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Indian BPO firm Firstsource Solutions Ltd’s IPO has got an overwhelming response from investors in all segments.

By the time the IPO closed on Friday February 2nd, it had been oversubscribed more than 50 times.

The oversubscription details are as follows:

Qualified Institutional Buyers (QIBs) segment – 72 times.
Non Institutional Investors segment – 40 times.
Retail Individual Investors (RIIs) segment – 11.5 times.

Employee Segment – 2 times.
The stock may list around 85 against the (likely) issue price of 64.

Within business today, fraud is becoming an ever increasing problem. Whether you are part of a multi-national company or a small, one man business, there is a very good chance that you will be targeted.

Since the advent of the internet the opportunities for criminals to attempt to part hard working people and corporations from their cash have increased. We’ve all received the advanced fee scam emails from Nigeria and the phishing attempts through paypal and various banking institutions.

However, not all the scammers are dumb. Some are creating far more elaborate schemes in order to trick the unprepared. The natural progression from phishing emails is the use of pharming websites. Through nefarious means a fraudster will drop malicious code onto your computer which will lay hidden in the registry. Without you knowing it will be redirecting your internet surfing.

For example, you type in the url for your internet bank as you are wise enough to know that clicking bank links in emails is risky. However, what you don’t realise, is that this malicious code has redirected you to another website that looks exactly like the banking site you meant to visit. You then go ahead and enter your login details, giving them straight to the fraudster.

Then there are faux business opportunities. These often target vulnerable people who are desperate for cash in a hurry – work at home scams entice these people into paying up front for nothing more than lists of other schemes or for materials to make products that the company have no intention of buying back from them.
Remember – money is supposed to be the root of all evil – so if something seems too good to be true…. It probably is!

Internet search and advertising firm Google has delivered yet another quarter of phenomenal growth. Declaring its results on Thursday, Google reported a growth of 176% in net earnings. Its net profit for 2006 Q4 jumped to $1.03 billion from $372.2 million in 2005 Q4.

Total revenues jumped from US$ 1.92 billion to $3.2 billion in the last quarter.

The quarterly earnings per share stood at 3.29$ compared to 1.22$ in 2005.

However some analysts pointed out that tax benefits were a major factor because of which Google beat street expectations. According to analyst Rob Sanderson, Google’s earnings without the tax benefits would have been $2.99 per share…just above $2.92 estimated by analysts.

The stock ended 4% lower at $481.75. Maybe investors expected Google to beat street estimates by a even larger margin.

Not all people have the expertise and time to build an investment portfolio. For such people there is an excellent alternative – mutual funds.

A mutual fund is an investment intermediary that allows a group of people to pool their money together and invest with a predetermined objective in mind.

Every investor in a mutual fund gets a portion of the pool according to the amount of investment that he makes. The capital (total fund) of the mutual fund is divided into units (shares). All investors get a number of shares proportionate to the amount they have invested in the mutual fund.

The investment objective of a mutual fund is decided beforehand. There are mutual funds that invest in stocks, bonds, money-market instruments, real estate, commodities or other securities, or some combination of these.

(All details regarding a fund’s policies, objectives, services, fees etc are available in the fund’s prospectus. Every fund issues a new prospectus at least once a year and this has to be sent to all present and prospective investors. Always have a copy of prospectus of fund that you have invested in.)

A mutual fund has a fund manager (or managers) who decides where the pool of money will be invested and in what proportion.

The value of the units increases or decreases depending on the change in aggregate value of investments made from the mutual fund capital.

The value of each Unit or Share of the mutual fund is called Net Asset Value – NAV

Read more about NAV Calculations.

Different types of mutual funds have different risk-reward profiles. A mutual fund that invests in stocks on behalf of its investors is a greater risk investment than a mutual fund that invests in government securities. The value of stocks can go down causing a loss to the investor over a period of time , but the money invested in government securities is relatively safe (unless the Government itself defaults – which is very rare.). At the same time the greater risk associated with stocks gives an opportunity for higher returns too. Stocks can go up to any limit, but returns from government securities are capped at the prevailing interest rates.

History of Mutual Funds:

The first known “pooling of money” for investment dates back to 1774. Following the 1772-1773 financial crisis, a Dutch merchant Adriaan van Ketwich invited people to contribute to form an investment trust. The goal of the trust was to provide diversification to small investors. Risk was lowered by investing in diverse markets such as Austria, Denmark, Spain and many other countries. A major portion of the funds was invested in bonds and equity exposure was limited. The trust was called Eendragt Maakt Magt, which means “Unity Creates Strength”.

