A mutual fund is a trust that pools the savings of a number of investors who share a common financial goal.The money thus collected is 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 unit holders in proportion to the number of units owned by them.
Thus the mutual fund is the most suitable investment for the common man as it offers an opportunity to investment in a diversified, professionally managed basket of securities at a relatively low cost.
Organisation of mutual fund• The Organization of a Mutual Fund is how the mutual funds are controlled. A number of entities are involved in the Organization of a Mutual Fund. This helps in the proper management of the mutual fund portfolio.1. SEBI: The primary aim of the Securities Exchange Board of India is to protect the interest of the mutual fund investors. All mutual funds, private sector and public sector are regulated by the guidelines of the SEBI. The Asset Management Company managing the funds has to be approved by the SEBI.
2. Mutual Fund Shareholders: The Mutual Fund Shareholders, like the other share holders have the right to vote. The voting rights include, the right to elect directors during the directorial elections, voting right to approve the alterations investment advisory contract pertaining to the fund and provide approval for changing investment objectives or policies3. Board of directors: The Board of directors supervise the functional activities, which include approval of the contract Asset Management Company and other various service providers.
4. Investment management company or Asset Management Company: This body handles the mutual fund portfolio as per the objectives and policies mentioned in the prospectus.5. Custodians: The custodians of the mutual funds protect the portfolio securities. Mostly qualified bank custodians are used for mutual funds.6. Transfer Agents: The transfer agent for the purpose of maintaining records and similar functions. The maintenance of the shareholders accounts, calculation of dividends to the be disbursed, sending information to the shareholders about the account statements, notices, and income tax information.
7. Trustee: The mutual fund is required to have an independent board of trustees, i.e.,two third of the trustees should be independent persons who are not associated with the sponsors in any matter.8. Sponsor: The sponsor should contribute at least 40% to the net worth of the asset management company. However, if any person hold 40% or more of the net worth of an AMC shall be a sponsor and will be required to fulfill the eligibility criteria in the mutual fund regulations.9. Unit holder: they are the party to whom the mutual fund is sold. They are the ultimate beneficiary of the income earned by the mutual fund.
Advantage of mutual fund1.Flexibility: The investments pertaining to the Mutual Fund offers the public a lot of flexibility by means of dividend reinvestment, systematic investment plans and systematic withdrawal plans2.Affordability: The Mutual funds are available in units. Hence they are highly affordable and due to the very large principal sum, even the small investors are benefited by the investment scheme.3.Liquidity: In case of Open Ended Mutual Fund schemes, the investors have the option of redeeming or withdrawing money at any point of time at the current rate of net value asset.4.Diversification: The risk pertaining to the Mutual Funds is quite low as the total investment is distributed in several industries and different stocks.
5.Professional Management: The Mutual Funds are professionally managed. The experienced Fund Managers pertaining to the Mutual Funds examine all options based on research and experience.6.Potential of return: The Fund Managers of the Mutual Funds gather data from leading economists and financial analysts. So they are in a better position to analyze the scopes of lucrative return from the investments.7.Low Costs: The fees pertaining to the custodial, brokerage, and others is very low.8.Regulated for investor protection: The Mutual Funds sector is regulated by the Securities Exchange Board of India (SEBI) to safeguard the rights of the investor.
The drawback of mutual fund1. Fees and commissions: The Mutual funds charge administrative fees to meet the daily expenses. Many funds charge brokerage or loads to pay financial planners or financial consultants, brokers. In case a shareholder does not use the services of financial adviser, he still has to pay a sales commission.2.No Guarantees: All investments bear risk factors. The Mutual Funds are no different. It depends on the stock market. A fall in the stock market would trigger a fall in the value of the mutual fund shares. Although the risk factor pertaining to Mutual funds are much lower compared to Mutual Funds.
3.Taxes: The proceeds from the sale of mutual funds are taxable, even if the same is reinvested in mutual funds.4.No Insurance: The Mutual funds are regulated by the central government. However mutual funds are still not insured against losses.5.Trading Limitations: The Mutual Funds usually have high liquidity, but most of the mutual funds, such as open-ended funds, are bought or sold at the end of the day6.Loss of Control: In case, if the mutual funds are managed by the investor himself, the portfolio management may go bad and have an adverse effect on the earnings from the investment.
