Purchase Redemption and Repurchase Price

Under various schemes offered by the Mutual Fund, the units of funds are purchased, redeemed, and repurchased. These prices vary according to the type of funds one deals in and the fund’s portfolio must be thoroughly studied before investing in y\the fund.

Purchase Price

Purchase price or sales price is the price paid to buy one unit of the fund. However, the fund can be loaded or it can be a No Load fund. In the former case when fund levies an entry load then the purchase price will be greater than net asset value of the fund. The price will depend upon the entry load levied on the fund. For a ‘No Load’ fund the purchase price is same as NAV. Generally, Funds charge an entry load between 1% and 2%. Exit loads range from 0.25% and 2.00%.
For e.g. Say an investor invests Rs 20,000/- and the current NAV is Rs.20/-. The entry load levied by the Mutual Fund is 1.00%; the price at which the investor invests is Rs.20.20 per unit. Units in a Mutual Fund are allotted to an investor depending upon the amount invested; it is not on thee basis of number of units purchased.
The investor receives 20000/20.20 = 990.099 units.

Now suppose the same investor decides to redeem his 990.099 units. The current NAV is Rs 25/- and the exit load is 1.25%. So the sale or redemption price per unit becomes Rs. 24.9875. The investor therefore gets 99.099 x 24.9875 = Rs.24762.3626.

So the purchase price here is Rs20.20 per unit as the investor has to pay the toll tax for entering the mutual fund bridge. Had it been a NO Load fund the purchase price would have been Rs 20.

Repurchase price

Generally, a Close-ended Fund has a fixed maturity period that range from 2 to 14 years. They sale only a fixed number of shares in the initial public offering after which the shares typically trade on a secondary market. The cost of closed-end fund shares that do business on a secondary market after their initial public offering is totally dependent on the market and doesn’t depend on the initial NAV. It may be more than or less than the share’s net asset value. Repurchase price is the price paid by a close-ended scheme to repurchase its units that are trading in the secondary market. The repurchase price can either be the NAV or it might have an exit load associated with it.

Redemption Price

Redemption price is the price received by the investor/customer on selling units of an open-ended scheme to the fund. In case of funds that does not levy an exit load the redemption price is same as the net asset value. However, in case the fund levies an exit load, the redemption price is lower than the net asset value. In that case the exit load percentage is subtracted from the NAV at the time of redemption of the fund.

Evaluation Criterion while buying a Mutual Fund

There are various aspects that should be looked into before putting your money into the Mutual Funds.

First of all the prospectus or the offer document must be studied in detail before investing. Various aspects covered must include:

Main features of the scheme followed: A Mutual Fund offers various schemes that are categorized according to investment objectives and Maturity period. Open-ended scheme doesn’t have a fixed maturity period and investors can buy or sell shares at any time based on NAV that is declared on daily basis. This scheme offers the highest liquidity. However, a closed-ended scheme has a fixed maturity period of 5-7 years. Based on investment objective, a scheme can be classified as growth scheme, income scheme, or balanced scheme. An investor, depending on his finances, risk-taking capacity, age etc, can take up any of the offered schemes.

Entry or Exit Loads: Some Mutual Funds offer a sales charge or load, which is to be paid when shares are bought or redeemed. There are some funds with no sales charge; these are called No Load Funds. Before investing the funds must be checked for the load they charge. However, it is meaningful to pay a load if fund gives a better investment than No-Load fund.

Risk factors involved in investment: Mutual Funds do not guarantee sure returns. These returns are related to the functioning of these funds. Mutual Funds invest in deposits, shares and debentures. There is some amount of risk associated with investment. The percentage may vary according to the working of the company or different companies may fail to pay the interest or principal amount on their securities. Government might change the rules regarding certain industries thus directly affecting the mutual bonds – this factor must be kept in mind while investing particularly in Sector funds.

Initial issue operating cost: One must check up with the offer document of the mutual fund for initial operating cost

Recurring Expenses that are to be charged: Again before investing all the expenses that are to be paid again and again must be kept in mind.

