It is a collective investment vehicle that collects money from a number of investors and invests the same in equities, bonds, government securities, and money market instruments by a professional Fund Manager.
The money collected in a mutual fund scheme is invested by professional fund managers in stocks and bonds etc. in line with a scheme’s investment objective. The income/gains generated from this collective investment scheme are distributed proportionately amongst the investors, after deducting applicable expenses and levies, by calculating a scheme’s “Net Asset Value” or NAV. In return, mutual fund charges a small fee.
In short, a mutual fund is a collective pool of money contributed by several investors and managed by a professional Fund Manager.
It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments, and/or other securities. And the income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting applicable expenses and levies, by calculating a scheme’s “Net Asset Value” or NAV. Simply put, the money pooled in by a large number of investors is what makes up a Mutual Fund.
Mutual Funds in India are established in the form of a Trust under Indian Trust Act, 1882, in accordance with SEBI (Mutual Funds) Regulations, 1996.
The fees and expenses charged by the mutual funds to manage a scheme are regulated and are subject to the limits specified by SEBI.
HOW A MUTUAL FUND WORK?
One should avoid the temptation to review the fund’s performance each time the market falls or jumps up significantly. For an actively-managed equity scheme, one must have patience and allow reasonable time – between 18 and 24 months – for the fund to generate returns in the portfolio.
When you invest in a mutual fund, you are pooling your money with many other investors. Mutual fund issues “Units” against the amount invested at the prevailing NAV. Returns from a mutual fund may include income distributions to investors out of dividends, interest, capital gains or other income earned by the mutual fund. You can also have capital gains (or losses) if you sell the mutual fund units for more (or less) than the amount you invested.
- Mutual funds are ideal for investors who –lack the knowledge or skill/experience of investing in stock markets directly.
- Want to grow their wealth, but do not have the inclination or time to research the stock market.
- wish to invest only small amounts.
WHY INVEST IN MUTUAL FUNDS?
As investment goals vary from person to person – Viz
- Post-retirement expenses,
- Money for children’s education or marriage,
- House, Car etc. purchase
And hence the investment products required to achieve these goals too vary.
Mutual funds provide certain distinct advantages over investing in individual securities.
Mutual funds offer multiple choices for investment across equity shares, corporate bonds, government securities, and money market instruments, providing an excellent avenue for retail investors to participate and benefit from the uptrends in capital markets.
The main advantages are that you can invest in a variety of securities for a relatively low cost and leave the investment decisions to a professional manager.
let us understand what is “Net Asset Value” or NAV.
Just like an equity share has a traded price, a mutual fund unit has a Net Asset Value per Unit. The NAV is the combined market value of the shares, bonds, and securities held by a fund on any particular day (as reduced by permitted expenses and charges). NAV per Unit represents the market value of all the Units in a mutual fund scheme on a given day, net of all expenses and liabilities plus income accrued, divided by the outstanding number of Units in the scheme.
Is mutual fund a good investment?
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. The money collected in mutual funds is invested by professional fund managers in line with the scheme’s stated objective. In return, the fund house charges a small fee which is deducted from the investment. The fees charged by mutual funds are regulated and are subject to certain limits specified by the Securities and Exchange Board of India (SEBI).
India has one of the highest savings rates globally. This penchant for wealth creation makes it necessary for Indian investors to look beyond the traditionally favored bank FDs and gold toward mutual funds. However, a lack of awareness has made mutual funds a less preferred investment avenue.
Mutual funds offer multiple product choices for investment across the financial spectrum. As investment goals vary – post-retirement expenses, money for children’s education or marriage, house purchase, etc. – the products required to achieve these goals vary too. The Indian mutual fund industry offers a plethora of schemes and caters to all types of investor needs.
Mutual funds offer an excellent avenue for retail investors to participate and benefit from the uptrends in capital markets. While investing in mutual funds can be beneficial, selecting the right fund can be challenging. Hence, investors should do the proper due diligence of the fund and take into consideration the risk-return trade-off and time horizon or consult a professional investment adviser. Further, in order to reap maximum benefit from mutual fund investments, it is important for investors to diversify across different categories of funds such as equity, debt, and gold.
While investors of all categories can invest in the securities market on their own, a mutual fund is a better choice for the only reason that all benefits come in a package.
TYPE OF MUTUAL FUND SCHEMES
Mutual Fund schemes could be ‘open-ended’ or close-ended and actively managed or passively managed.
An open-end fund is a mutual fund scheme that is available for subscription and redemption on every business throughout the year, (akin 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.
A closed-end fund is open for subscription only during the initial offer period and has a specified tenor and fixed maturity date (akin to 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 other stocks, so that investors seeking to exit the scheme before maturity may sell their Units on the exchange.
ACTIVELY MANAGED FUNDS
An actively managed fund is a mutual fund scheme in which the fund manager “actively” manages the portfolio and continuously monitors the fund’s portfolio , deciding on which stocks to buy/sell/hold and when, using his professional judgement, backed by analytical research. In an active fund, the fund manager’s aim is to generate maximum returns and outperform the scheme’s benchmark.
PASSIVELY MANAGED MUTUAL FUNDS
A passively managed fund, by contrast, simply follows a market index, i.e., in a passive fund, the fund manager remains inactive or passive inasmuch as, she does not use her judgment or discretion to decide as to which stocks to buy/sell/hold, but simply replicates/tracks the scheme’s benchmark index in exactly the same proportion. Examples of Index funds are an Index Fund and all Exchange Traded Funds. In a passive fund, the fund manager’s task is to simply replicate the scheme’s benchmark index i.e., generate the same returns as the index, and not to outperform the scheme’s benchmark.
Read more on Index Fund
Source/Contribution by: AMFIINDIA
For More detail: NJ Publications