds in India
· State Bank of India mutual fund
· ICICI prudential mutual fund
· TATA mutual fund
· HDFC mutual fund
· Birla sun life mutual fund
· Mutual Funds in India
· Reliance mutual fund
· Kotak Mahindra mutual fund etc.
WHAT IS TRADING IN SHARE MARKET?
Active trading is the act of buying and selling securities based on short-term movements to profit from the price movements on a short-term stock chart. Trading is essentially the exchange of goods and services between two entities. It is the basic principle which forms the core of all economic societies and financial activities The mentality associated with an active trading strategy differs from the long-term, buy-and-hold strategy found among passive or indexed investors. Active traders believe that short-term movements and capturing the market trend are where the profits are made.
There are various methods used to accomplish an active trading strategy, each with appropriate market environments and risks inherent in the strategy. Here are four of the most common active trading strategies and the built-in costs of each strategy. Day trading, position trading, swing trading, and scalping are four popular active trading methodologies.
4 COMMON ACTIVE TRADING STRATEGIES.
1. Day Trading: -
Day trading is perhaps the most well-known active trading style. It’s often considered a pseudonym for active trading itself. Day trading, as its name implies, is the method of buying and selling securities within the same day. Positions are closed out within the same day they are taken, and no position is held overnight. Traditionally, day trading is done by professional traders, such as specialists or market makers. However, electronic trading has opened up this practice to novice traders.
2. Position Trading
Some actually consider position trading to be a buy-and-hold strategy and not active trading. However, position trading, when done by an advanced trader, can be a form of active trading. Position trading uses longer term charts — anywhere from daily to monthly — in combination with other methods to determine the trend of the current market direction. This type of trade may last for several days to several weeks and sometimes longer, depending on the trend.
Trend traders look for successive higher highs or lower highs to determine the trend of a security. By jumping on and riding the “wave,” trend traders aim to benefit from both the up and downside of market movements. Trend traders look to determine the direction of the market, but they do not try to forecast any price levels. Typically, trend traders jump on the trend after it has established itself, and when the trend breaks, they usually exit the position. This means that in periods of high market volatility, trend trading is more difficult and its positions are generally reduced.
3. Swing Trading
When a trend breaks, swing traders typically get in the game. At the end of a trend, there is usually some price volatility as the new trend tries to establish itself. Swing traders buy or sell as that price volatility sets in. Swing trades are usually held for more than a day but for a shorter time than trend trades. Swing traders often create a set of trading rules based on technical or fundamental analysis.
These trading rules or algorithms are designed to identify when to buy and sell a security. While a swing-trading algorithm does not have to be exact and predict the peak or valley of a price move, it does need a market that moves in one direction or another. A range-bound or sideways market is a risk for swing traders.
4. Scalping
Scalping is one of the quickest strategies employed by active traders. Essentially, it entails identifying and exploiting bid-ask spreads that are a little wider or narrower than normal due to temporary imbalances in supply and demand. A scalper does not attempt to exploit large moves or transact high volumes. Rather, they seek to capitalize on small moves that occur frequently, with measured transaction volumes. Since the level of profit per trade is small, scalpers look for relatively liquid markets to increase the frequency of their trades. Unlike swing traders, scalpers prefer quiet markets that aren’t prone to sudden price movements.
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