History of Mutual Funds: The Company’s profile, its profits, portfolio and competence must be the first thing to check up before taking up an issue. Moreover if you are investing in one scheme of he mutual fund the track record of performance in other schemes launched must be checked up.

Type of Securities that the fund invests in: One must see to the bonds, debentures and other stock options that the mutual funds invest in. The market value of these securities must be considered before investing.

Professional qualification of the person handling the funds: The financial handler of mutual funds must be a professional with good experience in the particular field. It is his duty – what to buy, when to buy, keeping a close watch and when to sell off. Handling this collective investment is a major issue and must be given in safe hands.

Penalties, if any, to be imposed: The offer document of Mutual Funds must be read carefully for any kind of penalties imposed under any circumstances.

Benefits of Investing through Mutual Funds

Don’t be under the wrong notion that investment in mutual funds is a complex process and is not your cup of tea. It is rather an investment company that pools your money for the mutual benefits of those who invest in it. The benefits of mutual fund investment include:

Money Management by Professionals: One might have a capability, as an investor to take the right financial decisions but to make sound and effective investment decisions; a qualified and professional approach is a must. If one or more aspect is left out, it can result in failure or loss of investment so analytical guidance of a financial manager is must. Mutual fund is an answer to all the considerations of investment. Mutual funds allow an investor to entrust the investment decisions on the fund manager. It is then his responsibility to decide which securities to buy, when to buy and when to sell. They keep a close watch on the markets and invest and reinvest as and when needed. Their decisions and way to work are a result of experience and research skills in the field.

Low Investment and a good portfolio: A small investor generally takes all the investment decisions by himself. But mutual funds allow these investors to get the benefits of professional advice despite their low investment. Moreover, the portfolio gets richer by having proportionate share in securities one cannot think of buying individually.

Lower Transaction Cost: A mutual fund, on its merit as well as its high volume of its investments, can carry out buying and selling transactions in a more cost effective manner than an individual would do by himself. Moreover the time and effort invested towards the decision-making is also saved considerably.

Diversification: Mutual Funds put their funds in a various securities thus the resultant portfolio is diverse. This diversification reduces risk factor associated with owning a single security. An individual investor can never invest in such a pool of securities but Mutual Funds gives them an opportunity to do so. The Mutual Funds define a proportionate ownership in the complete portfolio of that particular fund. Thus the money gets invested across different categories and various asset classes.

Liquidity: Mutual Funds investment provides investors a simple entry into their investment. Open-ended mutual funds are very liquid; these funds buy back your shares at the prevailing market value on any day. These mutual fund redemptions are applied for via telephone or mail. Generally, the redemption amount is mailed in form of check to the investor on the successive business day following acceptance of the request.

Good Bargaining Capacity: Mutual Fund is a collective medium of investment. The investment of many people is pooled together thus the securities to be bought are bought in volumes. With ample amount of funds, the advantages in terms of bargaining capacity of funds increase.

Tax Benefits: Mutual Funds offer tax Benefits and are ideally suited for investors looking for tax concessions. These funds offer tax rebates to investors under section 88 of the Income Tax Act. Saving in Capital Gains under section 54EA and 54EB are also provided.

Different Schemes under Mutual funds – Tax Savings, Sectoral and Index

Tax Saving Schemes

These schemes give tax rebates to the investors under explicit requirements of the Income Tax Act, 1961 as well as saving in Capital Gains under section 54EA and 54EB, as the Government offers tax incentives for investment in particular avenues. Pension schemes offered by Mutual Funds, equity linked savings schemes are allowed as deduction under Section 88 of the Indian Income Tax Act, 1961. For example investing in diversified equity fund will never give you any tax benefits whereas investing in ELSS will show the tax benefits in the year of investment itself. The amount you invest in one financial year (April 1 to March 31) will be deducted from your taxable income that year. Tax-saving schemes mainly aim towards growth so they basically invest in equities. However, the risks associated with them are similar to any equity scheme.

