SSSSK

By : Sowmya.S
USN:18MBA49
WHAT IS A MUTUAL FUND?

 A mutual fund is a type of financial vehicle

made up of a pool of money collected from
many investors to invest in securities like stocks,
bonds, money market instruments, and other
assets.
 Mutual funds are operated by
professional money managers, who allocate the
fund's assets and attempt to produce capital gains
or income for the fund's investors.
 A mutual fund is both an investment and an actual company.
This dual nature may seem strange, but it is no different from
how a share of AAPL is a representation of Apple Inc. When an
investor buys Apple stock, he is buying partial ownership of
the company and its assets. Similarly, a mutual fund investor is
buying partial ownership of the mutual fund company and its
assets. The difference is that Apple is in the business of making
smart phones and tablets, while a mutual fund company is in
the business of making investments.
OBJECTIVES OF MUTUAL FUND
Mutual funds main objective is to act in the best interest of its
investors. All the activities of the mutual fund are directed only
towards serving its investors in the best possible manner.
Following are the certain objectives of the investors that can be
fulfilled by the mutual funds:-
 Professional Management – An investor gets the service of a
professional fund manager at a very low cost who manages the
pool of funds and invest the funds into various asset classes
after proper due diligence.
 Achieving goals – Mutual funds help in the achievement of
personal goals of the investor. An investor will be better off if
he/she links his/her goals to the investments and contribute a
sum in a mutual scheme for the achievement of the same.
 Liquidity – Mutual funds also fulfills the liquidity needs of the
investors. One can withdraw his/her investments as and when
needed (may be subject to exit loads). Mutual funds pay due
consideration on this aspect and maintain proper liquidity in
every scheme for unexpected large withdrawals.
 Risk adjusted returns – Mutual funds can generate higher risk
adjusted returns which are superior to any other traditional
instruments. The investment enjoys compounding benefit and
hence a huge wealth can be created over a long period of time
through mutual funds.
 Tax Savings – An investor can even save taxes by investing in
ELSS category of the mutual funds. The investment in ELSS
funds qualifies for tax deduction up to ₹1,50,000 u/s 80C of the
Income Tax Act, 1961.
Structure of mutual fund:

 Open-ended funds
In an open-ended mutual fund, an investor can invest or enter
and redeem or exit at any point of time. It does not have a fixed
maturity period.
 Close-ended funds
Close-ended mutual funds have a fixed maturity date. An
investor can only invest or enter in these type of schemes
during the initial period known as the New Fund Offer or NFO
period. His/her investment will automatically be redeemed on
the maturity date. They are listed on stock exchange(s).
Types of mutual fund:
1. Equity or growth schemes

These are one of the most popular mutual fund schemes. They
allow investors to participate in stock markets. Though
categorized as high risk, these schemes also have a high return
potential in the long run. They are ideal for investors in their
prime earning stage, looking to build a portfolio that gives
them superior returns over the long-term. Normally an equity
fund or diversified equity fund as it is commonly called invests
over a range of sectors to distribute the risk.

Equity funds can be further divided into three categories:

 Sector-specific funds

 index funds

 Tax saving funds

 Sector-specific funds:
These are mutual funds that invest in a specific sector. These
can be sectors like infrastructure, banking, mining, etc. or
specific segments like mid-cap, small-cap or large-cap
segments. They are suitable for investors having a high risk
appetite and have the potential to give high returns.
 Index funds:

Index funds are ideal for investors who want to invest in

equity mutual funds but at the same time don't want to depend
on the fund manager. An index mutual fund follows the same
strategy as the index it is based on.
 Tax saving funds:

These funds offer tax benefits to investors. They invest in

equities and are also called Equity Linked Saving Schemes
(ELSS). These type of schemes have a 3 year lock-in period.
The investments in the scheme are eligible for tax deduction
u/s 80C of the Income-Tax Act, 1961.
2. Money market funds or liquid funds:
These funds invest in short-term debt instruments, looking to
give a reasonable return to investors over a short period of
time. These funds are suitable for investors with a low risk
appetite who are looking at parking their surplus funds over a
short-term. These are an alternative to putting money in a
savings bank account.
3. Fixed income or debt mutual funds:
These funds invest a majority of the money in debt - fixed
income i.e. fixed coupon bearing instruments like government
securities, bonds, debentures, etc. They have a low-risk-low-
return outlook and are ideal for investors with a low risk
appetite looking at generating a steady income. However,
they are subject to credit risk.
4. Balanced funds:
As the name suggests, these are mutual fund schemes that
divide their investments between equity and debt. The
allocation may keep changing based on market risks. They are
more suitable for investors who are looking at a combination of
moderate returns with comparatively low risk.
5. Hybrid / Monthly Income Plans (MIP):
These funds are similar to balanced funds but the proportion
of equity assets is lesser compared to balanced funds. Hence,
they are also called marginal equity funds. They are especially
suitable for investors who are retired and want a regular
income with comparatively low risk.
6. Gilt funds:
These funds invest only in government securities. They are
preferred by investors who are risk averse and want no credit
risk associated with their investment. However, they are subject
to high interest rate risk.
 Advantages of Mutual Funds

 Professional Management – Highly qualified professionals

manages the funds.
 Higher Risk adjusted returns – Superior returns are
generated which are higher than any traditional investment
instruments.
 Low cost instruments – The cost to be paid is very nominal
and is capped at 2.25% for equity oriented schemes and 2% for
other schemes.
 Investment options – An investor has an option to invest
either in lump sum or SIP (Systematic Investment Plan).
 Diversification – Even a small sum of amount say ₹500 will
be diversified across many underlying assets.
 Disadvantages of Mutual Funds
 No portfolio customization – An investor does not have the
option of customizing the portfolio of the mutual fund scheme.
 Choice overload – There are hundreds of mutual fund schemes
available which might confuse the investors as to which
scheme they should choose.
Process of mutual fund