Basic of Mutual Fund......

MUTUAL FUND

A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities.

A mutual fund is formed when capital collected from different investors is invested in company shares, stocks or bonds. Shared by thousands of investors (including you), a mutual fund is managed collectively to earn the highest possible returns. The person driving this investment vehicle is a professional fund manager.

Mutual funds have become a very popular avenue for investment for many investors because of the benefits that they have. They allow investors market-linked returns, diversified risks through asset allocation, affordability through SIPs and ease of liquidity. Given these benefits and the potential of attractive returns, investors choose to invest their disposable savings in mutual funds.

Mutual funds come in many different variants and when it comes to choosing the best fund, investors are often confused. With so many options available, who can blame them! However, when investing in a mutual fund scheme, the risk profile and suitability should be judged so that the fund performs as per your expectations. Mutual funds are designed in different types so that they can fulfil the investment needs of different investors and so, choosing the best mutual fund should be done after careful consideration.

Mutual Fund:-

Money pooled from various individuals (investors).

Professionally Managed.

Well-regulated (by SEBI).

Higher returns than conventional investing.

Access to large portfolios.

Allows to invest in small amounts.

Investing in mutual funds is the easiest means to grow your wealth. This is why the fund manager’s expertise (thereby the fund house’s reputation) is an important factor to consider. All mutual funds are registered with SEBI (Securities Exchange Board of India) and therefore, quite safe.

Benefits of investing in a mutual funds:-

Each investor owns shares, which represent a portion of the holdings of the fund. Thus, a mutual fund is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

Small investments:-With mutual fund investments, your money can be spread in small bits across varied companies. This way you reap the benefits of a diversified portfolio with small investments.

Professionally managed:-The pool of money collected by a mutual fund is managed by professionals who possess considerable expertise, resources and experience. Through analysis of markets and economy, they help pick favourable investment opportunities.

Spreading risk:-A mutual fund usually spreads the money in companies across a wide spectrum of industries. This not only diversifies the risk, but also helps take advantage of the position it holds.

Transparency and interactivity:-Mutual funds clearly present their investment strategy to their investors and regularly provide them with information on the value of their investments. Also, a complete portfolio disclosure of the investments made by various schemes along with the proportion invested in each asset type is provided.

Liquidity:-Closed ended funds can be bought and sold at their market value as they have their units listed at the stock exchange. In addition to this, units can be directly redeemed to the mutual fund as and when they announce the repurchase.

Liquidity:-Closed ended funds can be bought and sold at their market value as they have their units listed at the stock exchange. In addition to this, units can be directly redeemed to the mutual fund as and when they announce the repurchase.

Choice:-A wide variety of schemes allow investors to pick up those which suit their risk / return profile.

Regulations:-All the mutual funds are registered with SEBI. They function within the provisions of strict regulation created to protect the interests of the investor.

Types of Mutual Funds:-

Every investor has a different investment objective. Some go for stability and opt for safer securities such as bonds or government securities. Those who have a higher risk appetite and yearn for higher returns may want to choose risk-bearing securities such as equities. Hence, mutual funds come with different schemes, each with a different investment objective.

There are hundreds of mutual fund schemes to choose from. Hence, they have been categorized as mentioned below.

By structure:-Closed-Ended, Open-Ended Funds, Interval funds.

By nature:-Equity, Debt, Balance or Hybrid.

By investment objective:-Growth Schemes, Income Schemes, Balanced Schemes, Index Funds.

There are hundreds of mutual fund schemes to choose from. Hence, they have been categorized by structure, nature and investment objective.

Types of mutual funds by structure:-

Close ended fund/scheme:-A close ended fund or scheme has a predetermined maturity period (eg. 5-7 years). The fund is open for subscription during the launch of the scheme for a specified period of time. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices or they are listed in secondary market.

Open ended fund/scheme:-The most common type of mutual fund available for investment is an open-ended mutual fund. Investors can choose to invest or transact in these schemes as per their convenience. In an open-ended mutual fund, there is no limit to the number of investors, shares, or overall size of the fund, unless the fund manager decides to close the fund to new investors in order to keep it manageable. The value or share price of an open-ended mutual fund is determined at the market close every day and is called the Net Asset Value (NAV).

Interval schemes:-Interval schemes combine the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices. FMPs or Fixed maturity plans are examples of these types of schemes.

Types of mutual funds by nature:-

Equity mutual funds:-These funds invest maximum part of their corpus into equity holdings. The structure of the fund may vary for different schemes and the fund manager’s outlook on different stocks. The Equity funds are sub-classified depending upon their investment objective, as follows:

Diversified equity funds.