Index Schemes

Under this scheme the mutual funds also called Index Funds imitate the performance of a specific index. The American index that is most commonly imitated is the S&P 500 by buying all 500 stocks using the same value as the index. BSE Sensex, the NSE S&P CNX 50 in India, NASDAQ 100, Russell 2000, MCSI-EAFE, Wilshire 5000 etc are the other popular stock indexes followed. These funds invest in a set of securities which moves according to a popular index used as a benchmark.and are called passive funds. The index determeines the choice of investments thus leaving the fund manager with no research on securities. However he only needs to adjust the funds i.e. buy and sell shares with change in Index. Thus the passive performance of funds is obvious causing a lower expense as compared to actively managed funds. The net asset value in Index schemes is directly proportional to the index they follow. However due to some factors such as tracking errors the percentage of change varies with each security. This variation is always mentioned in mutual fund document provided.Traditional Index schemes allow the change the share price only once a day. A new type of funds – Exchange-traded funds(ETFs) have a different approach. These index funds sell shares at a price that changes throughout the day, thus increasing the liquidity. Their practical approach have made them a hot cake financial tool with a bright future.

Sectoral Schemes

Sectoral Schemes are the ones that invest solely in particular sectors such as Fast Moving Consumer Goods (FMCG), Metal Industry, Information Technology, Petroleum Stocks, and Pharmaceuticals etc. The profits are dependent on the performance of particular industries. Unlike the equity schemes the portfolio of these schemes is limited to the particular sectors or industries. Therefore the risk factor associated with these schemes is usually high. A close watch on the rise and fall in the values of these securities is a must in order to avoid any unexpected results. Thus the user must exit from the scheme once there is a fear of losses in that particular sector else there is a risk of losing investment.

Roth IRA Misconceptions

Roth IRA is one of the most favorite retirement plans taken by most American employers. Its tax saving benefits has made it one of the popular plans in United States.

In spite of the popularity, not many people know the intricacies of the plan. Often the general mass has fewer facts and more misconceptions about the plan.

Misconception 1 – Roth IRA is the best IRA for everyone

This assumption can prove to be your biggest pit fall. It probably springs from another misconception that people often have. People think that it’s always monetarily beneficiary to pay tax later than now. The truth is that you can’t escape taxes. The belief that in future taxes will be minimal is nothing more then a figment of imagination that should be strongly thrown out of mind. Any IRA plan, Roth, Simple, Education, SEP or Traditional is good only if it suits your needs. Roth IRA withdrawals are tax free but not contributions. Hence, a Roth IRA account grows at a faster rate compared to a traditional IRA. However, in Traditional IRA the contributions are tax free. Hence, it’s incorrect to say that Roth IRA is the best retirement plan.

Misconception 2 – If you have little savings opt for Roth IRA

This is another misrepresentation of facts. Under Roth IRA, the contributions grow tax free. Hence, irrespective of the fact that whatever be the amount of contribution the tax free growth is for all who have Roth IRA. In fact, if people have higher contributions then they would have higher balance in Roth IRA. Such a class of people can also plan how to pass on the plan benefits to their children.

Misconception 3 – If you are taking Roth IRA, you should hold it for at least 10 years to maximize your gains

This is a popular notion people have in their minds about Roth IRA. There is no scientific proof that Roth IRA is beneficial only for specific term. It all depends on the contribution amount, withdrawals, age of the account owner, etc.

Misconception 4 – Traditional IRA and Roth IRA are nearly the same

Again nothing is same for the same person. The benefits vary as per your needs and use of the plan. Comparing both the schemes requires that you keep all the other parameters such as tax rates, withdrawals, age of account owner, etc. exactly same. This seldom happens in real world. So don’t buy a Traditional IRA just because you’re friend or relative has bought it.

Misconception 5 – Taxes will be low in future

No one of us is expert enough to take a sure prediction at the future. Hence, it’s wise not to make such bold decisions. Such thinking can often prove wrong resulting in huge monetary losses when you need it the most.

For any financial instrument, before taking it, read the policy documents clearly. You don’t have to rush through it especially with your IRA plan. Talk to your family and friends to get a more accurate assessment of your current financial condition and future needs. Take an IRA plan based on facts and not misconceptions other wise your future might hit you hard.

