Mutual fund

Mutual fund

Ø  Mutual fund is a financial intermediary that pools the savings of investors for collective investment in a diversified portfolio of securities.

Ø  The SEBI (Mutual Fund) Regulations, 1996 defines mutual fund as a “ a fund established in the form of a trust to raise money through the sale of units to the public.

Ø  MF serves as a link between the investor and the securities market by mobilizing savings from the investors and investing them in the securities market to generate returns.

Ø  The basic objective of mutual fund is to provide continuous liquidity and higher yields

Benefits of Mutual Fund

Ø  Professional Management

Ø  Portfolio Diversification

Ø  Reduction in transaction cost

Ø  Liquidity

Ø  Convenience

Ø  Flexibility

Ø  Tax benefits

Ø  Transparency

Ø  Equity Research

Types of Mutual Fund Schemes

•       Open-ended Fund / Scheme

Ø  An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis.

Ø  These schemes do not have a fixed maturity period. The number of units outstanding goes up or down every time, the fund issues new units or repurchasing existing units. This means, the unit capital of an open-ended mutul fund is not fixed but its variable.

Ø  Not listed in the stock exchange

Ø  Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.

•       Close-ended Fund / Scheme

Ø  A close-ended fund or scheme has a stipulated maturity period.

Ø  Realization is possible at the end of maturity

Ø  In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices.

Ø   SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.

Ø  And unit capital of a close-ended fund is fixed, because it makes a one time sale of a fixed number of units.

•       Growth / Equity Oriented Schemes

Ø  The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities.

Ø  Such funds have comparatively high risks.

Ø  These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences.

Ø  The mutual funds also allow the investors to change the options at a later date.

Ø  Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.

•       Income/ Debt Oriented Schemes

Ø  The aim of income funds is to provide regular and steady income to investors.

Ø  Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments.

Ø  Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds.

Ø  The NAVs of such funds are affected because of change in the domestic interest rates. However, long term investors may not bother about these fluctuations.