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Mutual Fund

What are mutual funds?


A mutual fund is a pool of savings contributed by multiple
investors. The common fund so created is invested in one or
many asset classes like equity, debt, liquid assets etc. It is called
a mutual fund because all risks, rewards, gains or losses
pertaining to, or arising from, the investments made out of this
savings pool are shared by all investors in proportion to their
contributions.
A mutual fund is in essence a Trust with a sponsor. They are
registered with SEBI (Securities Exchange Board of India) who
approves the Asset Management Company (AMC) managing the
fund. The AMC is under the purview of the trustees who have to
ensure the fund complies with regulation.
There are some terms unique to mutual funds which investors
should be aware about.
Fund Units or Shares - Investments in a mutual fund are
made by buying units or shares of a particular fund. The
more the units bought the higher the investment.
Net Asset Value - This is the unit price or price per share of
the fund. The NAV of a fund changes depending on the
funds performance. Units are purchased or sold/redeemed
at the prevailing NAV or unit price at the time of
purchase/sale.
Lock-in Period - Certain funds stipulate a period during
which units cannot be sold i.e. investors cannot liquidate
their investment during this period. If allowed, it is subject to
a penalty or loss of benefits.
Entry Load / Exit Load - These are charges levied by AMCs
on purchase / sale or transfer of fund units by investors.

These are amounts paid in addition to the NAV on purchase /


amounts deducted from the NAV on redemption/transfer.
Offer document - This is a formal document that outlines
the basic features of the fund. The objective of the fund and
the asset classes that the fund will invest in is mentioned in
the offer document. It also contains terms and conditions of
the fund and other details such as who will manage the fund,
risk factors, the funds performance history and other
financials. Investors should read the offer document carefully
before investing in a fund.
Assets Under Management (AUM): This refers to the
total market value of funds being managed by a mutual fund
company.
Expense Ratio: This indicates the expenses incurred by the
fund in relation to the total assets.
New Fund Offer (NFO): New fund offers are new
funds/schemes launched in the market by an AMC. Investors
can buy units of these new funds at the offer price, which is
usually very low. Subsequent purchases in these funds will
have to be made at prevailing NAVs.
Redemption: This is when fund units are
sold/transferred/cancelled.
Advantages of investing in mutual funds
Mutual funds have become a very popular investment option in
India and this trend still continues with new funds and schemes
being introduced in the market regularly. Some of the key reasons
why people invest in mutual funds are outlined below.
Professional management: Mutual funds are managed by
fund managers of asset management companies. These
managers employ their investment expertise to minimise
risks and maximise returns to investors. Individuals often

find it difficult to decide which assets to invest their savings


in due to lack of financial knowledge.
Diversification of risks: Since funds invest in a number of
securities, risk is diversified. The chances of all stocks
performing badly at the same time is low. Losses suffered on
some stocks are offset by gains made on others. This leads
to minimization of risks.
Affordable investment option: For those who dont have
sizeable amounts to invest in direct equity or other
instruments that require a high initial investment, mutual
funds make for an affordable investment avenue. Also,
transaction costs are spread out over a number of investors
thereby lowering individual costs.
Focused investments: All mutual funds feature schemes
clearly specifying which assets are targeted for investments,
allowing investors to direct savings to different asset classes
in an organised and focused manner. It also gives investors
access to certain securities otherwise unavailable to them
e.g. foreign sectors or foreign securities which cannot be
invested in by individuals.
Choice of assets: There are various types of funds e.g.
equity funds, debt funds, money market funds, hybrid funds,
sector funds, regional funds, fund of funds, index funds etc.
giving investors a wide range of choice.
Easy purchase and redemption: Fund units can be easily
bought and sold at prevailing unit prices or NAVs. Unless
theres a lock-in period, it is easy for investors to buy into or
out of a fund thereby providing liquidity.
Tax benefits: A number of funds/schemes have been
designed to act as tax-saving instruments e.g. ELSS or
equity linked saving schemes. Investments made in these
schemes qualify for income tax deductions.

High returns: Mutual funds have been known to provide


good returns on medium and long-term investments since
investors can diversify risk to enhance overall returns.
Regulated investments: All funds come under the purview
of SEBI (Securities Exchange Board of India) which ensures
dealings are as per regulations. This provides an element of
safety to investments made.
Easy to track: It can be hard for investors to regularly
review their investment portfolios. Mutual funds provide
clear statements of all investments which makes it easy for
investors to keep a tab on. Hybrid or balanced funds provide
investors an avenue to access both equity and debt funds at
one go in a proportion of choice.
SIP options: Systematic Investment Plans let individuals
invest small amounts on a regular basis to avail benefits of
rupee cost averaging. Its an alternative to those who cannot
invest lump sum amounts thereby appealing to investors
across income levels. Mutual funds accept initial investments
as low as Rs.500.
Flexibility through fund switching: Many funds offer
investors flexibility by letting investors switch between
schemes or between funds to avail better terms and/or
better returns.
Who can invest in mutual funds in India?
Mutual funds are open to a wide range of investors including
Resident Individuals, NRIs, PIOs, HUFs, Companies, Partnership
Firms, Trusts, Cooperative Societies, Banking and Non-Banking
Financial Institutions, registered FIIs, QFIs etc. This is not an
exhaustive list but represents the more commonly known types of
investors in mutual funds in India.