JANUS MUTUAL FUNDS

Janus Capital Management, one of the largest equity managers in the United States of America manages over $76 billion in mutual funds on behalf of their investors. The underlying focus of the company is on growth and core international mutual funds, extending their reach into balanced fixed income and money market funds. With about, 40 mutual funds along with bonds and money market funds Janus offer a full line of individual investor services.
Janus Capital Management, one of the largest equity managers in the United States of America manages over $76 billion in mutual funds on behalf of their investors. The underlying focus of the company is on growth and core international mutual funds, extending their reach into balanced fixed income and money market funds. With about, 40 mutual funds along with bonds and money market funds Janus offer a full line of individual investor services.Janus Mutual Funds make it easy for an investor to get started. In order to open a non-retirement account the minimum requirement is as little as $2,500. For a retirement account or a college saving account the minimum opening investment required of the investor is only $500. About 99.0% of the funds offered by Janus Capital are no load mutual funds. This aspect is important when an investor is thinking of investing in a mutual fund as loads significantly impact the total returns on the investment. Over the last five years the average return on Janus Mutual Funds has been 2.71%.

The expense ratio of Janus Mutual Funds runs from below average to very low as compared to most other mutual funds. On a domestic stock fund the average annual fee that is charged is just 0.91%. Nearly, 75% of Janus Mutual Funds are invested in domestic stocks.
Janus funds have their own unique objectives although they all have the same research-oriented and a hands-on investment approach for picking great companies.
Mutual Funds can be categorized into; stock funds, bond funds and money market funds. The stock funds that are available from Janus are; growth funds, specialty growth funds, core funds, risk-managed funds, value funds, international and global funds.
Although no cornerstone mutual fund such as the Magellan fund, there are some stand out mutual fund performers within the Janus family:

Janus Aspen International Growth (JAIGX): The funds focus is on international growth stocks with over $1.4 billion in assets. The funds main stock holdings are manufacturing (54.9%) and the services industries (34.3%). This no load fund carries an expense ratio of 0.70% and the minimum investment is $500,000. Over the last five years the total returns has been 14.51%. Some of the top companies held under the fund are Reliance Industries, The Tata Iron & Steel and Li & Fung Ltd.

Janus Overseas (JAOSX): Aimed at the large cap sector this overseas growth fund has about $4.2 billion in assets. With a minimum investment of $2,500 for this fund the main stock holding sectors are manufacturing (55.1%) and services (34.1%). This is a no load mutual fund and has an expense ratio of 0.89%. This growth fund invests in overseas companies based not on their geography or industry sector, but rather on their individual merits. Top holdings include Samsung Electronics, Tata Iron & Steel and Reliance Industries.

Janus Contrarian (JSVAX): With over $3.5 billion in assets this is a large blend fund for individual investors. The fund carries an average return of 12.14% calculated for over a period of 5 years. It is a no load mutual fund with an expense ratio of 0.93%. The top three holdings include St. Joe Corporation, Liberty Global and Ceridian Corporation. The funds assets are 100% invested in stocks.

Salary Reduction Plan 401(K)

This is a qualified plan provided by the employer to eligible employees of their organisations. The contributions to this plan are made by the employee on a salary deferral or salary reduction basis. It means that the employee’s pre-tax salary, matching his contribution to the Plan, is deducted and paid into his 401(K) account directly by the employer. The employer too sometimes makes a matching contribution into the employees 401(K) account. Sometimes the employer adds a profit sharing feature to the 401(K) plans as there is a provision in the plan which enables him to do so if it is in the interest of the employees. However it must be understood that all the earnings in this account are tax-deferred, meaning tax has to be paid at the time of withdrawal. There are, of course, limitations placed by the IRS on the contributions to the plan.

