• What the heck is a mutual fund
• Assets : Bigger the better ?
• NAV : Not Another Verbosity ? !!
• Why people love mutual funds ?
• What's the manager cooking ?

These days buying ten shares of Infosys will cost you more than a lakh of rupees. That�s a fortune? But if your zeal to be the proud owner of these pricey stocks is wee bit extinguished by the astronomical price tag, what do you do? The simplest thing to do is, of course, to walk up to your father-in-law for the ransom. Or you could sell the dream to colleagues in office who pool in money to jointly buy the ten stocks. Or you could invest in a mutual fund that holds Infosys stocks.

While we leave it on you to decide whether the first two options are safe and risk-free (or whether its easy to balance stocks with marital peace), let us tell you that crores of Indians have found mutual funds a great way to invest when they don�t have enough money to buy more than a few stocks.

But what makes mutual funds great?

A mutual fund is a trust that pools the money of several investors and manages investments on their behalf. Legally it is like any other company you know of. Hence, the fund is also called a mutual fund company. The fund company takes your money and like you from other new investors. This is added to the money that's already invested with the fund.

The fund collects this money from investors through various schemes. Each scheme is differentiated by its objective of investment or in other words, a broadly defined purpose of how the collected money is going to be invested. Based on these broad purposes schemes are classified into a dozen or so categories about which more later.

When you buy into a scheme of a mutual fund you are holding units of the scheme. Buying units is like owning shares of a scheme. The total money collected through a scheme constitutes the fund�s assets.

Investing and managing the collected money is a difficult task. The fund company delegates this to a company of professional investors, usually experts who are known for smart stock picks. This company is the Asset Management Company (AMC) and the fund company usually delegates the job of investment management for a fee.

Stay cool. Don�t lose your shirt yet. NAV is a cute little acronym that stands for "Net Asset Value".

Buying a scheme is like buying potatoes with a limited budget. With Rs.400 you can either buy 10 kg of the Rs.40 per kg-variety or 20 kg of the Rs.20 per kg-variety. NAV tells you how much it will cost you to buy one unit of a scheme at on any given day. So if you have Rs.50,000 in your pocket you can buy 1000 units of a scheme that is offering units at an NAV of 50 or you might buy 500 units of a pricier scheme with an NAV of Rs.100.

If you already hold a scheme it tells you on any day, the realizable value of each unit of the scheme. What that means is that it is the money you will get for each unit of the scheme, if the scheme is liquidated on that date or you want to exit the scheme. If you are planning to buy a scheme

After netting off liabilities from the asset value and dividing by the total number of units outstanding we arrive at the NAV.

In other words, NAV is the value per share. It lets you know how much your investment is worth at a particular time. It is the most important measure of the performance of a mutual fund. Let�s say you have invested in a scheme at Rs 10 a unit and now its NAV is Rs 12. Quite simply, that means your investment has appreciated by 20%.

But wait before you jump in joy -- you may not actually get that much when you redeem your units. That is because of the charges levied by some mutual funds. Though NAV is a good enough figure to tell you what the price of each unit is, it is not an exact one. Funds charge fee for managing your money called the annual expense fee. Some funds also charge a fee when you buy or sell units called the entry and exit load. Remember that loads are only applicable in open-ended schemes. More of this later.

A mutual fund may not be able to meet the investment objectives of all unit holders through just one portfolio. Some unit holders may want to invest in risk-bearing securities such as equity, while others may want to invest in safer securities like bonds or government securities.

Moreover, there are so many varying risks associated with different securities that it is often impossible for one individual to manage them. Therefore, a mutual fund tries to create different classes of risk portfolios by formulating different investment schemes. Each investment scheme specifies the kind of investments the scheme will make out of the monies collected.

Mutual funds have many benefits. They offer an easy and inexpensive way for an individual to get returns from stocks and bonds without:

But every coin has a flip side. With mutual funds,

you have no control on the investments of the fund; and, more importantly,

the downside of diversification is that a fund can hold so many stocks that a tremendously great performance by a stock will make very little difference to a fund's overall performance.

It�s all about the recipe. Just like successful cooking, a fund�s ability to fulfil the moneymaking objective of a scheme is determined by its recipe. The recipe for a scheme is its portfolio, which is mix of the investments the fund intends to make for the scheme.

The fund invests its assets by buying a mix of various securities like stocks or bonds. Depending on the scheme�s objective (about which we tell you later), the fund manager fixes the investment recipe or the portfolio. The portfolio, on any day, consists of the various securities the fund has invested in. By purchasing into a scheme you become a part owner of that portfolio.

Consider, one of the market favourites, Birla Advanatge Fund, a growth scheme with 26.43% of its portfolio in Infosys, 14.75% in VisualSoft and another 8.22% in SSI. With an investment of Rs.50,000 in the scheme you could own Rs.13,215 worth of Infosys, Rs.7375 of VisualSoft and Rs.4110 of SSI. Likewise you would own 27 other stocks that the scheme has put its money in. Hmmm, isn't that more satisfying than purchasing seven stocks of Infosys on your own with the same money?

Great cuisine, as the world knows, also depend on precise timing and correct estimations. By how much and when does a fund manager change his investment mix? The portfolio of a fund never remains the same for a long time. Is the fund manager's investment strategy one of buy and hold? Or is he a one who aggressively churns the fund? But most importantly, is he taking the right decision at the right time? Though as investors we don't always get to know when a manager is changing the scheme's portfolio, we can periodically keep track of the scheme's trading history.

Most schemes periodically announce their current portfolio though not all of them declare them as when the fund manager makes a change. As specified by the Securities and Exchange Board of India (SEBI) funds are supposed to declare their portfolio at least once every year.

The frequency with which a portfolio is churned is indicated by the turnover ratio, which is expressed as a percentage. A fund with a 100% turnover generally changes the composition of its entire portfolio each year. Low turnover of about 20-30% shows a fund following a cautious strategy i.e., buying stocks and holding them. Turnover in excess of 100% shows a fund into active trading i.e., one that sells and buys stocks very often.

Hold it. Technically speaking, a turnover ratio is a ratio comparing the rupee value of fund purchases or sales to the rupee value of total fund assets during the year. Hence, a 100% turnover ratio could also indicate that only a portion of the entire portfolio has been traded intensely over the last year.

Higher the turnover more the trades a fund does and hence greater are the transaction fees in the form of brokerage, custody fees, registration fees etc. that a fund has to pay. For a fund such high transaction costs affects its performance and the NAV. And as an investor you get less returns. Moreover, a fund with high turnover will also be making money more often as capital gains. These capital gains on distribution are open to taxes, which again would mean less returns for a untiholder.

A change in a fund's general turnover pattern can indicate changing market conditions, a new management style or a change in the fund's investment objective.

Getting back to cuisine talk. Do you stop frequenting the Udupi joint round the corner just because a new cook cooked your favourite appam even if it was to your liking? Similarly, there is not much reason to opt out of a fund just because it has a new manager. Managers usually work to the fund house's objective set for a scheme. However, do keep track what the new manager is upto. Is the manager handling the portfolio in a way that it reflects the fund's objectives? If the new manager churns the portfolio upside down, it might mean more capital gains distributions, and hence more taxes. Obviously then, (and before appams start tasting like idlis) time you looked for another fund.