Mutual funds are a type of certified managed combined investment schemes that gathers money from many investors to buy securities. There is no such accurate definition of mutual funds, however the term is most commonly used for collective investment schemes that are regulated and available to the general public and open-ended in nature. Hedge funds are not considered as any type of mutual funds.
Mutual funds are identified by their principal investments. They are the 4th largest category of funds that are also known as money market funds, bond or fixed income funds, stock or equity funds and hybrid funds. Funds are also categorized as index based or actively managed.
In a mutual fund, investors pay the funds expenditure. There is some element of doubt in these expenses. A single mutual fund may give investors a choice of various combinations of these expenses by offering various different types of share combinations.
The fund manager is also known as the fund sponsor or fund management company. The buying and selling of the funds investments in accordance with the funds investment is the objective. A fund manager has to be a registered investment advisor. The same fund manager manages the funds and has the same brand name which is also known as a fund family or fund complex.
As long as mutual comply with requirements that are established in the internal revenue code, they will not be taxed on their income. Clearly, they must expand their investments, limit the ownership of voting securities, disperse most of their income to their investors annually and earn most of their income by investing in securities and currencies.
Mutual funds can pass taxable income to their investors every year. The type of income that they earn remains unchanged as it gets transferred to the shareholders. For e.g., mutual fund distributors of dividend income are described as dividend income by the investor. There is an exception: net losses that are incurred by a mutual fund are not distributed or passed through fund investors.
Mutual funds invest in various kinds of securities. The various types of securities that a particular fund may invest in are mentioned in the funds prospectus, which explain the funds investments objective, its approach and the permitted investments. The objective of the investment describes the kind of income that the fund is looking for. For e.g., a “Capital Appreciation” fund generally looks to earn most of its returns from the increase in prices of the securities it holds rather than from a dividend or the interest income. The approach of the investment describes the criteria that the fund manager may have used to select the investments for the fund.
The investment portfolio of a mutual fund’s investment is continuously monitored by the fund’s portfolio manager or managers who are either employed by the fund’s manager or the sponsor.
1) Increase in diversification.
2) Liquidity on a daily basis.
3) Professional investment management.
4) Capacity to participate in investments that may be available only for larger investors.
5) Convenience as well as service.
6) Government oversight.
7) Easier comparison
1) High fees.
2) Less control over timing of recognition of gains.
3) Much lesser predictable income.
4) No opportunity for customization.
There are different types of Mutual funds as well. Here are some of them.
In open-end mutual funds, one must be willing to buy back their shares from investors at the end of
every business day at the net asset value that is calculated for that day. Most of the open-end funds also
sell shares to the public on every business day. These shares are also priced at a particular net asset
value. A professional investment manager will oversee the portfolio, while buying or selling securities
whichever is appropriate. The total investment in the funds will be variably based on share buying, share
redemptions and fluctuation in the market variation. There are also no legal limits on the number of
shares that can be issued.
Close-end funds generally issue shares to the public just once, when they are created via an initial public
offering. These shares are then listed for trading on a stock exchange. Investors, who dont wish any
longer to invest in the funds, cannot sell their shares back to the funds. Instead, they must sell their
shares to another investor in the market as the price they may receive may be hugely different from its
net asset value. It may be at a premium to net asset value (higher than the net asset value) or more
commonly at a lesser to net asset value (lower than the net asset value). A professional investment
manager will oversee the portfolio, in buying or selling securities whichever is appropriate.
UIT or Unit Investment Trusts issue shares to the public just once when they are created. The investorsin turn can cash in on the shares directly with the fund or they may also sell their shares in the market.
UITs do not have any professional investment managers. Their portfolio of securities is established by
the creation of the UITs and does not undergo any changes. UITs in general have a limited life span,
which is limited at their creation.
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A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI), that pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. In other words, a mutual fund allows an investor to indirectly take a position in a basket of assets.
Even in the US the concept of mutual funds has started picking up only in the last decade. This whole process of investor education and investor awareness takes a lot of time. But Indian investors are now beginning to understand the benefits of investing through the mutual funds route and hence the collections are beginning to pick up.
Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds mentioned above. All the mutual funds must get registered with SEBI. The only exception is the UTI, since it is a corporation formed under a separate Act of Parliament.
For a retail investor who does not have the time and expertise to analyze and invest in stocks and bonds, mutual funds offer a viable investment alternative. This is because:
Financial theory states that an investor can reduce his total risk by holding a portfolio of assets instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially reduced.
No. Mutual fund investments are not totally risk free. In fact, investing in mutual funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds the controllable risks are substantially reduced.