The salary reductions which are available to you will depend on your place of work. Many organisations whether privately or publicly held, offer the 401(K) salary reduction plans. However, some non-profit organizations like schools, colleges, museums and hospitals can also offer this plan, though many prefer the 403 (b) plans. The 401(k) plans first introduced in 1981 became so popular that by 2004 they had about 43 million participants. These numbers have steadily been increasing over the years because this plan offers you a choice to take your full salary home or contribute to a qualified plan and not only save for the future but also to save tax not only on your contribution but also on it earnings. The amount of tax that is to be paid can only be known at the time of withdrawal of the monies from the account. However your income being less after retirement there is bound to be a tax benefit at the time.
You can opt for this plan provided you are eligible and to be eligible you have to be employed for 365 days starting with the first day on the job. You can also be eligible if you have put in 1000 working hours during the year. It is also a good to know what you are getting into when you enrol and become a part of the plan. Like your contribution, your employers matching contribution, the decisions you may have to take to direct the growth of your investments and other benefits that make your retired life better.

However, being a part of plan 401(K) provides a good start to your retirement plans. Therefore it is better to start contributing earlier as an early start provides you with a greater chance to save a substantial amount in your retirement account. This plan works for you even if you are self employed and have not yet incorporated your business. The only difference is that you can add only 20% of your compensation over and above your salary deduction. One of the benefits of this plan is that you can transfer your account to the similar one with your new employer in case you plan to join another organisation.

If you are taking a savings retirement plan, then Plan 401(K) definitely deserves a serious consideration.

Simple IRA v/s Simple 401(K)

IRA and 401(K) are the most critical ways of having a steady income in your days of retirement. Most Americans opt for these plans to insure their future against any uncertainties. Hence, as an employer or employee it is very critical to choose the right plan. Though both the plans have certain common features, the differences too, are notable.

Employer Eligibility

If you already have a Simple IRA plan then you cannot have any other plan. So if you are still in the process of setting your IRA plan, ensure that your plan covers all the employees you want to get covered. Also if you have a large organization with 100 or more than 100 employees earning more than $5,000 annually, then you can’t set up Simple IRA or Simple 401(K) plan.
Both the above rules have certain exceptions. But those primarily take into account certain rare events like merger and acquisitions. Hence in your case, if its a normal situation, you can consider the above 2 conditions applicable to you.

Employee eligibility

For any employee to avail benefit of Simple IRA or Simple 401(K) plan, his/her age should be at least 21. Plus you should have been in employment for at least a year to join the IRA or 401(K) sponsored by the employer. You annual income should be at least $5,000.

Establishing the plans

Both Simple IRA and 401(K) plan should be established before October so that it can be used in that financial year.

Contributions

Employees can make their eligible amounts of contribution anytime before the end of the financial year. In both, employers can make same amount of contributions like the employees. However, employer’s contribution should not exceed 3% of employees compensation in Simple IRA.

However, in Simple 401(K), this rule is further subject to an income limit of USD 220,000. Say an employee has a compensation of $400,000 and has a Simple IRA. Say his/her own contribution is $12,000. Then the employer can match up this contribution as 3% of $400,000 is equal to $12,000. However, if he/she has a Simple 401(K), then the employer contribution is limited to 3% of $220,000 which is $6,600 (considerably lower than the Simple IRA employer contribution).

All contributions are immediately forfeited to the employees. Simple 401(K) doesn’t have a provision for employers to make lesser contribution. However, in Simple 401 Individual Retirement Account (IRA) plan, employers can reduce contributions to as low as a per cent of the employee contribution. However, the employer can’t do low contributions throughout the tenure of employee’s service. He/She can do so only 2 times in a period of 5 years.

Using the plans

Often employees need to use the accumulations of plan. There could be some urgent need for money for a short time. Simple 401(K) plan can prove to be of real help under such circumstances. You can take a loan from your Simple 401(K). However, you can‘t do so from your Simple IRA.

So before you set up a retirement plan or join one, keep above points in mind and evaluate the plan accordingly. Remember, the retirement plan single handedly plays a crucial role in deciding how you will spend the last few years of your life.

