Monday, 9 April 2012

Mutual Funds

Definition :
A mutual fund is a company that brings together money from many people and invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings.

Mutual Fund is a fund, managed by an investment company with the financial objective of generating high Rate of Returns. These asset management or investment management companies collects money from the investors and invests those money in different Stocks, Bonds and other financial securities in a diversified manner

Analysis :
A mutual fund is a group of investors operating through a fund manager to purchase a diverse portfolio of stocks or bonds. Mutual funds are highly cost efficient and very easy to invest in. By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. Also, one doesn't have to figure out which stocks or bonds to buy. But the biggest advantage of mutual funds is diversification.

Diversification means spreading out money across many different types of investments. When one investment is down another might be up. Diversification of investment holdings reduces the risk tremendously.
Mutual Fund is an instrument of investing money. Nowadays, bank rates have fallen down and are generally below the inflation rate. Therefore, keeping large amounts of money in bank is not a wise option, as in real terms the value of money decreases over a period of time.

One of the options is to invest the money in stock market. But a common investor is not informed and competent enough to understand the intricacies of stock market. This is where mutual funds come to the rescue.
On the basis of their structure and objective, mutual funds can be classified into following major types:

1. Open End Mutual Fund :
Open end funds are operated by a mutual fund house which raises money from shareholders and invests in a group of assets, as per the stated objectives of the fund. Open-end funds raise money by selling shares of the fund to the public, in a manner similar to any other company, which sell its stock to raise the capital. An open-end mutual fund does not have a set number of shares. It continues to sell shares to investors and will buy back shares when investors wish to sell. Units are bought and sold at their current net asset value.

Open-end funds are required to calculate their net asset value (NAV) daily. Since the NAV of an open-end fund is calculated daily, it serves as a useful measure of its fair market value on a per-share basis. The NAV of the fund is calculated by dividing the fund's assets minus liabilities by the number of shares outstanding. Open-end funds usually charge an entry or exit load from the investors.

Most of the open-end funds are actively managed and the fund manager picks the stocks as per the objective of the fund. Open-end funds keep some portion of their assets in short-term and money market securities to provide available funds for redemptions. A large portion of most open mutual funds is invested in highly liquid securities, which enables the fund to raise money by selling securities at prices very close to those used for valuations.

Some of the benefits of open-end funds include diversification, professional money management, liquidity and convenience. But open-end funds have one negative as compared to closed-end funds. Since open-end funds are constantly under redemption pressure, they always have to keep a certain amount of money in cash, which they otherwise would have invested. This lowers the potential returns.

2. Closed-End Mutual Fund :
A closed-end mutual fund has a set number of shares issued to the public through an initial public offering. These funds have a stipulated maturity period generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed.

Once underwritten, closed-end funds trade on stock exchanges like stocks or bonds. The market price of closed-end funds is determined by supply and demand and not by net-asset value (NAV), as is the case in open-end funds. Usually closed mutual funds trade at discounts to their underlying asset value.

>>Distinct Features of Closed-end Funds
  • These funds are closed to new capital after they begin operating
  • Closed-end funds trade on stock exchanges rather than being redeemed directly by the fund
  • Unlike open-end funds, the closed-end funds can be traded during the market day at any time. Open-end funds are generally traded at the closing price at the end of the market day.
  • Closed-end funds are usually traded at a premiuim or discount whereas open-end funds are traded at NAV.
>>Advantages of Closed-end Funds
  • Closed-end funds don't have to worry about the redemption of shares, hence they tend to keep less cash in their portfolios and cam invest more capital in the market. Therefore, they have the potential to generate greater returns as compared to open-end funds.
  • In case of market panic and mass-selling by investors, open-end funds need to raise money for redemptions. To cope with the liquidity concerns, the manager of an open-ended fund may be forced to sell stocks he would rather keep, and keep stocks he would rather sell. In such as scenario the quality of the portfolio may be affected.

Tuesday, 3 April 2012

Reverse Merger

Reverse Merger :
An act where a private company purchases a publicly traded company and shifts its management into the latter. It also normally involves renaming the publicly traded company. This allows private companies to become publicly traded while avoiding the regulatory and financial requirements associated with an IPO.