The fund had some attractive features:

-It had an embedded lottery to attract small investors.
-It promised a statutory dividend of 4% per annum, which was slightly below the average interest rates on the bonds in its portfolio. Thus the interest income to the trust exceeded the required payouts and the difference was converted to cash reserve.
-The cash reserve was used to retire a few fund shares every year at a 10% premium over par and so the remaining shares earned a higher interest. Thus the cash reserve increased over time – further accelerating share redemption.
-The trust was to be dissolved after 25 years and total portfolio was to be divided among the remaining shareholders.

However, a war with England led to many bonds defaulting and a decrease in investment income for the fund. Share redemption was suspended in 1782 and later the interest payments were lowered too. The fund slowly faded away.

The idea of mutual funds slowly evolved in many European countries and finally reached US at the end of nineteenth century. The first closed-end fund of US was formed in 1893 and was known as “The Boston Personal Property Trust.

The first step towards open-end funds was in the form of Alexander Fund in Philadelphia in 1907. The fund had new issues every six months and also allowed investors to make withdrawals on demand.

The first open-end fund was the Massachusetts Investors’ Trust in Boston which was formed in 1924 and went public in 1928. The first balanced fund was also launched in 1928 – The Wellington fund invested in both stocks and bonds.

The first concept for Index based funds was given by William Fouse and John McQuown of Wells Fargo Bank, in 1971 .The concept became a reality in 1976 when John Bogle established the first retail Index fund and named it the First Index Investment Trust. It is now known as the Vanguard 500 Index fund. In November 2000 the fund became the world’s largest fund with over 100 billion dollars in assets.

Mutual funds have come a long way since the days of Eendragt Maakt Magt. Every second household in US invests in mutual funds. Their popularity is soaring in emerging markets like India too. Mutual funds provide a unique combination of diversification, low costs and simplicity and this has made them the preferred investment for many investors.

The Net Asset Value is the fund’s share price. The NAV is calculated by dividing the current value of the portfolio by the number of fund units (shares) outstanding.
NAV for most funds is calculated on daily basis and is available in daily financial papers.

Suppose there are three investors in a mutual fund – A, B and C.

A invests 2$.
B invests 3$.
C invests 5$.

Suppose the Mutual Fund company decides to initially issue shares (units) at 1$ each.

Thus initial corpus of the Mutual Fund will be 2+3+5 = 10$.

A will get 2 units.
B will get 3 units.
C will get 5 units.

Now suppose the fund manager invests 3$ in Company 1, 3$ in Company 2 and 4$ in Company 3.

After one year

Value of investment in Company 1 = 5$
Value of investment in Company 2 = 2$
Value of investment in Company 3 = 5$

Thus total value of the mutual fund portfolio = 5+2+5 = 12$.

Now NAV (Net Asset Value) is calculated as

NAV per Share = Current value of Fund Portfolio / Number of Fund Units

= 12$ / 10 Shares = $ 1.2

Thus after one year,

Value of A’s portfolio = NAV of each unit X Number of units held by A = 1.2 X 2 = 2.4 $

Similarly

Value of B’s portfolio = 3.6 $
Value of C’s portfolio = 6 $

As you can see from the above example, the ABSOLUTE GAIN made by each investor in the mutual fund is proportional to the amount invested initially by him, but in terms of PERCENTAGE all three have gained 20% returns in one year.

Note: NAV may not be a good indicator of a fund’s performance because it does not include the effect of dividends distributed by it every year.

(In US, most mutual funds find it favorable to qualify as a “Regulated Investment Company” under the Internal Revenue Code. This helps them to pass on their incomes and gains to shareholders without having to pay taxes at fund level on dividend and capital gains from sell of securities. Thus “double taxation” is avoided and taxation applies only at shareholder level. To qualify as a “Regulated Investment Company”, the fund must pay out minimum 90% of its gains and income during the tax year, to its shareholders.)

Whenever a fund distributes a dividend to its shareholders, its NAV goes down by the same amount. Thus for someone not invested in the fund, the returns may appear lower, if only the NAV appreciation is considered and distributions are not included in the calculations.

Load (for Mutual funds) can be defined as a fee or a commission that an investor has to pay to the mutual fund company at the time of buying or redeeming the shares of the mutual fund.

If the fee is charged at the time the investor buys the shares, it is known as the front-end load. If the fee is charged at the time of redemption of the shares by the investor, it is known as the back-end load.

Sometimes back end load applies only when the shares are sold within a specific time period after being bought.

