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
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. 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. 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. 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. 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. 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. 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.