Posted On Tuesday, Apr 26, 2016
Q1) How mutual funds investment differs from investing in equity. What are the advantages and disadvantages?
Let me explain this using a table to make it simple for you.
|Equity Mutual Funds||Equity|
|Mutual fund is a pooled vehicle. Investors pool in their savings into a mutual fund`s Equity scheme||This is an investment made directly into equity by the investor. Eg. Buying shares of a listed company.|
|There is a professional fund manager managing investments||Investor will have to do his/her own research|
|Risks are of two types when investing in Equities |
1. Permanent loss of capital.
2. Volatility in the price of the investment that you hold
Mutual funds NAV can be volatile, and therefore risky. Risk is mitigated because it is well diversified.
Investing in individual equities can be risky. The risk could come from loss of capital as well as the volatility in the price of the stock.
Investment in Mutual Fund will have access to professional fund manager.
Mutual funds are regulated by SEBI. A mutual fund house is an asset manager therefore they strive to manage the assets prudently. Investors can start their investments in equity mutual fund with as less as Rs. 500 through Systematic Investment Plan, which may not be possible with equity.
There is no additional expense incurred like management fee in mutual fund. However replicating such performance at all times is very difficult
There is element of cost associated with mutual fund investments such as expense ratio, exit loads.
You need research skill.
The cost of going wrong on investment can be very high.
Tracking market performance diligently may not be possible.
Q2)How long the bear market will continue?
For those who are not aware of what a bear market is – it is a market trend of showing negative returns. When the market falls and that trend continues for a significant amount of time, then that market is said to be in a bear run. Similarly a bull market is when they tend to scale new highs almost every day. These actions are metaphors for the movement of the market. A bull thrusts its horns up into the air while a bear swipes its paws down.
There is no scientific way to predict how long a trend would last eg. bear market. There are technical studies done by technicians who try to predict the duration of bear markets, but it is beyond my capacity to have a view on that.
Q3) What are the risks involved in mutual fund investment?
Risk of investing in any instrument can broadly be categorised into two:
Permanent loss of capital- example investing in a company that goes bust.
Volatility in the price of the investment that you hold, Eg. It could be the price of the share that you hold or the unit value of the units of the mutual fund that you hold.
Both the above risks are reduced in the case of a mutual fund- since the investment is diversified across a number of stocks in an equity mutual fund or across a range of fixed income instruments- in the case of liquid or debt fund.
To summarize, mutual fund investment can be volatile depending on market conditions, but the risk is lower compared to holding direct equity or holding a bond.
Sometimes an asset class can be more volatile than it normally is. In such cases you can reduce the risk by investing in multiple asset class such as equity mutual fund, debt mutual fund or gold fund. Or you can straightway invest in a multi asset fund such as Quantum Multi Asset Fund, which reduces the risk of having a high exposure to one asset class and gives your investment portfolio the much needed diversification.
To get a general idea of risk involved in a particular mutual fund product you could refer the Product Label of that scheme. Mutual fund regulator SEBI has introduced ‘Riskometer’ that shows the level of risk associated with that particular scheme.
Q4) Why Quantum is not offering dividend payout mode only growth mode?
This is question investors have been asking us often & we like that, as it gives us an opportunity to share our philosophy with you! Firstly, by definition, dividends declared by the fund are transfers of a portion of profit earned by the fund to its shareholders/investors.Product Label
Declaring a dividend not only involves a cost, but also creates a situation where some investors are ok to receive a dividend while others are not.
At Quantum, we want our investors to declare their own dividends!
By this we mean that we don’t want to give you money when you don’t need it or you need more of it or you need less of it. A mutual fund gives one dividend to all its investors, it cannot give you a tailor-made payout for exactly the amount of money you need. So, giving a dividend may not solve your problem.
Instead, we leave that decision up to you.
Another fact is that, for regular dividends to be paid out, a certain number of holdings must be sold off in order to raise the money. Now this sell off might not be at the most appropriate valuations – thus losing out on higher returns.
But that does not stop you from paying a dividend to yourself for any amount that you wish, whenever you wish. You have a family occasion coming up and need money. You don’t have to depend on your mutual fund to pay out your dividend. Instead, you can redeem as many units as would provide you the required amount and effectively pay yourself a handsome “dividend”.
|Name of the Scheme||This product is suitable for investors who are seeking*||Riskometer|
|Quantum Multi Asset Fund|
(An Open-ended Fund of Funds Scheme)
|• Long term capital appreciation and current income|
• Investments in portfolio of schemes of Quantum Mutual Fund whose underlying investments are in equity and equity related securities of companies, debt and money market instruments and physical gold.
Investors understand that their principal will be at Moderately High Risk
* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.
Subbu`s Solution is authored by I. V. Subramaniam. I. V. Subramaniam is a director of Quantum Asset Management Company Private Limited. The responses expressed here are strictly for information and explanation purpose only. The responses are meant for general reading purpose and not to be considered as an investment advice / recommendation. The responses are not intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or units of the Mutual Fund. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. The Sponsor, The Investment Manager, The Trustee, their respective directors, employees, affiliates or representatives shall not be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in the responses.
Risk Factors: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Please visit - www.QuantumMF.com to read Scheme Specific Risk Factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the scheme`s objective will be achieved and the NAV of the scheme(s) may go up or down depending upon the factors and forces affecting securities markets. Investment in mutual fund units involves investment risks such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the Sponsor / AMC/ Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited (AMC). The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.