How to invest in mutual funds

Mutual funds are made easily accessible to investors. Applications


can be made in the following ways.
Agents: These are professionals who are trained to reach
out to customers to provide information on the various funds
provided by a company. They help process applications and
deal with related issues e.g. redemption, cancellation,
transfer of units and other dealings with the company. Agent
commissions, which normally range up to 6%, are added on
to the purchase price of fund units.
Direct: Customers can circumvent agents and apply to a
scheme themselves. They can do this by visiting the nearest
office of the mutual fund company or by going online. Forms
can be availed and submitted at the appropriate office or
downloaded from the company website and submitted at the
office. Alternatively, applications can be processed online.
Applying for Mutual Funds Online
Online transactions are becoming increasingly popular for many
reasons, as mentioned below.
Convenience: Schemes can be applied from the comfort of
ones own office or home.
Easy comparison: Besides company websites, there are a
number of online financial services providers which act as
single-point portals for viewing and comparing funds and
schemes from multiple companies.
Affordable: By circumventing agents, investments are
cheaper since commissions arent added on to purchase
costs.
Independence: All required information, including
brochures and other material, are provided online for easy
perusal. This lets investors avoid misselling by agents and
make informed, independent decisions.

Types of mutual funds in India


There are many different types of mutual funds categorised based
on structure, asset class and

Based on asset class


Equity Funds: These are funds that invest in equity
stocks/shares of companies. These are considered high-risk
funds but also tend to provide high returns.
Debt Funds: These are funds that invest in debt
instruments e.g. company debentures, government bonds
and other fixed income assets. They are considered safe
investments and provide fixed returns.
Money Market Funds: These are funds that invest in liquid
instruments e.g. T-Bills, CPs etc. They are considered safe
investments for those looking to park surplus funds for
immediate but moderate returns.
Balanced or Hybrid Funds: These are funds that invest in
a mix of asset classes. In some cases, the proportion of
equity is higher than debt while in others it is the other way
round. Risk and returns are balanced out this way.
Sector Funds: These are funds that invest in a particular
sector of the market e.g. Infrastructure funds invest only in
those instruments or companies that relate to the
infrastructure sector. Returns are tied to the performance of
the chosen sector. The risk involved in these schemes
dependS on the nature of the sector.
Index Funds: These are funds that invest in instruments
that represent a particular index on an exchange so as to
mirror the movement and returns of the index e.g. buying
shares representative of the BSE Sensex.

Tax-Saving Funds: These are funds that invest primarily in


equity shares. Investments made in these funds qualify for
deductions under the Income Tax Act. They are considered
high on risk but also offer high returns if the fund performs
well.
Fund of funds: These are funds that invest in other mutual
funds and returns depend on the performance of the target
fund.
Based on structure
Open-Ended Funds: These are funds in which units are
open for purchase or redemption through the year. All
purchases/redemption of these fund units are done at
prevailing NAVs. These funds are preferred since they offer
liquidity to investors.
Close-Ended Funds: These are funds in which units can be
purchased only during the initial offer period. Units can be
redeemed at a specified maturity date. To provide for
liquidity, these schemes are often listed for trade on a stock
exchange.
Based on investment objective
Growth funds: Under these schemes, money is invested
primarily in equity stocks with the purpose of providing
capital appreciation. They are considered to be risky funds
ideal for investors with a long-term investment timeline.
Income funds: Under these schemes, money is invested
primarily in fixed-income instruments e.g. bonds, debentures
etc. with the purpose of providing capital protection and
regular income to investors.
Liquid funds: Under these schemes, money is invested
primarily in short-term or very short-term instruments e.g. TBills, CPs etc. with the purpose of providing liquidity. They

are considered to be low on risk with moderate returns and


are ideal for investors with short-term investment timelines.
Mutual funds offer investors many benefits. However, the onus of
making a sound investment lies on the investor. Funds should be
chosen keeping in mind investment objective, liquidity
requirements. investment timelines and affordability.
Objectives of the study
1.
2.
3.
4.

To examine the performance of selected mutual funds.


To study the risk return preference of investors.
To study the purpose of buying mutual funds.
To predict the trends for investment of selected mutual
funds.
5. To examine the performance of selected schemes by using
the portfolio performance evaluation models namely sharpe ,
treynor, Jensen.
6. To get an insight knowledge of mutual funds.
7. To know the mutual funds performance in the present markets.