A very important risk involved in mutual fund investments is the market risk. When the market is in doldrums, most of the equity funds will also experience a downturn. However, the company specific risks are largely eliminated due to professional fund management.
In an open-ended mutual fund there are no limits on the total size of the corpus. Investors are permitted to enter and exit the open-ended mutual fund at any point of time at a price that is linked to the net asset value (NAV). In case of closed-ended funds, the total size of the corpus is limited by the size of the initial offer.
the continuous offer period starts when the investor can enter and exit the fund at a price linked to the NAV Yes. But the only difference is that in case of open-ended funds, a month after the initial offer closes
Generally every fund levies either an entry load or an exit load or both to provide for administrative and other routine costs. The purchase price will be higher than the NAV to the extent of the entry load and the redemption price will be lower than the NAV to the extent of the exit load.
According to Sebi regulations, all closed-ended funds have to be necessarily listed on a recognized stock exchange. Thus the secondary market provides an exit route in case of closed-ended funds.
One can invest by approaching a registered broker of Mutual funds or the respective offices of the Mutual funds in that particular town/city. An application form has to be filled up giving all the particulars along with the cheque or Demand Draft for the amount to be invested.
Performance indicators like total returns given by the fund on different schemes, the returns on competing funds, the objective of the fund and the promoters image are some of the key factors to be considered while taking an investment decision regarding mutual funds.
As a service to the investing community, We do it for you. Our research team evaluates each scheme based on primary as well as secondary information and presents an unbiased report which will help you to take a decision on whether a fund is worth investing or not
Currently there exist balanced funds, Income fund, Growth funds, Sector funds etc. To get more details about the different funds and their features please visit our mutual fund glossary
That depends on the strategy of the concerned scheme. But generally there are 3 broad categories. A dividend plan entails a regular payment of dividend to the investors. A reinvestment plan is a plan where these dividends are reinvested in the scheme itself. A growth plan is one where no dividends are declared and the investor only gains through capital appreciation in the NAV of the fund.
It depends on your investment object, which again depends on your income, age, financial responsibilities, risk taking capacity and tax status. For example a retired government employee is most likely to opt for monthly income plan while a high-income youngster is most likely to opt for growth plan.
A systematic investment plan is one where an investor contributes a fixed amount every month and at the prevailing NAV the units are credited to his account. Today many funds are offering this facility.
A systematic investment plan (SIP) offers 2 major benefits to an investor:
NAV is the net asset value of the fund. Simply put it reflects what the unit held by an investor is worth at current market prices. For details on calculation methodology and formulae, please click on our mutual fund glossary
Once again this decision will depend on factors like your income, savings, risk aversion and tax status.
In case of closed-ended funds there is a target amount and the funds are permitted a green-shoe option to retain over-subscriptions up to a certain limit. In case of open-ended funds there are no such limits and all applications are honored.
For the guidance of the investors our web site is giving a detailed analyses of the forthcoming schemes of different mutual funds .You can visit our website to get such information on forthcoming scheme openings.
As per Sebi Regulations, mutual funds are not allowed to assure returns. However, funds floated by AMCs of public sector banks and financial institutions were permitted to assure returns to the unitholders provided the parent sponsor was willing to give an explicit guarantee to honor such a commitment. But in general, mutual funds cannot assure fixed returns to their investors.
Investors need to be clear that mutual funds are essentially medium to long term investments. Hence, short-term abnormal profits will not be sustainable in the long run. But in the medium to long run the mutual funds tend to outperform most other avenues of investments at the same time avoiding the risk of direct investment accompanied with professional fund management.
While the concept remains the same of collecting money from investors, pooling them and investing the funds, the target investors are different. In the case of portfolio management the target investors are high networth investors while in case of mutual funds the target investors are the retail investors.
An entry load is an additional cost that an investor pays at the point of entry. Assume that your proposed investment is Rs.10,000/-. Also assume that the current NAV of the fund is Rs.12.00 and that the entry load is Rs.0.50. Then you will receive 10000/12.50 = 800 units. For detailed explanation of entry load, refer our mutual fund glossary.
An exit load is levy that an investor pays at the point of exit. This is levied to dissuade investors from exiting the fund. Assume that the current NAV of the fund is Rs.12.00 and that the exit load is Rs.0.50. Now if you sell 800 units then you stand to receive 800X11.5 = Rs. 9200. For detailed explanation of exit load, refer our mutual fund glossary.
Yes. One can redeem part units also.
The moment you buy or get allotted the units, a passbook will be given to you mentioning the number of units allotted/bought and redeemed by you. The recording of entries would be similar to your pass book entries in the bank. In mutual fund terminology it is called Account Statement.
As an investor you need to exercise caution in two areas :
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