|
MUTUAL FUNDS
An investment company that acquires funds by selling shares to investors, and buys existing shares back at the request of the shareholder, and then invests the money in diversified stocks, bonds and/or other assets (securities), is known as a mutual fund. The combined holdings of stocks, bonds or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings. A share represents part ownership in a company, commonly called "stocks" and "equities." Each share represents an investor's proportionate ownership of the fund's holdings and the income those holdings generate. Mutual fund is an investment company that is concerned with the collection of funds of smaller investors and place them under professional management, thereby allowing them to diversify their portfolio. A mutual fund is created by pooling together contributions from various investors. The corpus of the fund is then deployed in investment alternatives that help to meet predefined investment objectives. A mutual fund upon its formation issues a prospectus that gives details of its intended investment strategy as well the fees the investors will be charged.
A mutual fund basically refers to a partnership, unit trust or company that is formed or organized for the purpose of investing, and which issues shares or similar interests that entitle the holder to receive an amount computed by reference to the value of the share or interest. Such investment companies purchase financial assets using funds obtained mainly by issuing shares. There are myriad kinds of mutual funds, each with its own goals and methodologies.
The income earned by a mutual fund through the investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by it. Mutual fund industry in India was introduced by UTI in the year 1963. From the year 1987,
non-UTI players entered the industry. In the past decade, Indian mutual fund industry had seen dramatic improvements, both quality-wise as well as quantity-wise. Growth of mutual funds in India was slow in its initial phase, since UTI was alone in this field. However, with the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families.
ADVANTAGES OF MUTUAL FUNDS:
These days the bank rates have fallen down and are generally below the inflation rate. Therefore, keeping large amounts of money in bank is not a wise option, as in real terms the value of money decreases over a period of time. One of the options is to invest the money in stock market. But a common investor is not informed and competent enough to understand the intricacies of stock market. This is where mutual funds come to the rescue. Some of the benefits that investing in mutual funds offer are-
· Reduces risk- By investing in a number of companies across a broad cross-section of industries and sectors, mutual funds increase the diversification of portfolio of an investor, thereby minimizing risk. This is because seldom do all the stocks decline at the same time in the same proportion.
· Maximize opportunities- Most mutual funds involve skilled professionals, backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme.
·
Liquidity or quick access to money- Mutual funds can be bought and sold on any dealing day.
·
Affordability- Mutual funds are highly cost efficient. A Mutual Fund because of its large corpus allows even a small investor to take the benefit of its investment strategy.
· Choice of schemes- Mutual funds offer a family of schemes to suit the varying needs of investors over a lifetime.
·
Convinience- Mutual fund shares can be bought either by mail, phone or over the internet.
·
Tax benefits- The special tax treatment of mutual funds is designed in part to provide their investors with a long-term capital gain or tax-exempt interest.
DISADVANTAGES OF MUTUAL FUNDS:
The following are important disadvantages of investing through mutual fund:
·
No guarantees: Mutual funds are like many other investments are without a guaranteed return. There is always the possibility that the value of mutual fund will go down if the entire stock market declines in value, no matter how balanced the portfolio may be. Mutual funds experience price fluctuations along with the stocks that make up the fund. So one needs to do a fair bit of research on the risks involved while buying a particular fund.
·
Fees and commission: All funds have a range of different fees. When the fund doesn't make money these fees only magnify losses.
·
Management risks- The investor must rely on the integrity of the professional fund manager. If he does not perform well, the investor may not make much money, or sometimes may be at loss.
WORKING OF MUTUAL FUNDS:
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unitholders. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. Mutual fund schemes refer to a defined investment objective and strategy. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public. Wide variety of mutual fund schemes exist to cater to the needs of the investors, such as financial position, risk tolerance and return expectations etc. The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV).The money collected from the investors is invested in securities markets by the mutual funds. NAV is nothing but the market value of the securities held by mutual fund schemes. NAV of a scheme varies on day to day basis, since the market value of securities changes every day.
Mutual fund schemes may be classified on the basis of its structure and its investment objective. On the basis of structure, schemes can be classified as under-
·
Open-ended funds: Such funds are available for subscription all through the year, without any fixed maturity.
·
Closed-ended funds: Such funds have a stipulated maturity, ranging from 3-15 years, and the fund is open for subscription only during a specified period.
·
Interval funds: Such funds combine the features of both open as well as closed ended schemes.
On the basis of objectives, classification is as follows-
·
Growth funds: Growth funds are those mutual funds that aim to achieve capital appreciation by investing in growth stocks. They focus on fast growing companies rather than companies that pay out dividends.
·
Income funds: The aim of income funds is to provide regular and steady income to investors and generally invest in bonds, government securities, etc.
·
Balanced funds: Such funds buy a combination of common stock, preferred stock, bonds, and short-term bonds, thereby providing the investor the option of growth (by investing in both stocks) and income (by investing in bonds).
·
Money market funds: The aim of money market funds is to provide easy liquidity, preservation of capital and moderate income. Money market funds are generally the safest and most secure of mutual fund investments.
·
Tax-saving schemes: These schemes offer tax rebates to the investors. Tax-saving funds offer a unique investment proposition since investors are granted the opportunity to invest in a market-linked investment avenue and yet claim tax benefits.
Association of mutual funds in India(AMFI), an apex body of all Asset Management Companies (AMC) is a non-profit organization, which has been registered with SEBI. AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fund industry. AMFI assures the investors in units of mutual funds that the mutual funds function within the strict regulatory framework. It follows the principle of both protecting and promoting the interests of mutual funds as well as their unit holders.
|