The reason given by load funds to impose loads on mutual funds transactions is that loads will discourage investors from frequent trading in mutual funds. If investors move in and out of mutual funds quickly then the funds have to maintain a high cash ratio and this may lower the returns of the funds. Also more trading will mean funds have to pay more commissions to their brokers and this will decrease returns.

All the fees received as load fees goes in paying commission to the fund brokers. It does not provide any incentive for the fund manager for better performance of the fund. Thus a load fund has no reason why the fund managers should perform better than those of the no-load funds.

In the past few decades no difference has been seen in the performance of no-load and load funds (not considering the load). When the load is considered, the investors who paid a load in load funds lowered their returns.

Also load funds encourage sales persons to push their funds and thus lead to partial marketing of funds where the sales persons push load funds over no-load funds, even when the load funds are performing poorly compared to no-load funds.

If you already own a load fund, do not sell it just because now you feel load funds are bad. You have already paid the load (in both cases of front-end and back-end loads) by buying the fund and thus you hold or sell decision should be based on how well you think the fund will perform in the future. In certain funds, longer you hold the fund; lower your back-end load. Check the details in the fund prospectus.

Loads are actually understated for investors. For an investment of $1000 in 5% load fund, the actual load ($50) is on $950 (the investment that reaches the fund after load is deducted). $50 is actually 5.26% of $950 and thus the effective load is 5.26% for the investor.

Another important point is that just because a fund is a load fund doesn’t mean you should avoid it. Here is an example to explain the point. A person decides to invest 1000$ in a fund which has two classes – Class A and Class B. Class A has 3% front-end load and Class B has no load. The person missed the fine print, which stated the Class B had 1% 12b-1 annual fees.

If the fund made 10% gains each year Class A fund will be

$970 *1.10*1.10*1.10*1.10*1.10 = $1562.

For class B the initial amount is $ 1000, but there is a 1% annual reduction due to 12b-1 fees.

$1000 * (1.10*0.99) * (1.10*0.99) * (1.10*0.99) * (1.10*0.99) * (1.10*0.99) = $1532.

Thus you can see from the above example that Class A fund gives a better return in spite of being a load fund because of the 1% 12b-1 fees applicable to Class B fund.

A fund cannot be considered a true no-load fund if it deducts 12b-1 fees from assets of the investors.

The smart investor knows where his money is going. For an investor of mutual funds, it is necessary to understand it expenses. These expenses have a direct impact on the funds’ performance and should not be overlooked.

All mutual funds have certain expenses that are met from the capital invested in their funds. The ratio of expenses associated with the operation of the mutual fund to the total assets of the fund is called the “Expense Ratio”. The Expense ratio varies from 0.25% to 1.5%. In some actively managed funds it may be as high as 2%. The expense ratio is usually dependant on the “turnover ratio”.

The turnover rate or the turnover ratio of a fund is the percentage of the fund’s portfolio that changes every year. If a fund has high turnover rate – that is if it sells and buys stocks more frequently then obviously its expenses will go up and so will it’s expense ratio.

The expenses for a mutual fund have three components:

-The “Investment Advisory Fee” or “Management Fee” is the money that goes to pay the salaries of the fund managers and other employees of the mutual fund.

-Administrative costs are the costs associated with the daily work of the fund like stationery costs, cost of maintaining customer help-lines etc.

-12b-1 Distribution fee is the cost associated with advertising, marketing and distribution of the fund. It has no benefit for the investor and one should avoid funds in which a large amount of the expenses go to the 12b-1 fee. By law the annual 12b-1 fee cannot be greater than 1% of the fund’s assets. Also not more than 0.25% can be paid to brokers.

For an investor there is an additional cost associated with investing in certain mutual funds – “load.” Load is the commissions that mutual funds take when a customer buys or redeems shares of a fund.

It is important to keep an eye on the expense ratio of your funds as it indicates how much the fund withdraws from its assets every year to cover its expenses. The higher the expense ratio the lower will be your returns. At the same time it is essential to keep the returns in mind too – A fund have 2% expense ratio and giving 12% returns is far better than a fund (of similar class) having an expense ratio of 1% and giving 6% returns.

Note: Do not compare returns of funds in different risk classes. Returns of different classes of funds vary greatly because of the risk associated with different types of funds. An equity fund has a greater risk associated with it and therefore cannot be compared with a debt fund. Similarly an index fund investing only in index stocks which are relatively stable and less risky cannot be compared with a fund which invests in stocks of small companies – a high risk investment.

Avoiding funds with high expense ratios is not a bad idea. One cannot be sure that the past performance of the fund will be repeated in the future, but the expenses of the fund are more or less certain for the future too.