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What is Mutual Funds?

What is mutual funds

Investing your hard earned money in multiplier tools or for profits and dividends is much desired by the working class these days. Of all investment options, mutual funds are touted to be the best tool for wealth creation over long term. They are of several types, with risk variations depending on the kind of asset classes these funds are invested in. As the name denotes, mutual fund is a fund which is created when a large number of investors put in their money, and these investments are then managed by professionally qualified people who are experienced in investing in different asset classes, such as shares, bonds, money market instruments and even gold and property.

The assets name suggests the kind of their scheme, e.g. a diversified equity fund will invest in a diverse range of stocks, a gilt fund will invest in various government securities, while a pharma fund will invest in stocks of pharmaceutical or related companies.

Mutual funds, first of all came in the money market (regulated by the RBI), but they have the freedom to operate in the capital market, too. This is why they have provision of dual regulators – the RBI and SEBI. Mutual funds are are required by law to register with the Securities and Exchange Board of India (SEBI) so as to keep a strict vigil and also acts as the first wall of defence for all investors.

Each mutual fund is basically run by a group of qualified and experienced individuals who form a company, which is called as an Asset Management Company (AMC). Here the operations of the AMC are under the guidance of an additional group of people called the Trustees. The members of the AMC as well as the trustees, have a fiduciary accountability, for they are entrusted with the task of managing the hard earned money of the common people.

A Fund House can be a company or even a bank and only they are qualified to sell mutual funds. The only exception being a distributor who could be an individual working for the fund house, is permitted to sell the mutual funds. The fund house allots the ‘units’ of the MF to the investor at a price fixed by SEBI, which is based on the net asset value (NAV). Here NAV is the total value of investments in a scheme divided by the total number of units issued to investors in the same scheme. These NAVs are computed and published on a daily basis.

Types of Schemes offered by Mutual Funds

  1. Open-ended Schemes: An open-ended fund is usually available on an ongoing basis, where an investor can buy or sell as and when they intend to, on the basis of the NAV. Hence, the number of units issued also changes along with the value of the scheme’s portfolio. Therefore, the NAV also changes on a daily basis. In India, usually fund houses can sell any number of units of a particular scheme, but at times they limit selling additional units of a scheme for some time.
  2. Closed-ended Schemes: A close-ended fund usually issue units only once when they launch an offer, and these are called the New Fund Offer (NFO). Subsequently, these units are listed on the stock exchanges where they are traded on a daily basis, where any investor can buy and sell them. Close-ended schemes are managed by fund houses for a defined period of time, and at the end of the term either the money is returned to the investors or the scheme is made open ended. However, units of close ended funds which are listed on the stock exchanges, trade at a high discount to their NAVs. When the closure date nears, the discount between the NAV and the trading price narrows, and gradually on the day of closure of the scheme.
  3. Exchange-Traded Funds (ETFs): ETFs have a combination of open-ended and close-ended schemes. Like any other close-ended schemes, these too are listed and traded on a stock exchange on a daily basis. However, the prices are generally close to its NAV, or the underlying assets, like gold ETFs.

Advantages of investing in MFs –

  1. Diversified portfolio,
  2. Professionally managed services,
  3. Government backed regulatory help,
  4. Liquidity
  5. Low cost for all the benefits.

When an investor, invests in a mutual fund scheme that has blue chip stocks in its portfolio, he can indirectly get an access to these stocks, which otherwise buying and managing directly on the stock market would be costlier.

Mutual funds invest the investors money in both the loan and share markets. Buyers of MF units are given choice/option as in which of the markets they wish their money to be invested by the fund managers of the MF.

SEBI (Securities and Exchange Board of India) has classified the mutual fund schemes into five broad categories to avoid confusion and make it easier for investors to compare plans with similar characteristics

These are –

Debt, Equity, Hybrid, Solution- oriented (such as retirement and children funds), and other schemes.


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