These days you are hearing more and more about mutual funds as a means of investment. A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The investors money is collected and then invested in capital market instruments such as shares, debentures and other securities.The income earned through these investments and the capital appreciation realised are shared by its unitholders 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.
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FLOW CHART BELOW DESCRIBES BROADLY THE WORKING OF A MUTUAL FUND
FUTURE OF MUTUAL FUNDS IN INDIA
Mutual funds industry has shown a remarkable growth over the years. In the present times, there are more than 46 Management Companies which manage the assets of their clients which is over 17 Lac Crores . The sector has an immense potential for growth. According to Asset Under Management vs Gross Domestic Ratio, India stands at considerable low of 7% while the developed countries like US, UK and Australia are at 91%, 51% and 114% respectively. These figures are for the year 2015. Apart from this, more than 85% of AUM is received from the major 15 cities. Considering various developmental factors, the growth of mutual funds in India is likely to further consolidate and we can expect the Industry to thread bearer of the Financial Services Sector.
ADVANTAGES OF INVESTING IN MUTUAL FUNDS
With mutual fund investments, you can spread your money in small fragments across different companies. This way you reap the benefits on your small investments.
Investors can redeem their units from the fund house any time, in case of their investment in open-ended scheme whereas in closed-ended schemes, one can buy and sell the units at the market value as the units are already listed on the stock exchange.
Mutual funds companies invest across various industries and sector to diversify the risk.
Investors can choose any mutual fund scheme as per their financial goals. With various plans, mutual funds have to offer such as regular investment, regular withdrawal and dividend reinvestment plans. Investors can invest or withdraw depending upon their preferences and convenience accordingly.
Mutual funds have a number of investors, the fund’s transaction costs and fund management fees get reduced to a considerable extent. Thus, mutual funds are relatively less expensive than direct investment in the capital markets.
Mutual fund is professionally managed by skilled fund managers. These fund managers use their investment expertise for analyzing the performance and prospects of various financial instruments before selecting a particular investment.
Investors have choice to opt schemes offered by mutual funds companies depending upon their risk/return profile.
*Fund switching flexibility
Some of the mutual fund schemes offer the flexibility to investors to switch between schemes or funds for tapping better returns available on other schemes/funds.
All the mutual funds are registered with SEBI in order to protect the interests of investors. They are regulated and monitored by the SEBI for safeguarding the rights of investors.
*Easy Tracking of investments
It becomes difficult for investors to consistently review their investment portfolios. To simplify the procedure, mutual funds provide clear statements of all investments for easy accessibility of investors.
Mutual funds also offer tax-saving schemes such as ELSS or equity linked saving schemes. Investments made in these schemes are entitled to income tax deductions.
Systematic Investment Plan or SIP is a strategy of investment that allows one to invest a certain amount of money at a regular interval. Investors with low-income levels can invest in SIP i.e. Systematic Investment Plan as low as ₹500.
SWP refers to Systematic Withdrawal Plan which allows an investor to withdraw a fixed or variable amount from his mutual fund scheme on a preset date every month, quarterly, semi annually or annually as per his needs.
STP refers to Systematic Transfer Plan where an investor invests a lump sum amount in one scheme and regularly transfers (i.e. switches) a predefined amount into another scheme.
TYPES OF MUTUAL FUNDS IN INDIA
There are different types of mutual funds which have been categorized on the basis of asset class, structure and investment objective that has been described below:
These funds invest only in stocks and provides high returns over a long-term. Equity funds have less tax liability in the long term as compared to debt funds.
*Money Market Funds
These schemes invest in short-term instruments like commercial paper, certificate of deposit, treasury bills and overnight money. These schemes are least volatile as compared to other schemes because they invest in money market instruments with short-term maturities.
*Balanced or Hybrid Funds
These funds invest in a mixed combination of asset classes such as equity and debt. There are some hybrid funds where the proportion of equity is higher than debt while in other schemes it is far way different. The main aim of hybrid funds is to suitably balance the risk and returns.
These funds invest in debt-market instruments such as bonds, government securities, debentures and so on. These are comparatively stable investment than other equities.
Index funds are those funds which invest in instruments representing a specific index on an exchange so as to reflect the movement and returns of the index. e.g. buying shares replicating of the BSE Sensex.
These schemes restrict their investment in one or more predefined sectors e.g. technology sector, infrastructure sector and so on. Since their performance is dependent upon one particular type of sector, they provide less amount of diversification and are considered to be risky.
These funds make a major investment in equity shares. Investments made in these funds are entitled to deductions as per Income Tax Act . They are considered highly-risky but also provide high returns on the better performance of the fund. Such types of schemes are also called as ELSS(Equity Linked Savings Scheme)
FUND OF FUNDS
A Fund of Funds is a mutual fund scheme that invests in other mutual funds. Similar to balanced funds, they try to make asset allocation and diversification easier for the investor. By investing in Fund of Funds, investors can derive the benefits of diversification across various fund categories. e.g. Gold Funds leveraging the performance from Gold exchange traded fund.
BASED ON STRUCTURE
These are the funds without any fixed maturity period. Open-end mutual fund shares are bought and sold on demand at their net asset value, or NAV, which is based on the value of the fund's underlying securities and is generally calculated at the close of every trading day. Investors buy shares directly from a fund.
*Closed Ended Funds
A closed-end fund (CEF) or closed-ended fund is a collective investment model based on issuing a fixed number of shares which are not redeemable from the fund. Unlike open-end funds, new shares in a closed-end fund are not created by managers to meet demand from investors.
Exchange-traded funds also trade like stocks on an exchange, but their market prices hew more closely to their net asset value than closed-end funds. Premiums and discounts usually stay within 1 percent of NAV, with the exception of some smaller ETFs that trade infrequently. An ETF is a basket of stocks that reflects the composition of an Index, like S&P CNX Nifty or BSE Sensex. The ETFs trading value is based on the net asset value of the underlying stocks that it represents.
BASED ON INVESTMENT OBJECTIVE
A growth fund is a type of mutual fund that invests primarily in those stocks which provide capital appreciation. They are considered to be risky funds and are suited for the investors with a long-term investment horizon.
These are the funds which invest predominantly in short-term or very short-term instruments with a residual maturity of upto 91 days such as T-Bills, CPs etc. They provide high liquidity with moderate returns and are suited for investors with short-term investment horizon.
These are the funds, where money is invested predominantly in fixed income security such as bonds, debentures etc. with an objective of providing capital protection and continual income to investors.