Mutual Funds, Mutual Fund Basics, Types of Mutual Funds, Mutual Fund Investments
Mutual Fund Basics
Learn How to Invest in Mutual Funds
Table of Contents
• What are Mutual Funds
• How Mutual Funds Work
• Mutual Fund Schemes
• Types of Mutual Funds
• Mutual Funds Money Investments & Objectives
• Mutual Fund Scheme Benefits
• Advantages of Investing in Mutual Funds
What are Mutual Funds
•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 realized are shared by its unit holders 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.
How do Mutual Fund Work
• Each fund's investments are chosen and monitored by professionals
who use this money to create a portfolio.
• Professionals are called Fund Managers.
•That portfolio could consist of stocks, bonds, money market
instruments or a combination of those.
• The Portfolio comprises of the assets the investment is diversified
• As an investor, you own shares of the mutual fund, not the individual
securities. Mutual funds permit you to invest small amounts of money,
however much you would like, but even so, you can benefit from being
involved in a large pool of cash invested by other people. All
shareholders share in the fund' s gains and losses on an equal basis,
proportionately to the amount they've invested.
• The investment objective is the goal that the fund manager sets for
the mutual fund when deciding which stocks and bonds should be in the
fund's portfolio. For example, an objective of a growth stock fund might
be long-term capital appreciation.
Mutual Funds Schemes
• Open-ended Fund/ Scheme - An open-ended fund or scheme is
one that is available for subscription and repurchase on a
continuous basis. These schemes do not have a fixed maturity
period. 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: A close-ended fund or scheme has
a stipulated maturity period e.g. 5-7 years. The fund is open for
subscription only during a specified period at the time of launch
of the scheme. Investors can invest in the scheme at the time of
the initial public issue and thereafter they can buy or sell the
units of the scheme on the stock exchanges where the units are
A mutual fund scheme can be
classified into open-ended scheme or
close-ended scheme depending on its
• Interval Schemes : Interval Schemes are that scheme, which
combines the features of open-ended and close-ended schemes.
The units may be traded on the stock exchange or may be open
for sale or redemption during pre-determined intervals at NAV
Types of Mutual Funds… (1)
Types of Mutual Funds… (2)
Equity funds invest a maximum part of their corpus into
equities holdings. The structure of the fund may vary
different for different schemes and the fund manager’s
outlook on different stocks.
The objective of Debt Funds is to invest in debt papers.
Government authorities, private companies, banks and
financial institutions are some of the major issuers of debt
papers. By investing in debt instruments, these funds ensure
low risk and provide stable income to the investors.
Balanced Funds, are a mix of both equity and debt funds. They
invest in both equities and fixed income securities, which are in
line with pre-defined investment objective of the scheme. These
schemes aim to provide investors with the best of both the
worlds. Equity part provides growth and the debt part provides
stability in returns.
Mutual Funds Money Investments & Objectives
Growth Schemes are also known as equity schemes. The aim of these schemes
is to provide capital appreciation over medium to long term. These schemes
normally invest a major part of their fund in equities and are willing to bear
short-term decline in value for possible future appreciation.
Income Schemes are also known as debt schemes. The aim of these
schemes is to provide regular and steady income to investors. These
schemes generally invest in fixed income securities such as bonds and
corporate debentures. Capital appreciation in such schemes may be limited.
Balanced Schemes aim to provide both growth and income by periodically
distributing a part of the income and capital gains they earn. These schemes
invest in both shares and fixed income securities, in the proportion indicated
in their offer documents (normally 50:50).
Money Market Schemes aim to provide easy liquidity, preservation of capital
and moderate income. These schemes generally invest in safer, short-term
instruments, such as treasury bills, certificates of deposit, commercial paper
and inter-bank call money.
Money Market Schemes
Mutual Funds – Other Beneficial Schemes
Tax-saving schemes offer tax rebates to the investors under tax laws
prescribed from time to time. Under Sec.88 of the Income Tax Act,
contributions made to any Equity Linked Savings Scheme (ELSS) are eligible
Index schemes attempt to replicate the performance of a particular index such
as the BSE Sensex or the CNX S&P Nifty. The portfolio of these schemes will
consist of only those stocks that constitute the index. The percentage of each
stock to the total holding will be identical to the stocks index weightage. And
hence, the returns from such schemes would be more or less equivalent to
those of the Index.
Sector funds/schemes which invest in the securities of only those sectors or
industries as specified in the offer documents. e.g. Pharmaceuticals,
Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The
returns in these funds are dependent on the performance of the respective
Advantage of Investing in Mutual Funds
Asset Allocation: Asset Allocation involves diversifying your investments
in various assets. For example, by choosing to buy stocks in the retail
sector and offsetting them with stocks in the industrial sector, you can
reduce the impact of the performance of any one security on your entire
portfolio. So if one asset doesn’t perform well, you can fall back on
Economics of Scale: Purchasing multiple securities at a time will reduce
the cost of the securities.
Divisibility : Smaller denominations of mutual funds provide mutual fund
investors the ability to make periodic investments through monthly
purchase plans while taking advantage of dollar-cost averaging.
Liquidity: Another advantage of mutual funds is the ability to get in and
out with relative ease. In general, you are able to sell your mutual funds
in a short period of time without there being much difference between
the sale price and the most current market value.
Professional Management & Benefits: When you buy a mutual fund, you
are also choosing a professional money manager. This manager will use
the money that you invest to buy and sell stocks that he or she has
carefully researched. Therefore, rather than having to thoroughly
research every investment before you decide to buy or sell, you have a
mutual fund's money manager to handle it for you. For the average
investor, there is an option of Tax rebates under section 80cc.