Mutual funds(by mba student)

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Mutual Funds
WHAT IS A MUTUAL FUND?
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.
TYPES:-
There are 3 types of mutual funds: open-end, unit investment trust, and closed-end.
The most common type, the open-end fund, must be willing to buy back shares from investors every business day. Exchange-traded funds (or "ETFs" for short) are open-end funds or unit investment trusts that trade on an exchange. Open-end funds are most common, but exchange-traded funds have been gaining in popularity.
OPEN-END FUNDS
Open-end mutual funds must be willing to buy back their shares from their investors at the end of every business day at the net asset value computed that day. Most open-end funds also sell shares to the public every business day; these shares are also priced at net asset value. A professional investment manager oversees the portfolio, buying and selling securities as appropriate. The total investment in the fund will vary based on share purchases, share redemptions and fluctuation in market valuation. There is no legal limit on the number of shares that can be issued.
CLOSED-END FUNDS
Closed-end funds generally issue shares to the public only once, when they are created through an initial public offering. Their shares are then listed for trading on a stock exchange. Investors who no longer wish to invest in the fund cannot sell their shares back to the fund. Instead, they must sell their shares to another investor in the market; the price they receive may be significantly different from net asset value. A professional investment manager oversees the portfolio, buying and selling securities as appropriate.
UNIT INVESTMENT TRUSTS
Unit investment trusts or UITs issue shares to the public only once, when they are created. UITs generally have a limited life span, established at creation. Investors can redeem shares directly with the fund at any time or wait to redeem upon termination of the trust. Less commonly, they can sell their shares in the open market. Unit investment trusts do not have a professional investment manager. Their portfolio of securities is established at the creation of the UIT and does not change.
ADVANTAGES AND DISADVANTAGES:-
Mutual funds have advantages compared to direct investing in individual securities. These include:
• Increased diversification
• Daily liquidity
• Professional investment management
• Ability to participate in investments that may be available only to larger investors
• Service and convenience
• Government oversight

Mutual funds have disadvantages as well, which include:-
• Fees
• Less control over timing of recognition of gains
• Less predictable income
• No opportunity to customize


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Mutual funds(by mba student)

  1. 1. MUTUAL FUNDS
  2. 2. WHAT ISAMUTUAL FUND? A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.
  3. 3. Types Of Mutual Fund Schemes: Type of Mutual Fund Schemes Structure Investment Objective Special Schemes Open Ended Funds Close Ended Funds Interval Funds Growth Funds Income Funds Balanced Funds Money Market Funds IndustrySpecific Schemes Index Schemes Sectoral Schemes
  4. 4.  BY STRUCTURE  Open-Ended – anytime enter/exit  Close-Ended Schemes – listed on exchange, redemption after period of scheme is over.  BY INVESTMENT OBJECTIVE  Equity (Growth) – only in Stocks – Long Term (3 years or more)  Debt (Income) – only in Fixed Income Securities (3-10 months)  Liquid/Money Market (including gilt) – Short-term Money Market (Govt.)  Balanced/Hybrid – Stocks + Fixed Income Securities (1-3 years)  SPECIAL SCHEMES Funds based on Size of the Companies Invested:  Large cap funds  Mid cap funds  Small cap funds 
  5. 5. Advantages of investing in a Mutual Fund  Affordability A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc. depending upon the investment objective of the scheme. An investor can buy in to a portfolio of equities, which would otherwise be extremely expensive.  Diversification We must spread our investment across different securities (stocks, bonds, money market instruments, real estate, fixed deposits etc.) and different sectors (auto, textile, information technology etc.).  Variety Mutual funds offer a tremendous variety of schemes.
  6. 6.  Professional Management Qualified investment professionals who seek to maximize returns and minimize risk monitor investor's money. • Transparency Being under a regulatory framework, mutual funds have to disclose their holdings, investment pattern and all the information that can be considered as material, before all investors. SEBI acts as a watchdog and safeguards investors’ interests • Liquidity A distinct advantage of a mutual fund over other investments is that there is always a market for its unit/ shares. It's easy to get one’s money out of a mutual fund. Redemptions can be made by filling a form attached with the account statement of an investor.
  7. 7. RISK FACTORS OF MUTUAL FUNDS THE RISK-RETURN TRADE-OFF: The most important relationship to understand is the risk-return trade-off. Higher the risk greater the returns/loss and lower the risk lesser the returns/loss. MARKET RISK: Sometimes prices and yields of all securities rise and fall. Broad outside influences affecting the market in general lead to this. CREDIT RISK: The debt servicing ability of a company through its cash flows determines the Credit Risk faced by you. INFLATION RISK: Inflation is the loss of purchasing power over time.
  8. 8. INTEREST RATE RISK: In a free market economy interest rates are difficult if not impossible to predict. POLITICAL/GOVERNMENT POLICY RISK: Changes in government policy and political decision can change the investment environment. LIQUIDITY RISK: Liquidity risk arises when it becomes difficult to sell the securities that one has purchased.

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