UNDERSTANDING MUTUAL FUNDS:
A Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board Of India) that collects money from a group of investors and invest on their behalf in a variety of different financial instruments or securities such as equity shares, Bonds, debentures etc. the schemes offered by mutual funds vary from fund to fund. Investors are also given the option to either get dividends or to participate only in capital appreciation of the scheme. Mutual funds issues units to the investors and so they are also known as ?Unit Holders?.
Every Mutual Fund is managed by a Fund Manager, who using his investment management skills and necessary research works ensures better returns to the investors. Any capital appreciation and other income earned from these investments are passed on to the investors in proportion of the number of units they own.
ADVANTAGES OF MUTUAL FUNDS
a) Professional Management
Most of the mutual funds in India employ the leading professional for managing their investments. These professionals take decisions as to on what securities, the buying and selling of the funds will take place.
b) Low Transaction Cost
Due to the economies of scale, mutual funds pay lesser transaction costs and these benefits are passed on to the investors.
c) Transparency
Mutual funds regularly provide investors with all the material facts, updated information related to the markets and the schemes
d) Safety
All the mutual funds are registered with SEBI and they function within the provisions of strict regulation designed to protect the interests of the investors.
e) Liquidity
An investor may not be able to sell some of the shares held by him very easily and quickly, whereas units of a mutual fund are far more liquid.
DISADVANTAGES OF MUTUAL FUNDS
a) Difficulty in Selecting Schemes
Many investors find it difficult to select one option from the variety of schemes available and thus they may have to take advice from financial planners in order to invest in the right fund.
b) No Customized Portfolios
Investors have no right to interfere in the decision making process of a fund manager and hence investors find it as a constraint in achieving their financial objectives.
c) Cost Control Not Possible
Investors have to pay investment management fees and fund distribution costs as a percentage of the value of his investments, irrespective of the performance of the fund.
TYPES OF MUTUAL FUNDS:
BY STRUCTURE
a)Open-Ended Funds
An open-ended fund is one that is available for subscription all through the year. These do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value related prices. The key feature of open-ended schemes is liquidity.
b)Closed-Ended Funds
It has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of scheme. Investors can invest in the scheme at the time of IPO and thereafter can buy or sell the units of scheme on Stock Exchanges where units are listed.
c)Interval Funds
Interval funds combine features of open-ended and closed-ended schemes. They are open for sale or redemption during pre-determined intervals at Net Asset Value related prices.
BY INVESTMENT OBJECTIVES
a)Growth Funds
The aim of growth funds is to provide capital appreciation over medium to long-term. Growth schemes are good for investors having a long-term outlook seeking growth over a period of time.
b)Income/Debt Oriented Scheme
The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, Government securities, etc. Such funds are less risky compared to equity schemes.
c)Balanced Funds
The aim of balanced funds is to provide both growth and regular income. Such schemes invest both in equities and fixed income securities in the proportion indicated.
d)Money Market/Liquid Funds
These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, government securities, etc.
e)Gilt Funds
These funds invest exclusively in government securities. Government securities have no default risk.
OTHER SCHEMES
a)Tax Saving Schemes
These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. These schemes are growth oriented and invest pre-dominantly in equities. The risks associated are like any equity-oriented scheme.
b)Special Schemes
i.Industry Specific Schemes:
They invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like Info tech, FMCG, etc.
ii.Index Schemes:
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index. NAV of such schemes would rise or fall in accordance with the rise or fall in the index.
iii.Sectoral Schemes:
These are the schemes, which invest in the securities of only those sectors or industries as specified in the offer documents e.g. Pharmaceuticals, Software, etc. While these funds may give higher returns, they are more risky compared to diversified funds.
