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Mutual Funds
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Mutual fund is referred to a mechanism focusing on pooling money through issuance of units to investors, and investing funds in securities according to objectives disclosed in offer document. Investments made in securities are spread across a wide spectrum of industries. Therefore, risk gets diversified since movement of stocks cannot be in same direction at similar proportion at same time. Mutual fund companies allot units to its investors according to proportion of money invested by them. These investors in MFs are called as unitholders.
Profits or losses get distributed by investors proportionately according to the investments made. MF companies tend to come out with several schemes that are launched from time to time having diverse investment objectives. MFs should be registered with Securities and Exchange Board of India (SEBI) before collecting funds from public.
Mutual fund schemes are managed by professional portfolio managers. Their main job is to invest funds and then manage it carefully. Focus is on creating wealth for fund’s investors in such a way that investment objectives get satisfied. SEBI is the regulatory body of MF market in India, and it ensures ethical and transparent management of investors’ wealth.
Price of MF is called as net asset value (NAV) per share. This exhibits investments in several different securities rather than just one holding. NAV can be calculated by dividing total value of securities in a particular portfolio by total MF units outstanding.
A particular scheme of mutual fund is classified as growth, income or a balanced scheme on the basis of its investment objective. These schemes can be any of the two, open-ended or closed-ended schemes. Classification of such schemes has been done as follows:
Main aim of growth schemes is to offer capital appreciation in the medium to long run. As the name dictates, these schemes make major investments in equities. Since the investments are done in equities, they have higher risks. Such schemes offer several options such as dividend option, growth option, etc. According to their goals and risk tolerance, investors can choose a suitable option. Investors are required to indicate their option in an application form. Some MFs allow investors to change selected options later. These schemes are suitable for investors who have a long-term outlook and who seek capital appreciation over a period of time.
As the name explains, the main aim of these schemes is to offer regular and steady income to investors. Therefore, these schemes invest money in fixed-income securities including bonds, corporate debentures, government securities, money-market instruments, etc. In comparison to equity schemes, they are less risky. However, scope of capital appreciation is limited in such schemes.
NAVs of these schemes change due to changes in interest rates. When interest rates fall, their NAVs tend to go up in the short run and vice-versa. Long-term investors can ignore these minor fluctuations.
Balanced schemes aim to provide both growth and regular income to their unit-holders. Therefore, these schemes invest both in equities and fixed income securities. Investments are made according to proportion written in offer documents. Such schemes are apt for investors who look for moderate growth. Balanced hybrid schemes should invest ~40-60% in equity or debt. Aggressive hybrid schemes need to invest ~65-80% of corpus in equity, while ~20-35% can be invested in debt. Such funds can be affected due to fluctuations in share prices. NAVs are less volatile against pure equity funds.
Such schemes are also known as income schemes as focus is on offering easy liquidity, capital preservation and moderate income. Such schemes make investment in short-term instruments including T-bills, CDs, commercial paper (CP) and inter-bank call money, etc. Returns don’t fluctuate much in comparison to other schemes. These funds are suitable for corporate and individual investors if they want to keep surplus funds for shorter time horizon.
Such funds make investments exclusively in government securities (G-Secs). These securities carry zero default risk. NAVs tend to fluctuate because of changes in interest rates and other factors like in income/debt-oriented schemes.
These funds tend to replicate portfolio of a particular index like BSE Sensex, NSE Nifty, etc. Index funds invest in securities in similar proportion as comprised in an index. NAVs will fluctuate according to the fluctuation in index. However, NAVs don’t fluctuate by same percentage because of factors called as “tracking error”. Relevant disclosures are made in offer document of MF scheme.
A mutual fund is an investment scheme where a group of people pool in their money to be managed by a professional fund manager. The fund manager invests this money in different securities like stocks, bonds, and other assets, depending on the objective of the fund. Mutual fund investors get the benefit of professional money management, as most fund managers are experienced and have a good track record.
Mutual funds offer a variety of schemes with different investment objectives, so investors can choose a scheme that suits their needs. However, mutual fund investments come with some risks, as the value of the fund units can go up or down depending on the performance of the securities in the fund portfolio. Also, investors should be aware of the fees and charges associated with mutual fund schemes before investing.
Each person who has invested their money into the fund gain ownership over a part of the fund, known as a unit. We can also say that the entire fund is subdivided into multiple parts known as units. So, when a person wants to invest in a fund he has to buy these units.
Investing in shares exposes the risk of the particular company, hence it’s more risky. Whereas in mutual funds, the risk is mitigated with the help of a bouquet of diverse stocks. A common dilemma which all the prospective investors have, is to choose which one is the better. The fact remains that both these avenues are distinctive from each other. One must choose which suits risk appetite and financial goals.
A mutual fund (MF) is referred to a collective investment vehicle which collects & pools money from several investors and invests that money in equities, bonds, government securities, money market instruments, etc. Mutual funds can be of different types including open-ended funds, closed-ended funds, equity funds, hybrid funds, etc. For more information, please contact us!
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