What is a Mutual Fund
•A mutual Fund is a
mediator that brings together a group of people and invest their money in
stocks, bonds, Government securities and
other securities by issuing units to its investors.
•Each investor owns
share, which represent a portion of the holdings of the fund.
•Thus mutual funds 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.
Investing
in Mutual Funds give you a gamut of benefits:
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 favorable investment
opportunities.
Spreading your 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: One can redeem the
units at any point of time he or she likes to .
Choice: A wide variety of
schemes allow investors to pick up those which suit their risk / return
profile .How are Mutual Funds Classified
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. Types of Mutual Funds by Structure
Open-ended Fund/ Scheme :
An open-ended fund or scheme is one that is available
for subscription and repurchase on a continuous basis. These schemes do not
have a fixed maturity period. Investors can conveniently buy and sell units at
Net Asset Value (NAV) related prices after deduction of exit load, if any which
are declared on a daily basis. The key feature of open-end schemes is
liquidity.
Close-ended Fund/ Scheme :
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 Schemes according to Investment Objective
Growth / Equity Oriented Scheme :
The aim of growth funds is to provide
capital appreciation over the medium to long- term. Such schemes normally
invest a major part of their corpus in equities. Such funds have comparatively
high risks. These schemes provide different options to the investors like
Growth option, dividend option, capital appreciation, etc. and the investors
may choose an option depending on their preferences. The investors must
indicate the option in the application form. The mutual funds also allow the
investors to change the options at a later date. Growth schemes are good for
investors having a long-term outlook seeking appreciation over a period of
time.
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, corporate debentures, Government securities
and money market instruments. Such funds are less risky compared to equity
schemes. These funds are not affected because of fluctuations in equity
markets. However, opportunities of capital appreciation are also limited in
such funds. The NAVs of such funds are affected because of change in interest
rates in the country. If the interest rates fall, NAVs of such funds are likely
to increase in the short term and vice versa. However, long-term investors may
not bother about these fluctuations.
Balanced
Funds :
The aim of balanced funds is to provide
both growth and regular income as such schemes invest both in equities and
fixed income securities in the proportion indicated in their offer documents.
These are appropriate for investors looking for moderate growth. They generally
invest 40-60% in equity and debt instruments. These funds are also affected
because of fluctuations in share prices in the stock markets. However, NAVs of
such funds are likely to be less volatile compared to pure equity funds.
Money Market or 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, certificates of deposit, commercial paper and interbank call
money, government securities, etc. Returns on these schemes fluctuate much less
compared to other funds. These funds are appropriate for corporate and
individual investors as a means to park their surplus funds for short periods.
Gilt Funds :
These funds invest exclusively in
government securities. Government securities have no default risk. NAVs of
these schemes also fluctuate due to change in interest rates and other economic
factors as is the case with income or debt oriented schemes.
Index Funds :
Index Funds replicate the portfolio of a
particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty),
etc. These schemes invest in the securities in the same weightage comprising of
an index. NAVs of such schemes would rise or fall in accordance with the rise
or fall in the index, though not exactly by the same percentage due to some
factors known as "tracking error" in technical terms. Necessary
disclosures in this regard are made in the offer document of the mutual fund
scheme. There are also exchange traded index funds launched by the mutual funds
which are traded on the stock exchanges. What are sector specific funds/schemes
•These are the
funds/schemes which invest in the securities of only those sectors or
industries as specified in the offer documents.
•For example
Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks,
etc.
•The returns in these
funds are dependent on the performance of the respective sectors/industries.
While these funds may give higher returns, they are more risky compared to
diversified funds.
FAQ’s on Mutual Funds
•What is Net Asset Value (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 realizable value of
all assets and dividing it by number of units outstanding.
•Does investing in mutual funds mean
investing in equities only? : Mutual Funds,
besides equities, can also invest in debt instruments such as bonds,
debentures, commercial paper and government securities. Every mutual fund
scheme is governed by the investment objectives that specify the class of
securities it can invest in.
•What is the role of Fund Manager : Fund managers
constantly monitor market and economic trends and analyze 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.
What
is a Systematic Investment Plan? :SIP is a method of investing a fixed/regular sum every
month or every quarter. With the growing everyday expenses, it becomes
difficult to accumulate a considerable sum which can be invested at one go. But
with an SIP, you can start with a modest amount of Rs. 250 every month and
this can be invested in any scheme of your choice as most mutual funds have
this facility for their schemes. 
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