Mutual Funds Concept and functiong

What is a mutual fund?

A mutual fund is an investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets.

The pool money managed by portfolio managers, some one knows about market very well or certified financial analysts. The mangers to create a portfolio with investment objective and with respect to risk.

These Mutual funds will give the opportunity to retail investors to invest in the market with certified portfolio managers to manage these funds.

Who are the origins of these Mutual Funds?

Mutual funds created by AMC (Asset Management Companies), in India we have near about 40 asset management companies, those guys are launched more than 4000 funds with different objectives. 

We will consider one example and will discuss properly about the funds distribution.

Let me take one fund XYZ and the fund value 1000rs and these thousand rupees will invest in different stocks with different weightage or depends on risk profile .and this will be divided by 10rs as a face value.

No of units = Total fund/price of per unit

X = 1000/10

X= 100 units

Above 100 units will distribute or sell into the market (New fund offer) and after this will register in exchange for liquidity or trading purpose .once the funds will get any capital appreciation or depreciation into the market and that will distributed into equally.

Note: When a scheme is first made available for investment, it is called a ‘New Fund Offer’ (NFO). During the NFO, investors may have the chance of buying the units at their face value.

Types of Funds

Three types of funds having in the market

Open-Ended funds

Close-Ended funds

Interval Funds

Open ended Funds: The investors enter or exit any time, even after the NFO. if any investor want to exit from the fund he can sell at NAV price it’s called repurchase transaction. The fund will continue with remaining investors.

Closed ended Funds: Have fixed maturity .Investors can buy units form the fund during its NFO. In this case any investor wants to exit means he can sell his units from the exchange to other investor and the price will depends on Demand and supply situation .

Interval Funds: Combine feature of both open and close ended funds schemes. They are largely close ended but become open –ended at pre specified intervals.

Let me take any example: any fund might be open-ended scheme between Jan 1-15 and July 1-15 in a year and in case client want to exit in between he can exit from exchange also like close- ended funds.

Under these funds we have different options like Equity, Debt and balanced funds these funds will come under open-ended funds and capital protection, fixed maturity plans   will come under close –ended funds.

In India we have different AMC (Asset management company’s) in that we can have few top AMC. please check below one for top funds.

Advantages of Mutual Funds :

We have some benefits investing through mutual funds, as an investor will think below factors before investing in the market.

Diversification

High Returns

Economical

Liquidity 

Expertise.

My suggestion, as a newbi can prefer initally mutual funds for investing purpose after that you can start investing in stcok market directly.

How does the stock market work? Who decides the price of stocks?

What is Stock?  

Stock is piece or small part of the company to distributing to the Public (shareholders) who are invested in the company and to share company’s future profits. For instance, if you buy 1 stock of SBI now, you will be the shareholder and will get benefit of the company’s profit.

In otherworld’s, the capital raised by companies or corporation through issue and subscription of shares. The issuing shares and collecting capital through the market called IPO’s (Initial public offer).

Once the share issued to the public through IPO’s, these companies will list stocks in secondary market (NSE, BSE).these markets will help to the companies for free floating the stocks .this will maintain the supply and demand to the public.

How Buyers and Sellers do the transactions in Secondary Market.

Buyers and sellers will open the trading and demat account form the broker. The broker one who has membership with exchange to provide the platform for trading. Brokers are mediators for customers and exchange. As an exchange can’t manage the retail clients for these transactions, so will provide the service through authorized brokers (Zerodha, Rksv and ICICI etc.) 

Note : you can prefer account with Zerodha .india's first discount broker and nominal costing with better service.

How the Stock price decided?

In the market there are different methods to find the value of stock and future prospect price. This will help to judge the stock weather undervalued or overvalued. And this is called valuation of stock.

Stock valuation methods:

Stocks have a two types of valuations.one is a value created using some type of cash flows ,sales or fundamental earning analysis. The other value is dictated by how much an investor is willing to pay for a particular share of stock and how much other investors are willing to sell stock (supply and demand).

Fundamental valuation is the valuation that people used to justify stock price. This will be mostly depends on historic ratios and statistics and it will help for long- term stock prices.

The other way stocks are valued is based on supply and demand. The more people that want to buy the stock, the higher its price will be .And conversely, the more people that want to sell the stocks, the higher its price will be. This form valuation is very hard to predict and it will help full short term stock prices. 

Different methods:

    EPS(Earning per Share )

    P/E(Price to earnings)
   Growth Rate
   ROA (Return on Assets)
   P/S(Price to sales)
   EBITDA etc.

Factors effecting the stock prices:

Few factors will effect the stock prices but this will be depends on the factor weather permanent or temporary.

Political Stability: this will be the one reason for company performance .weather the ruling party supporting to the industry polices or any changes in polices.so this will shows the price movements.

Macroeconomics: the economy of the world weather supporting to this industry or not and the supply and demand uncertainty in exporting countries.

Microeconomics: Within the industry any competitor come up with new methodology and low cost productions .this will effect the price movements.

Industry Trends:  The current trend markets will support this industry will be positive otherwise it will show the bad results.

Company Management:  Company itself occurs any management stability issues and new reforms and employee satisfaction levels also will play the main role in stock price movements.

All the above things will help you to understand the stock valuations but there is no guaranty for the price movements and we need to believe and proceed.

Nobody knows the right price of a stock, it’s always a mystery!

"In the short term, the market is a voting machine. But, in the long term, the market is a weighing machine".  -- Ben Graham