Investment Valuation in India

Growth vs Dividend Option in a Mutual Fund When we select the fund for investing, often, the funds offer you the option of Growth Plan or the Dividend Option. It is important to understand the difference between the two and to select the option best suiting the needs and taxability aspects for an individual. Regular Income: The dividend option helps you get regular income (for example, for senior citizens). The growth option does not help you get regular income. Building Wealth: Since the dividend option gets you money at regular intervals, you cannot get the benefit of compounding. It is not suitable for building wealth. The growth option, instead, helps you build wealth over time and income gets compounded. Growth option is suitable for people wanting to save for future (example, child’s marriage, higher education etc) Tax Treatment: While dividends from equity oriented funds are tax free, if the fund is a non-equity fund, there is a Dividend Distribution Tax (...

Mutual Fund investment is common and is often advised as one of the safest options for investments by individuals. But these individuals are loaded with questions given the large number of funds available. We try and answer some of the questions that investors have. Should one invest in an Actively Managed fund or a Passively managed Fund Actively managed funds are more popular among investors, but carry a higher risk than passive index funds. Fund managers often use a benchmark (say Nifty, BSE 200 and so on) to measure their performance. A fund manager trying to beat the benchmark is forced to take positions that would give his fund an edge over the benchmarked index. It is not uncommon that in most cases, they fail to beat the benchmark and the fund - consequently the investors - suffer. So picking the right fund becomes an important decision for the investor. “Past performance is not an indicator for future performance”. So even if you buy consistent outperforming funds, the...

Vulture Funds are financial organizations/private equity firms that seek to invest in debt issued by a company (or in case of a sovereign debt, a country) that is weak and dying. They are also called “Distressed Debt funds”. They buy up sovereign debts of poor nations that are assumed default or near bankrupt when at time the debt is just about to be written off and eventually sue the debtor for the full value of the debt plus interest in the future. The full value is usually 10 times the original paid up debt. Alternatively, they hold on to these investments (if the issuer doesn’t default) and sells them when the prices skyrocket. So these vultures prey upon the debt cancellation measures received by the poor companies/nations by purchasing their debt at a discount (sometimes as low as 20%) and redeeming it at a premium (including interest). They provide a useful alternative for investors who are unable to follow up upon their defaulted debt and in turn are certain to face financial r...

Investment in Unlisted Equity Shares With a view to bringing about uniformity in calculation of NAVs of mutual funds schemes, the following guidelines are being issued for valuation of unlisted equity shares in consultation with Association of Mutual Funds in India (AMFI). The guidelines also prescribe exercise of due diligence while making such investments and review of their performance so as to protect the interests of investors. Methodology for Valuation Unlisted equity shares of a company shall be valued "in good faith" on the basis of the valuation principles laid down below: Based on the latest available audited balance sheet, net worth shall be calculated as lower of (i) and (ii) below: (i) Net worth per share = [share capital plus free reserves (excluding revaluation reserves) minus Miscellaneous expenditure not written off or deferred revenue expenditure, intangible assets and accumulated losses] divided by Number of Paid up Shares. (ii) After taking into account th...

MUTUAL FUND OVERVIEW What is a Mutual Fund? A mutual fund is a pool of money that is professionally managed for the benefit of all shareholders. As an investor in a mutual fund, you own a portion of the fund, sharing in any increases or decreases in the value of the fund. A mutual fund may focus on stocks, bonds, cash, derivatives or a combination of these asset classes. There are different types of mutual funds. Some mutual funds are riskier than others. For example, it is unlikely that you will lose money in a mutual fund that buys money market instruments, such as treasury bills. Risk can sometimes work in your favor: the higher the risk, the bigger the potential return (and the bigger the potential loss); the lower the risk, the smaller the potential return (and the smaller the potential loss). To reduce your overall risk and enhance potential returns, you should invest in a diversified portfolio of mutual funds which have different risk characteristics. An investment in a Fund is ...

SEBI has made rules for valuation of securities by Mutual Funds. Lets look at the valuation Equity Securities for now. Mutual funds shall categorise the securities according to the following norms 1. TRADED SECURITIES : When a security (other than Government Securities) is not traded on any stock exchange on a particular valuation day, the value at which it was traded on the selected stock exchange or any other stock exchange, as the case may be, on the earliest previous day may be used provided such date is not more than thirty days prior to valuation date. 2. THINLY TRADED SECURITIES : (i) Thinly Traded Equity/Equity Related Securities : When trading in an equity/equity related security (such as convertible debentures, equity warrants, etc.) in a month is less than Rs. 5 lacs or the total volume is less than 50,000 shares, it shall be considered as a thinly traded security and valued accordingly. Where a stock exchange identifies the "thinly traded" securities by applyi...

How do I invest in a scheme of a mutual fund? Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms, filled application forms can be deposited with mutual funds through these agents/distributors etc. Now a days post offices and banks also distribute the units of mutual funds. However, you may please note that the mutual funds schemes being marketed by banks and post offices should not be taken as their own schemes and no assurance of returns is given by them. How do I fill up the application form of a mutual fund scheme? You must mention clearly your name, address, number of units applied for and such other information as required in the application form. You must give your bank account details so as to avoid any fraudulent encashment of any cheque/draft issued by the mut...

A Accrued interest Interest that has been earned but not received. Accumulation plan An arrangement which enables an investor to purchase mutual fund shares regularly in large or small amounts. Annual Report A financial report sent yearly to a publicly held firm's shareholders. This report must be audited by independent auditors. Annuitant An individual who purchases an annuity and will receive payments from that annuity. Annuity A contract that guarantees a series of payments in exchange for a lump sum investment. Ask price A proposal to sell a specific quantity of securities at a named price. Assets What a firm or individual owns. B Back-end load A sales charge levied when mutual fund units are redeemed. Balance sheet A financial statement showing the nature and amount of a company's assets, liabilities and shareholders' equity. Balanced fund A mutual fund which has an investment policy of "balancing" its portfolio generally by including bonds and shares in vary...