The lowdown on MF schemes

May, 2015 by

The lowdown on MF schemes

Big incomes and yet a burned hole in the pocket at the end of the day…, Does that describe you accurately? If so then mutual funds would suit you to a T.

After all, what other investment option allows you to keep your money relatively safe while assuring you healthy returns? Attractive!

So what is a mutual fund?

Simply put, a mutul fund is a trust that pools together the money of different investors and invests them in various money market investments. It is managed by a professional fund manager who trades(buys and sells) in accordance with the investment strategy or objective. The incomes or gains realized from trading are then distributed back to the investors in proportion to their original investments into the fund.

With regard to returns disribution, Mutual funds usually offer three different options to investors to choose from.

* Dividend Payout,
* Dividend Re-investment, and the
* Growth option.

An propspective investor must choose carefully which options suits him or her best.

Growth or dividend?

The dividend option enables you to partially cash in on the returns earned by the fund from time to time through the dividends that it declares, whereas the returns in growth option are retained in the MF and reflect as an appreciation in the fund’s Net Asset Value (NAV). However, the dividend does not in any way add to your returns from the fund though it presents a great opportunity to get periodic payouts on a high-yield investment.

The Dividend Re-investment option authorises the fund to plough back the dividends declared into the fund at the prevailing NAV, also fetching you more units. It is voluntary to participate in these plans, but if you elect to, you’ll receive additional shares in the company instead of, and to the value of the cash dividend you would otherwise receive. In terms of its effect on your returns, the Dividend Re-investment option is no different from the Growth option.

The Dividend Re-investment option is the superior option for investors who yearn for tax efficiency and are willing to remain invested in equities through stock market ups and downs. If you need liquidity, you can clear up a part of your holdings at NAV.

One of the appealing features of Dividend payouts is that it helps you re-balance your equity holdings when the markets are bullish, guarding you to an extent against a decline in values. The down side is that it is a `set and forget’ strategy that could result in an opportunity loss in a rising market.

The right choice

Now that you have made a thoughtful decision to invest, you are bound to read about, hear about, or experience the risks involved. All funds fluctuate and choosing the right fund requires finding both a fund with a successful track record and one that also meets your investment objectives.

The prospectus states purchase redemption and annual fees as well as statistics such as turnover ratios (the frequency of liquidations within the fund). Sensibility lies in creating a diversified portfolio that mixes stock funds, international funds, bond funds and other specialty funds.

If are you searching for capital appreciation. then you might desire a growth or aggressive growth fund; if you are looking for safety, choose balanced fund and if you are looking to invest in a certain sector such as technology, pick a sector-based fund.

Because, deciding on the correct option is perhaps as important to the health of the investment as choosing the particular mutual fund is.

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