7.Inefficiency of Cash Reserves: The Mutual Funds maintain big cash reserves, for situations such as a number of large withdrawals. The investors are provided with liquidity, and a major portion of the financial resources is maintained as cash, and it is not invested in some assets.8.Management risk: The investment pertaining to the Mutual Funds depends on the fund manager and his selection of the mutual fund portfolio, which is based on speculation. If things do not go as expected, the investments may not earn enough money.
Characteristic of mutual fund• 1. Open-end Funds ▫ a. Investors buy and sell shares back to the fund itself ▫ b. There is no limit on the number of shares the fund can issue ▫ c. NET ASSET VALUE (NAV) Defined as the total market value of all securities held by the fund less liabilities, divided by the number of fund shares outstanding.
Net asset value example• Example: NAV ▫ XYZ Mutual Fund owns assets totaling $10M and liabilities equal to $500,000 with 500,000 shares outstanding ▫ Therefore, NAV is: $10,000,000 - $500,000 / 500,000 $19/share
• 2. Closed-end Funds ▫ a. A fixed number of shares outstanding ▫ b. 100 Closed-end funds ▫ c. $8 billion market value• 3. Investment Trusts ▫ a. Interest is an unmanaged pool of investments ▫ b. Usually consist of corporate, government, or municipal bonds
• 4. Load or No Load ▫ a. Load Fund Charges a commission when shares are bought (7 - 8 1/2% or more) ▫ b. No Load Fund No sales charges are levied• 5. Other fees and Costs ▫ a. Professional Management Fee .25 to 1.75 percent of the average dollar amount of assets under management
Types of fund (equity)• 1. Growth ▫ Goal is capital appreciation• 2. Maximum Growth ▫ Highly speculative, seeking large profits from capital gains a. Often buy stocks of small, unseasoned companies b. Highly speculative
• 3. Income ▫ CURRENT income is main objective a. Interest income b. Dividend income• 4. Balanced Funds ▫ Objective is to earn both capital gains and current income a. High-grade common stocks (60 - 75%) b. Fixed income securities (25 - 40%)
• 5. Small Company ▫ Invest in small companies that usually have sales of $100 million or less. 6. International ▫ Can invest in one region or area of the world ▫ Can invest in specific country• Bond Funds ▫ Objective is to invest in bonds a. Income is primary objective b. Two advantages Liquidity Diversification
• 6. Money Market Funds ▫ Offers the individual investor access to high- yielding money market instruments without having to pay $100,000 denominations a. Bank CD’s b. Treasury Bills c. Commercial Paper• 7. Dual Funds ▫ Closed-end Funds with two types of shares a. INCOME shares (Senior) which receive two times income as Junior b. CAPITAL shares (Junior) which receive two times the capital gains as Senior
• 8. Specialty Funds - Single Industry ▫ a. Option trading ▫ b. Commodity funds ▫ c. Oil drilling ▫ d. Cattle funds ▫ e. Electronics ▫ f. Gold ▫ g. Chemicals ▫ h. Health
Special services• 1. Saving Plans ▫ Investor adds funds on a regular basis• 2. Automatic Reinvestment Plans ▫ Dividends and capital gains are reinvested in additional shares• 3. Regular Income ▫ Through withdrawal plans, the investor can receive periodic repayment or income Shares or Dollars
• 4. Conversion Privileges ▫ Allows the investor the right to switch from one fund to another a. Must confine switches within the same family of funds b. Usually no transfer charges• 5. Check Writing Privileges ▫ a. Shareholders have the right to write checks drawn on the Mutual Fund account ▫ b. Normally checks must be written for at least $500 ▫ c. Almost all Money Funds have this privilege
• The mutual fund universe can be divided into six basic styles: ▫ Small cap growth funds ▫ Large cap growth funds ▫ Small cap value ▫ Large cap value ▫ Foreign funds ▫ Fixed income funds
Various mutual fund in India1. State bank of India mutual fund2. ICICI prudential mutual fund3. TATA mutual fund4. HDFC mutual fund5. Birla Sun Life mutual fund6. Reliance mutual fund7. Kotak Mahindra mutual fund