In order for a reverse merger to happen smoothly, the publicly traded company is usually a shell corporation, that is, one with only an organizational structure and little or no activity. The two businesses can then merge the private company's product(s) with the public company's structure. It also makes initial trading less dependent on market conditions, a key risk in IPOs. However, it is important to note that a reverse merger only provides the private company with more liquidity if there is a real market interest in it.

A reverse merger is a strategy where a private company purchases control of a public shell company and then they do a merger with the private company. With a reverse merger the private company shareholders receive most of the shares in the public company and control of the board. A reverse merger is a very fast way to go public with the time table only being a couple of weeks. The reason a reverse merger is so quick is the public shell company already went through all the paper work and reviews in order to become public.

Reverse Merger Analysis :
Reverse merger allows your private company to go public.  
Reverse merger financial transactions are becoming increasingly popular and accepted. It is an alternative means for private companies to go public. The public shell is a vital aspect of a reverse merger transaction. A public shell is a publicly listed company with no assets or liabilities. It gets the name "shell" because the only thing remaining from the current company is its corporate shell structure. When a private company merges into this entity it becomes a shell.

Advantages :
There are several benefits to a reverse merger when compared to an Initial Public Offering (IPO). You will often receive a higher value for your company and the company won't have to have an underwriter. Another few benefits are that it is much cheaper and less time consuming to go public this way. Also with a reverse merger the ownership control will not be as diluted as with a regular public offering.
More businesses qualify for a reverse merger because a long and stable history of income is not required to qualify. The lack of an earning history will not keep a privately-held company from going public this route.

The benefits to reverse mergers is that you can demand a higher stock offering for the company stock, going public at a lesser cost and less dilution then an initial public offering. With the reverse merger you are less susceptible to the market. When going public the benefits are great when trying to raise capital. With the company now being public the stock is liquid and able to be uses for financing. Your company will now have the ability to acquire other companies using stock. Being public allows the company to offer stock incentive plans to keep employees.

Public Company Vs. Private Company

Distinction between a public company and a private company :
The distinction between a public company and a private company are explained in the following manner:

1. Minimum Paid-up Capital :
A company to be Incorporated as a Private Company must have a minimum paid-up capital of Rs. 1,00,000, whereas a Public Company must have a minimum paid-up capital of Rs. 5,00,000

2. Minimum number of members:

The minimum number of person required to form a public company is seven, whereas in a private company their number is only two.

3. Maximum number of members:

There is no limit on the maximum number of member of a public company, but a private company cannot have more than fifty members excluding past and present employees.

4. Commencement of Business:

A private company can commence its business as soon as it is incorporated. But a public company shall not commence its business immediately unless it has been granted the certificate of commencement of business.

5. Invitation to public:

A public company by issuing a prospectus may invite public to subscribe to its shares whereas a private company cannot extend such invitation to the public.

6. Transferability of shares:

There is no restriction on the transfer of share In the case of public company whereas a private company by its articles must restrict the right of members to transfer the share.

7. Number of Directors:

A public company must have at least three directors whereas a private company may have two directors.

8. Statutory Meeting :

A public company must hold a statutory meeting and file with the register a statutory report. But in a private company there are no such obligations.

9. Restrictions on the appointment of Directors:

A director of a public company shall file with the register a consent to act as such. He shall sign the memorandum and enter into a contact for qualification shares. He cannot vote or take part in the discussion on a contract in which he is interested. Two-thirds of the directors of a public company must retire by rotation. These restrictions do not apply to a private company.

10. Managerial Remuneration :

Total managerial remuneration in the case of public company cannot exceed 11% of net profits, but in the case of inadequacy of profit a minimum of Rs. 50, 000 can be paid. These restrictions do not apply to a private company.

11. Further Issue of Capital:

A public company proposing further issue of shares must offer them to the existing members. A private company is free to allot new issue to outsiders.

12. Name :

A private company has to use words ‘private limited’ at the end of its name. But a public company has to use only the word ‘Limited’ at the end of its name.

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