Clear your fundamentals

Mutual Funds Products And Services Price: Rs 170 Pages: 211 By: Rachana Baid Published By: Taxmann Publications

Target audience: All investors Quick read tip: Don’t miss chapter four to understand basic concepts of fund investing Language: Easy Style: Illustrative Visuals: Tables and charts

It is not like a textbook— it is a textbook. Part of the curriculum of the Indian Institute of Banking and Finance, Mutual Funds Products and Services takes students through the history of the Indian mutual fund industry. Along the way, it explains fund basics and advanced investment strategies followed by fund managers. You’re not a student and there is no exam to give. So why are we reviewing this book?

Because if you are new to fund investing, there is nothing like a textbook for a step-bystep guide with numerical examples. And the performance of mutual funds in the past few weeks must have made many people who have been investing in funds for a couple of years feel like newbies. Why couldn’t your fund achieve its target return? Where does that fund invest? Investors are waking up to parameters beyond returns for evaluating a fund. In such a time, it is best to revise your basics.

The book has four sections. It first explains the concept of mutual funds, their evolution and organisational structure. You’ll find definitions of terms used by fund managers and other equity analysts. Refresh your understanding of the advantages of investing in funds: professional investment management, lower transaction costs and regulatory protection. If you want to know how a fund house is structured, the answers are here. Unlike the US and UK, Indian mutual funds have the option of setting up either as board of trustees or a trust company.

The second section explains different categories of funds and decodes a fund’s offer document. The authors strongly recommend scrutinising the offer document before investing in a fund. An offer document discloses all important information about the mutual fund such as its investment objectives, risk factors, unit holders’ rights, etc. Most investors know this but very few read the document. After the recent fall in returns in funds, investors are sure to find new wisdom in such advice.

Tips for investing in mutual funds Understand categories of funds: Different funds have different risk profiles. Before choosing a fund, check its fund category to understand the risk-reward trade-off Read offer document: It contains investment objectives, risk factors, information about loads, expenses and fees and investment restrictions.This will help you understand whether a fund fulfils your investment needs Compare fund performance: Use various risk and returns measures like CAGR, holding period return, Sharpe and Treynor ratios to evaluate a fund across various categories Read Securities and Exchange Board of India’s regulations: These rules for unit holders’ protection will help you understand your rights as a fund investor. Also, you will be less susceptible to false promises made by fund agents

In addition to telling readers what is an equity diversified fund, debt fund, etc, funds are also categorised according to different styles of investing like growth investing and value investing. A growth fund invests chiefly in companies which are expected to perform better than the market whereas value funds invest in shares of undervalued companies.

This section also examines different schemes like growth, dividend and dividend reinvestment. So if you want regular income, the book tells you it’s best to opt for the dividend option.

In the third part, investment strategies of fund managers are discussed along with explanations of mathematical and statistical tools for evaluating a fund’s performance. The strategies are broadly divided into active and passive. They include timing the market (forecasting market movements), group rotation (under or over weighing a sector) and stock selection (identifying attractive stocks). The advantages and disadvantages of investing styles such as value investing and hedging are also explained in detail.

The use of numerical examples should enable readers to better understand such concepts as value averaging, dollar cost averaging, systematic investment plans and calculation of net asset value of a fund. Four measures of return are discussed: holding period return, compound average return, rupee weighted return and time weighted return. The book compares them to tell readers what is the utility of each measure. For instance, time weighted return is preferred over rupee weighted return as fund managers have no control over intermediate cash flows and such cash flows can vary from fund to fund.

The risk profile of a fund is explained using standard deviation, beta, R-square and some popular risk adjusted measures such as Sharpe and Treynor ratios. However, if you are not well acquainted with statistics, you might have to read more on the subject to understand these measures.

Various equity (Bombay Stock Exchange and National Stock Exchange) and debt (Credit Rating Information Services of India) indices used for benchmarking equity and debt funds are also briefly touched upon. The final section deals with regulatory aspects of mutual funds. It explains the structure of Indian mutual funds which includes four entities: sponsor, trustees, custodian and asset management company.

Details about the minimum net worth, infrastructure, disclosure requirements, investment and borrowing restrictions and advertising rules should benefit investors immensely. You will know your rights as a fund investor and be better equipped to detect when a fund or an agent is making false promises. So it’s time to become a student again. Read this book as your homework for the month. And we are sure you will score better with your next mutual fund investment.

Also read our review of the book Mutual Funds for Dummies