DEFINITIONof'MutualFund'

Aninvestmentvehiclethatismadeupofapooloffundscollectedfrommanyinvestorsforthepurpose
ofinvestinginsecuritiessuchasstocks,bonds,moneymarketinstrumentsandsimilarassets.Mutual
fundsareoperatedbymoneymanagers,whoinvestthefund'scapitalandattempttoproducecapital
gainsandincomeforthefund'sinvestors.Amutualfund'sportfolioisstructuredandmaintainedto
matchtheinvestmentobjectivesstatedinitsprospectus.

INVESTOPEDIAEXPLAINS'MutualFund'
Oneofthemainadvantagesofmutualfundsisthattheygivesmallinvestorsaccesstoprofessionally
managed,diversifiedportfoliosofequities,bondsandothersecurities,whichwouldbequitedifficult
(ifnotimpossible)tocreatewithasmallamountofcapital.Eachshareholderparticipates
proportionallyinthegainorlossofthefund.Mutualfundunits,orshares,areissuedandcantypically
bepurchasedorredeemedasneededatthefund'scurrentnetassetvalue(NAV)pershare,whichis
sometimesexpressedasNAVPS.

How is a mutual fund set up?

Amutualfundissetupintheformofatrust,whichhassponsor,trustees,assetmanagementcompany
(AMC)andcustodian.Thetrustisestablishedbyasponsorormorethanonesponsorwhoislike
promoterofacompany.Thetrusteesofthemutualfundholditspropertyforthebenefitofthe
unitholders.AssetManagementCompany(AMC)approvedbySEBImanagesthefundsbymaking
investmentsinvarioustypesofsecurities.Custodian,whoisregisteredwithSEBI,holdsthesecurities
ofvariousschemesofthefundinitscustody.Thetrusteesarevestedwiththegeneralpowerof
superintendenceanddirectionoverAMC.TheymonitortheperformanceandcomplianceofSEBI
Regulationsbythemutualfund.

SEBI Regulations require that at least two thirds of the directors of

trustee company or board of trustees must be independent i.e. they
should not be associated with the sponsors. Also, 50% of the
directors of AMC must be independent. All mutual funds are required
to be registered with SEBI before they launch any scheme.
What are the benefits of investing in mutual funds?
Followingarethebenefitsofinvestinginmutualfunds:

Smallinvestments:Mutualfundsacceptinvestmentsaslowasfewthousandrupees,whichisinvested
acrossthemarkets.Suchaspreadisdifficultforaninvestortodo.
Professionalism:Professionalsmanagethemoneycollectedbyamutualfund.Theyanalyzethe
marketstopickgoodinvestments.
Spreadingrisk:Aninvestorwithasmallamountofmoneywouldbeabletoinvestinonlyoneortwo
stocks/bonds,thusincreasingrisk.However,amutualfundwillspreaditsriskbyinvestinginvarious
soundstocksorbonds.Afundnormallyinvestsincompaniesacrossawiderangeofindustries,sothe
riskisspread.
Transparencyandinteractivity:Mutualfundsprovideinvestorswithinformationonthevalueof
theirinvestments.Mutualfundsalsoprovidecompletepictureoftheinvestmentsmadebytheirvarious
schemesandtheproportioninvestedineachassettype.
Liquidity:OpenendedfundscanbesoldbacktomutualfundsatNAVbasedpricessubjecttoexit
loadsandcloseendedfundscanbesoldatthestockexchangeswheretheyaretraded.

Choice:Thefundscanbepickedfromawidearray.Thisenablestheinvestortochoosewhatsuitshim
bestaccordingtohisriskandreturnexpectation.
Equity/GrowthFunds
Equity/Growthfundsinvestamajorpartofitscorpusinstocksandtheinvestmentobjectiveofthese
fundsislongtermcapitalgrowth.Whenyoubuysharesofanequitymutualfund,youeffectively
becomeapartownerofeachofthesecuritiesinyourfundsportfolio.Equityfundsinvestminimum
65%ofitscorpusinequityandequityrelatedsecurities.Thesefundsmayinvestinawiderangeof
industriesorfocusononeormoreindustrysectors.Thesetypesoffundsaresuitableforinvestorswith
alongtermoutlookandhigherriskappetite.
Debt/IncomeFunds
Debt/Incomefundsgenerallyinvestinsecuritiessuchasbonds,corporatedebentures,government
securities(gilts)andmoneymarketinstruments.Thesefundsinvestminimum65%ofitscorpusin
fixedincomesecurities.Byinvestingindebtinstruments,thesefundsprovidelowriskandstable
incometoinvestorswithpreservationofcapital.Thesefundstendtobelessvolatilethanequityfunds
andproduceregularincome.Thesefundsaresuitableforinvestorswhosemainobjectiveissafetyof
capitalwithmoderategrowth.
BalancedFunds
Balancedfundsinvestinbothequitiesandfixedincomeinstrumentsinlinewiththepredetermined
investmentobjectiveofthescheme.Thesefundsprovidebothstabilityofreturnsandcapital
appreciationtoinvestors.Thesefundswithequalallocationtoequitiesandfixedincomesecuritiesare
idealforinvestorslookingforacombinationofincomeandmoderategrowth.Theygenerallyhavean
investmentpatternofinvestingaround60%inEquityand40%inDebtinstruments.

Who regulates mutual funds?

AllmutualfundsareregisteredwithSEBIandtheyfunctionwithintheprovisionsofstrictregulation
designedtoprotecttheinterestsoftheinvestor.
WhatarethedifferenttypesofMutualfunds?
Broadlythedifferenttypes(andsubtypes)ofMFsare:
EquityFunds
SubtypeInvestmentsMade
DiversifiedAcrossallindustries
Sector/themespecificInthatparticularsectororitsalliessuchasinfrastructureorenergyorsoftware
DividendyieldInstockswhichpayhighdividend
DebtFunds
SubtypeInvestmentsMadeIn
IncomeFund/LongtermbondBondsofcorporate,governmentandotherissuers
ShortTermIncomeFund/ShorttermbondsIssuersincludingcorporate,government,banks
FloatingRatefundsBondswhoseinterestsareresetatpresettimeperiods,likeyourfloatingrate
housingloaninterestisresetwheninterestratesgoupordown
Liquid/LiquidPlusFund/VeryShortTermBonds:IsanalternativetoshorttermdepositsVeryshort
termbondsandmoneymarketinstrumentsthatmaturewithinayearsothathighliquiditycanbehad
HybridFunds

EquityorientedHaveanequityexposureofmorethan60%restindebtinvestments.
DebtorientedHavedebtexposureofmorethan50%restinequities.
MonthlyincomeplansHaveequityexposurerangingfrom1025%andrestinbonds.