Mutual Funds-MFs
Mutual funds (MFs) have gained popularity in the last few years though they have been in existence for a few decades now. MFs can be defined as a financial intermediary or investment vehicle. They intermediate between the investors and the various Financial investment items. Mutual Funds pool together funds collected from a large base of investors and invest them into various financial instruments. Mainly they invest in instruments such as equity stocks, bonds, fixed deposits, debt and money market instruments. Thus a mutual fund is a type of investment vehicle consisting of a portfolio of financial assets of stocks, bonds, or other securities. Mutual funds are ideal for investors who either lack large sums for investment, or for those who neither have the inclination nor the time to research the market, yet want to grow their wealth
Total value of the assets under management of a Mutual fund is the the sum total of the market value of all the assets or investments made by the MF. This is actually the Gross value and is known as the AUM or Asset Under Management of the MF.
Let’s understand the NAV or Net Asset Value in respect of MFs.. When people invests in a MF, they are allotted Units or shares in the MF at NAV. The NAV refers to the per unit price of any Mutual Fund scheme. The NAV is arrived at by adding the income or gains generated from the collective investment that is the market value or AUM after deducting applicable expenses and levies and dividing the this amount by the number of units outstanding under the MF scheme.
This can be represented as
Market value of Fund+Accrued income -Accrued Expense
NAV = ——————————————————————————
Number of units outstanding
Mutual Funds are trusts that collect money from a number of investors who share a common investment objective.People entrust their money with Mutual funds because MFs have got expertise in the investment market and with large sums at their disposal have the benefit of economy of scale. The driving force behind investments in Mutual Funds is to generate better return for the investors, much better than the bank fixed deposits and other risk-free investments. In order to achieve the same mutual funds, utilize the services of expert Fund Managers. Each Fund manager allocate the fund’s among the financial assets and attempt to produce capital gains or income for the fund’s investors by creating a portfolio which is structured and maintained to match the investment objectives stated in its prospectus.
Mutual funds work on the principle of Risk dispersion, that is they follow the adage “Don’t keep all your eggs in one basket”. They spread out their investments among various sectors of the economy and inside a particular sector, among various investment tools and companies.
Other features
Concept :Mutual Fund companies float various schemes to attract different kinds of investors and entice them into investing their money with the particular scheme.Investors select a particular MF scheme as per their Goal, Financial profile and Risk aptitude.This large fund corpus collected from a large number of investors is entrusted with a highly professional team of skilled investors who are completelly knowledgeable and updated with the latest happening in the economy and its impact on the various financial sectors like stock market, bond market etc.This team is headed by a Fund Manager who is not only highly qualified in Investment Management but also holds years of experience and sound knowledge of the financial asset he is managing,The Fund Manager takes various decisions related to the fund like investing in an asset, exiting from an investment, reinvesting, declaring Dividend etc. Thus Mutual Funds offer professional investment services to at a very low cost to an ordinary investor, with even a small amount at his disposal, who may not have much knowledge on investments
The Process : So Investors invest in MF schemes. The Fund collected is managed by the Fund manager, The Fund manager through his expertise and knowledge works rigorously to generate maximum possible to the investors through the investment decision he makes. The investment in securities generatereturn in the form of income capital gain and get added to the fund corpus after deducting expenses and fees and get distributed among the investors as dividends or as increse inthe NAV. This process cycle is depicted beside.
Eligibility: All Indian residents above the age of 18, Hindu Undivided families (HUFs), NRIs, Companies, Trusts, banks, FIIs registered with SEBI and partnership firms can all invest in MFs. Minors accounts can be opened by guardians.An investor has to complete the KYC process by submitting his credentials such as ID proof and Address proof.
Minimum amount: Though generally MFs insist for Rs 500 as minimum investment amount many of the present day MFs allow you to start the investment with Rs 100. There is no maximum limit.
Charges: Mutual funds charge annual fees (called expense ratios) and, in some cases, commissions.You can invest directly and through MF Distributors. Apart from the fee for managing the funds, when invested through Distributors additional commission will be charged..
Tenure: Short term MFs are for period ranging from 15-91 days. There are close ended funds with 3-5 years tenure. Open ended schemes do not have a fixed maturity period.
Mutual funds are flexible investment vehicles, in which you can begin and stop investing as per your convenience.
. Mutual Funds offer various types of funds/schemes with varying degree of risks. MF returns are not guaranteed.
Types of Mutual Funds
Mainly MFs can be segregated into 3 broad categories as per the investment or asset class of the scheme.
1.Equity Mutual Funds—As the name indicates these mutual funds mainly invest in equity shares of various companies. Capital appreciation is an important objective for these funds. But since the returns on equity funds are linked to market movements of stocks, these funds have a higher degree of risk. They are a good choice if you want to invest for long term goals such as retirement planning or buying a house on retirement as the level of risk comes down over time.These are in the high-risk category.
2.Debt or Fixed Income Mutual Funds —These funds invest in fixed income securities like bonds. debentures, fixed deposits etc. and belong to low risk category.These funds aim to offer reasonable returns to the investor and are considered relatively less risky. These funds are ideal if you aim for a steady income and are averse to risk.
3.Hybrid or Balanced Mutual Funds—These funds invest both in Equity and Debt products and are considered to have medium risk.Based on the allocation between equity and debt (asset allocation), hybrid funds are further classified into various sub-categories.
By Structure Mutual Funds can be classified as Open ended and Close ended Funds
Open ended funds
An open-end fund is a mutual fund scheme that is available for subscription and redemption on every business day throughout the year, (like to a savings bank account, wherein one may deposit and withdraw money every day). An open ended scheme is perpetual and does not have any maturity date.
Close ended funds
A closed-end fund is open for subscription only during the initial offer period and has a specified tenor and fixed maturity date (like a fixed term deposit). Units of Closed-end funds can be redeemed only on maturity (i.e., pre-mature redemption is not permitted). Hence, the Units of a closed-end fund are compulsorily listed on a stock exchange after the new fund offer, and are traded on the stock exchange just like Equity stocks, so that investors seeking to exit the scheme before maturity may sell their Units on the exchange.
Mutual funds can also be classified into four based on the investment objectives.
- Growth funds
The main objective of growth funds is capital appreciation. These funds put a significant portion of the money in Equity stocks. These funds can be relatively more risky due to high exposure to equity and hence it is good to invest in them for the long-term. Equity funds are mainly growth funds. - Income funds
As the name suggests, income funds try to provide investors with a stable income. These are debt funds that invest mostly in bonds, government securities and certificate of deposits, etc. They are suitable for investors with a lower-risk appetite. - Liquid funds
Liquid funds put money in short-term money market instruments like treasury bills, Certificate of Deposits (CDs), term deposits, commercial papers and so on. Liquid funds help to park your surplus money for a few days to a few months .The Money Market Mutual funds belong to this category. - Tax saving funds
Tax saving funds offer you tax benefits under Section 80C of the Income Tax Act. Investment in these funds are eligible for deductions up to Rs 1.5 lakh each year. Equity Linked Saving Scheme (ELSS) are an example of tax saving funds.
Some of the major MFs in the country are SBI Mutual Fund, ICICI Prudential Mutual Fund, Aditya Birla SunLife Mutual Fund, IDFC Mutual Fund and UTI Mutual Fund etc.