MUTUAL FUND

MUTUAL FUND
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as stocks, bonds, debentures and other securities and as well as in short-term money market instruments such as Treasury bills, commercial paper etc. The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

Mutual Fund Operation Flow Chart

Organisation of a Mutual Fund

Mutual Funds in India are governed by the SEBI (Mutual Fund) Regulations 1996 as amended from time to time.

TYPES OF MUTUAL FUND

BY STRUCTURE BY INVESTMENT OBJECTIVE EQUITY DEBT
BALANCED FUNDS LIQUID / MONEY MARKET

OPEN ENDED CLOSE ENDED

TYPES OF MUTUAL FUND

BY STRUCTURES OPEN ENDED SCHEMES An open-end fund is one that is available for subscription all through the year. These funds do not have a fixed maturity period. CLOSE ENDED SCHEMES A close ended fund has a stipulated maturity period which generally ranging from 3 to 15years. This fund is open for subscription only during a specified period. Investors can invest in the schemes at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed.

BY INVESTMENT OBJECTIVE

Growth / Equity Oriented Scheme Equity funds are made up of investments of only common stock. The aim of growth funds is to provide capital appreciation over the medium to long term. These can be riskier (and earn more money) than other types. Income / Debt Oriented Schemes 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.

BALANCED FUNDS
They are a mix of both equity and debt funds. The aim of balanced funds is to provide both growth and regular income as such schemes invest in both equities and fixed income securities, in the proportion indicated in their offer documents (normally 50:50). These are appropriate for investors looking for moderate growth.

MONEY MARKET
This scheme aim is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in short-term instruments, such as treasury bills, certificates of deposit, commercial paper an and government securities etc. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods. This scheme is considered to be the safest amongst all categories of mutual funds.

OTHER SCHEMES
Tax Saving Schemes: Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Index Schemes: Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. This scheme would rise or fall in accordance with the rise or fall in the index. Sector Specific Schemes: These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. 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.

Sector funds Equity funds Index funds Balance d funds

RETURNS

Debt funds

Liquid funds

RISK

ADVANTAGES OF MUTUAL FUND

Professional Management Professionally managed, by well qualified professional. Considered to be relatively less expensive way to make and monitor their investments. Diversification Investors risk is spread out and minimized up to certain extent Invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. Liquidity Allows investors to liquidate their holdings as and when they want.

ADVANTAGES OF MUTUAL FUND

Economies of Scale Help to reducing transaction costs, and help to bring down the average cost of the unit for their investors by buying and selling large amounts of securities at a time Simplicity Investments in mutual fund is considered to be easy and the minimum investment is small. Most AMC also have automatic purchase plans whereby as little as Rs. 2000.

DISADVANTAGES OF MUTUAL FUND

Fees and Expenses: Most mutual funds charge management and operating fees that pay for the fund's management expenses. In addition, some mutual funds charge high sales commissions. Insurance: Mutual funds, although regulated by the government, are not insured against losses. Loss of Control: The managers of mutual funds make all of the decisions about which securities to buy and sell and when to do so. This makes it difficult for individual s to choose their portfolios.

DISADVANTAGES OF MUTUAL FUND

Trading Limitations: Although mutual funds are highly liquid in general, most mutual funds (called open-ended funds) cannot be bought or sold in the middle of the trading day. Poor Performance: Returns on a mutual fund are by no means guaranteed. Different Types: There are over 10,000 mutual funds in operation, and these funds vary greatly according to investment objective, size, strategy, and style. So even the process of selecting a fund can be tedious.

VARIOUS MUTUAL FUNDS IN INDIA

STATE BANK OF INDIA MUTUAL FUND ICICI PRUDENTIAL MUTUAL FUND TATA MUTUAL FUND HDFC MUTUAL FUND BIRLA SUN LIFE MUTUAL FUND RELIANCE MUTUAL FUND KOTAK MAHINDRA MUTUAL FUND ETC.