Mid-cap funds.

Small cap funds.

Sector specific funds.

Tax savings funds (ELSS).

Equity investments rank high on the risk-return grid and hence, are ideal for a longer time frame.

Debt mutual funds:-These funds invest in debt instruments to ensure low risk and provide a stable income to the investors. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. Debt funds can be further classified as:

Gilt funds.

Income funds.

MIPs.

Short term plans.

Liquid funds.

Balanced funds: - Balanced funds combine equity and debt investments. They invest in both equities and fixed income securities which are in line with pre-defined investment objective of the scheme. The equity portion provides growth while debt provides stability in returns. This way, investors get to taste the best of both worlds. About 60% to 65% of the fund is invested in equity and the remaining in debt. Alternatively, in debt-oriented balanced funds, 65% is invested in debt and the remaining in equity. Balanced funds provide moderate returns and the investment risk is also moderate as equity and debt balance each other.

Tax savings funds (ELSS):- ELSS is a type of equity mutual funds only but it is listed independently because of the distinct tax advantages the fund has. Investments in the ELSS funds are allowed as a tax-free deduction under Section 80C up to a maximum of INR 1.5 lakhs. Moreover, ELSS investments also have a lock-in period of 3 years. Investments done in ELSS schemes cannot be redeemed before the completion of 3 years. Risk is high because it is an equity scheme and so are the returns.

Types of mutual funds by investment objective:-

Growth schemes:-Also known as equity schemes, these schemes aim at providing capital appreciation over medium to long term. These schemes normally invest a major portion of their fund in equities and are willing to withstand short-term decline in value for possible future appreciation.

Income schemes:-Also known as debt schemes, they generally invest in fixed income securities such as bonds and corporate debentures. These schemes aim at providing regular and steady income to investors. However, capital appreciation in such schemes may be limited.

Index schemes:-These schemes attempt to reproduce the performance of a particular index such as the BSE Sensex or the NSE 50. Their portfolios will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weight age. And hence, the returns from such schemes would be more or less equivalent to those of the Index.

If you have even as little as a few hundred rupees to spare, you can start your investment journey with mutual funds.

Depending on your investment objectives and future needs, you can choose to buy a particular number of units of a fund. A mutual fund invests the pool of money collected from the investors in a range of securities comprising equities, debts, money market instruments etc., with a nominal AMC fees. In proportion to the number of units you hold, the income earned and the capital appreciation realised by the scheme will be shared with you accordingly.

Why mutual fund is a safe investment option?

Diversification:-Investors can spread out and minimize their risk up to a certain extent by purchasing units in a mutual fund instead of buying individual stocks or bonds. By investing in a large number of assets, the shortcomings of any particular investment are minimized by gains in others.

Economies of scale:-Mutual funds buy and sell large amounts of securities at a time. This helps reduce transaction costs and bring down the average cost of the unit for investors.

Professional management:-Mutual funds are managed by thorough professionals. Most investors either don’t have the time or the expertise to manage their own portfolio. Hence, mutual funds are a relatively less expensive way to make and monitor their investments.

Liquidity:-Investors always have the choice to easily liquidate their holdings as and when they want.

Simplicity:-Investing in a mutual fund is considered to be easier as compared to other available instruments in the market. The minimum investment is also extremely small, where an SIP can be initiated at just Rs.50 per month basis.

What is Portfolio:-

A portfolio of a mutual fund scheme is the basket of financial assets it holds. It consists of investments diversified in different securities and asset classes which help reduce the overall risk. A mutual fund scheme states the kind of portfolio it seeks to construct as well as the risks involved under each asset class.

What is NAV:-

Net Asset Value (NAV) is the actual value of one unit of a given scheme on any given business day.

The NAV reflects the liquidation value of the fund's investments on that particular day after accounting for all expenses. It is calculated by deducting all liabilities (except unit capital) of the fund from the realisable value of all assets and dividing it by number of units outstanding.

Role of Fund manager:-

Fund managers constantly monitor market and economic trends and analyse securities in order to make informed investment decisions.

They play a vital role in implementing a consistent investment strategy that is in synergy with the goals and objectives of the fund.

Who Is Registrar:-

A Registrar is responsible for accepting and processing the unit holders' applications, carrying out communications with them, resolving their grievances and dispatching Account Statements to them.

In addition, the registrar also receives and processes redemption, repurchase and switch requests. The Registrar maintains an updated and accurate register of unit holders of the Fund and other records as required by SEBI Regulations and the laws of India. An investor can get all the above facilities at the Investor Service Centers of the Registrar.