Establishing a SEP IRA Plan

SEP (Simplified Employee Pension) IRA is established by employers, including self employed individuals like sole proprietors or partnership firms. If you are running a company with say 20 employees, then you can open a SEP IRA for each of your employees. All contributions to the SEP IRA plan are tax deductible. This means if you are contributing say an annual total amount of $50,000 to IRA. You can deduct the same from your annual taxable income and save taxes. Employees too don’t have to pay taxes on contributions. However, if an employee withdraws money from the plan, then he or she will have to pay the tax applicable at that time. If the applicable tax at time of withdrawal is lower then the tax rate during the time of contribution, then your whole investment idea could be considered profitable. Establishing a Simplified Employee Pension Individual Retirement Account is not a difficult task. The US government and its agencies like the IRS have simplified things substantially for you. Moreover you can easily hire finance professional or any finance company to assist you in setting up the plan. There are various flavours of SEP IRA plan. IRS model, 5305 SEP IRA, etc. are some of the popular types of SEP IRA. Irrespective of which type of IRA you opt for your company employees, you will need some basic information. You will need to decide criteria on which an employee can join the plan. Then you will have to arrive at a formula to calculate your contribution. Plus, you will be required to include your basic company details.

The financial institution that you contact for establishing the plan has a critical role to play in the entire plan life cycle. Once the plan is established, they act as a Trustee for the whole plan. They manage the funds received by the plan. They then invest the funds in to suitable instruments thereby ensuring growth of the funds. They also do various administrative functions like providing yearly statements to the members of the plan. As per government guidelines, the employees should receive the statement by end of January each year. Statement shows how much contribution has the employer made in the previous year. Usually reputed mutual funds, banks and insurance companies act as Trustees for any SEP IRA plan. The model that you use for establishing the plan is also a very critical step in the whole process. Most employers opt for the IRS model. The plan acts like a contract or policy document which specifies all terms and conditions for all participants. If you have a need to change anything in the plan, you are free to do so anytime during the life of plan. However, you will have to inform all the participants at least 30 days prior to putting the change in effect. Generally, employee communication is critical to avoid any legal action from government or any of its agencies.

Once established, a SEP IRA plan is simple to operate and maintain as majority of the tasks are carried out by the financial institution. Also your employees will be happy with a good plan. A well established SEP IRA can make notable difference in your employee satisfaction levels and ultimately will help your company bottom line.

401(K) Fees and Expenses

The plan 401(K) is gaining popularity with more and more employees taking part and contributing a part of their salary towards securing their future after retirement. This plan also provides you with a chance to make use of these funds and contribute to their growth by directing your own investments. If you want to direct your own investments, you will have to plan your objectives, learn to weigh the risk and judge the performance of the investment options available so that you may be able to take sound decisions.

The factors that might generally affect the returns on your investment are the fees and expenses. They will also have an impact on your retirement income. Therefore it is necessary for you to study your investment options carefully keeping in mind the fact that cheaper investment options may not necessarily be better options. You must compare the total cost and all available services not forgetting the fees involved in the transactions.
Fees will have to be considered because while your contributions and earnings on the investments provide the required growth to your account, expenses and fees contribute to substantial reduction to that growth. Let us take for example that you have 35 years left for retirement and at present you have $ 25,000 in your 401(K) account. If your investment growth during this period is pegged at 7% with the fees and expenses at 0.5%; your account balance with no further contributions to your account, will have grown to $ 227,000. However, if your fees and expenses increase by 1% and are now at 1.5% then your account will have only $ 163,000. The 1% increase in fees and expenses will have reduced your retirement account balance by 28%. Therefore, of the many investment options now being offered under plan 401(k) with the promise of excellent services to be provided, it will be better to consider the cumulative cost of fees and expenses on your retirement savings, before opting to invest in them.

The 401(k) plan fees and expenses are of three types. a) Plan Administration Fees consist of day to day expenses that are needed to for administering the whole plan. These include accounting, legal services, electronic access to plan information and other such expenses b) Investment Fees are by far the largest component of expenses that are required to manage the Plan investments Therefore you must pay special attention to this aspect as they are charged on percentage basis on investment. They are also deducted directly from your investment returns. As these fees are not specifically shown on the in investment statements, they are not easily apparent c) Individual Service Fees consist of fees charged to a participant for taking a loan or for executing the investment directions given by the participant.
To keep a check and save you from making risky or expensive investments the employers have been given the task of keeping an eye on all investments. They are required to comply with the IRS rules. The sole aim is to protect the interest of the participants and their beneficiaries.