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Mutual fund is a pool of money, collected from the investor, and is invested according to certain investment objectives. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investments and the capital appreciation realized by the scheme is shared by its unit holders in proportion to the number of units owned by them (pro rata). 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 portfolio at a relatively low cost.
Mutual fund schemes may be classified on the basis of its structure and its investment objective.
Open ended Fund : An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.
Close ended Fund : A closed-end fund has a stipulated maturity period which generally ranges from 3 to 15 years. The fund is open for subscription only during a specified period. 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 they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor.
Interval Fund Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices.
Growth Fund The aim of growth funds is to provide capital appreciation over the medium to long term. Such schemes normally invest a majority of their corpus in equities. It has been proved that returns from stocks, have outperformed most other kind of investments held over the long term. Growth schemes are ideal for investors having a long term outlook seeking growth over a period of time.
Income Fund The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income.
Balanced Fund The aim of balanced funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls. These are ideal for investors looking for a combination of income and moderate growth.
Money Market Funds The aim of money market funds is 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. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for Corporate and individual investors as a means to park their surplus funds for short periods.
Tax Saving Schemes These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws as the Government offers tax incentives for investment in specified avenues. Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction Under 80C of the Income Tax Act, 1961.
Industry Specific Schemes : Industry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like Infotech, FMCG, and Pharmaceuticals etc.
Index Schemes Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50
Sectoral Schemes Sectoral Funds are those which invest exclusively in a specified sector. This could be an industry or a group of industries or various segments such as 'A' group shares or initial public offerings.
» Professional Management
A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments.
» Diversification
By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out.
» Economies of Scale
Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than you as an individual would pay.
» Liquidity
Just like an individual stock, a mutual fund allows you to request that your shares be converted into cash at any time.
» Simplicity
Buying a mutual fund is easy! Most Companies have their own line of mutual funds, and the minimum investment is small.
What is wealth creation? In the simplest sense - a desire to be rich, a desire to have control over the aspects that affect our financial life, a desire to command respect with the control of money path and having more than sufficient funds to cater all our needs in future. Through mutual funds we can create wealth and also reduce the market risk factor by a technique called averaging which can be achieved through Systematic Investment plan (SIP) and Systematic Transfer Plan (STP).
DISCLAIMER : MUTUAL FUND INVESTMENT ARE SUBJECT TO MARKET RISK,PLEASE READ THE OFFER DOCUMENT CAREFULLY BEFORE INVESTING, PAST PERFORMANCE MAY OR MAY NOT BE SUSTAINED IN FUTURE.