Mutual Fund

Do not Put All Eggs in One Basket’. Mutual Fund is the best vehicle to apply this proverb in practical life.
Like most developed and developing countries the mutual fund cult has been catching on in India. There are various reasons for this. Mutual funds make it easy and less costly for investors to satisfy their need for capital growth, income and/or income preservation.

And in addition to this a mutual fund brings the benefits of diversification and money management to the individual investor, providing an opportunity for financial success that was once available only to a select few.

Understanding Mutual funds is easy as it's such a simple concept: a mutual fund is a company that pools the money of many investors -- its shareholders -- to invest in a variety of different securities. Investments may be in stocks, bonds, money market securities or some combination of these. Those securities are professionally managed on behalf of the shareholders, and each investor holds a pro rata share of the portfolio -- entitled to any profits when the securities are sold, but subject to any losses in value as well.
For the individual investor, mutual funds provide the benefit of having someone else manage your investments and diversify your money over many different securities that may not be available or affordable to you otherwise. Today, minimum investment requirements on many funds are low enough that even the smallest investor can get started in mutual funds.
A mutual fund, by its very nature, is diversified -- its assets are invested in many different securities. Beyond that, there are many different types of mutual funds with different objectives and levels of growth potential, furthering your chances to diversify.



What is an Asset Management Company?

An Asset Management Company (AMC) is a highly regulated organisation that pools money from investors and invests the same in a portfolio. They charge a small management fee, which is normally 1.5 per cent of the total funds managed.

What is NAV?

NAV or Net Asset Value of the fund is the cumulative market value of the assets of the fund net of its liabilities. NAV per unit is simply the net value of assets divided by the number of units outstanding. Buying and selling into funds is done on the basis of NAV-related prices

What are the different types of Mutual funds?

(a) On the basis of Objective


Equity Funds/ Growth Funds

Funds that invest in equity shares are called equity funds. They carry the principal objective of capital appreciation of the investment over the medium to long-term. The returns in such funds are volatile since they are directly linked to the stock markets. They are best suited for investors who are seeking capital appreciation. There are different types of equity funds such as Diversified funds, Sector specific funds and Index based funds.


Diversified funds

These funds invest in companies spread across sectors. These funds are generally meant for risk-taking investors who are not bullish about any particular sector.

Sector funds

These funds invest primarily in equity shares of companies in a particular business sector or industry. These funds are targeted at investors who are extremely bullish about a particular sector.


Index funds

These funds invest in the same pattern as popular market indices like S&P 500 and BSE Index. The value of the index fund varies in proportion to the benchmark index.


Tax Saving Funds

These funds offer tax benefits to investors under the Income Tax Act. Opportunities provided under this scheme are in the form of tax rebates U/s 88 as well saving in Capital Gains U/s 54EA and 54EB. They are best suited for investors seeking tax concessions.


Debt / Income Funds

These Funds invest predominantly in high-rated fixed-income-bearing instruments like bonds, debentures, government securities, commercial paper and other money market instruments. They are best suited for the medium to long-term investors who are averse to risk and seek capital preservation. They provide regular income and safety to the investor.


Liquid Funds / Money Market Funds

These funds invest in highly liquid money market instruments. The period of investment could be as short as a day. They provide easy liquidity. They have emerged as an alternative for savings and shortterm fixed deposit accounts with comparatively higher returns. These funds are ideal for Corporates, institutional investors and business houses who invest their funds for very short periods.


Gilt Funds

These funds invest in Central and State Government securities. Since they are Government backed bonds they give a secured return and also ensure safety of the principal amount. They are best suited for the medium to long-term investors who are averse to risk.


Balanced Funds

These funds invest both in equity shares and fixed-income-bearing instruments (debt) in some proportion. They provide a steady return and reduce the volatility of the fund while providing some upside for capital appreciation. They are ideal for medium- to long-term investors willing to take moderate risks.


Hedge Funds

These funds adopt highly speculative trading strategies. They hedge risks in order to increase the value of the portfolio.

(b) On the basis of Flexibility


Open-ended Funds

These funds do not have a fixed date of redemption. Generally they are open for subscription and redemption throughout the year. Their prices are linked to the daily net asset value (NAV). From the investors' perspective, they are much more liquid than closed-ended funds. Investors are permitted to join or withdraw from the fund after an initial lock-in period.


Close-ended Funds

These funds are open initially for entry during the Initial Public Offering (IPO) and thereafter closed for entry as well as exit. These funds have a fixed date of redemption. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but the discount narrows as maturity nears. These funds are open for subscription only once and can be redeemed only on the fixed date of redemption. The units of these funds are listed (with certain exceptions), are tradable and the subscribers to the fund would be able to exit from the fund at any time through the secondary market.


Interval funds

These funds combine the features of both open-ended and close-ended funds wherein the fund is closeended for the first couple of years and open-ended thereafter. Some funds allow fresh subscriptions and redemption at fixed times every year (say every six months) in order to reduce the administrative aspects of daily entry or exit, yet providing reasonable liquidity.

(c) On the basis of geographic location


Domestic funds

These funds mobilise the savings of nationals within the country.


Offshore Funds

These funds facilitate cross border fund flow. They invest in securities of foreign companies. They attract foreign capital for investment.

Is there is any tax applicable on the redemption of mutual funds?

Yes. The tax applicable is called as STT i.e. Security transaction tax which is 0.25%. STT is applicable only in case of redemption of equity linked schemes.

Advantages of investing in mutual funds:

  • Portfolio Diversification: ‘Do not Put All Eggs in One Basket’. Mutual Fund is the best vehicle to apply this proverb in practical life as a diversified equity scheme invests across multiple sectors and stocks. A typical diversified equity scheme holds around 30 to 50 stocks in portfolio so even if few stocks or sectors do not perform well investor’s money can get protected.
  • Diversification of Risk: Whatever is your investment amount, that amount gets diversified across multiple stocks held by fund manager.
  • Liquidity: Mutual Fund investment provides high degree of liquidity as investors can sell units to the fund if scheme is open ended or in the stock market if scheme is close ended. Investor normally gets money credited in bank account or receives cheque within three working days of redemption.
  • Professional Management and Expertise: Through mutual fund, individual investor can take advantage of expertise of fund manager and his fund management and research team. This kind of detailed research work is not possible to do for an individual investor. Fund managers are highly qualified and experienced in their field which allows investors to take advantage of their expertise.
  • Convenience: Mutual Funds score over other products in terms of convenience and ease. What investors require is to fill an application form and attach a copy of PAN card and cheque.
  • Tax Advantage: Investment made in mutual funds offer multiple tax advantages and prove tax efficient. There is no long term capital gain in equity schemes if an investor stays invested for one year. Dividends are also tax free in hands of investors in equity schemes.



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