Monday, 7 April 2014

Mutual Funds


Mutual Funds are professionally managed vehicles of collective investment that pool the savings of many investors for investment in securities and the profits are shared equally among its participants in proportion to their holdings.

The fund manager collects money from the members and invests them in diversified portfolio of financial assets with a view to reducing risk and maximizing income for distribution to its members.

The Mutual Funds usually invest their funds in equities, bonds, debentures, call money etc. depending on the objectives and team of scheme.

Selection of Mutual Funds depends on-

1. When did you want returns.
2. How much of risk you can take.

NO RISK
Invest in Government Securities which gives you Guaranteed Returns.

WILLING TO TAKE RISK
Invest in shares, Real Estate etc.

WANT LIQUIDITY
Invest in Gold.

  •  Mutual Fund is a tax saving instrument.

Net Asset Value (NAV)

The NAV of a scheme is a number which basically represents the value in rupees per fund units as on a particular date.

NAV= (Realizable value of all assets- Liabilities and outstanding expenses) /Number of Fund Units

  • NAV keeps on changing with the changes in the market rates of equity and bond markets.
  • Mutual Funds makes more profit when NAV increases.
  • When NAV comes down customers purchase more units and sells it when the market recovers and NAV goes up.

Classification of Mutual Funds

A) According to the type of investment

1. Open Ended Schemes
  • There is no specific date when the scheme will be closed.
  • Allowed to issue and redeem units any time during the life of the scheme.
2. Closed Ended Schemes
  •  There is a closing date when finally the scheme will be winded up.
  • At the end of the term, the corpus is dis-invested and proceeds distributed to the various unit holders in proportion to their holdings.
  • After final distribution the scheme ceases to exist.
 B) According to type of investment

While launching a new scheme every Mutual Fund is supposed to declare in the prospectus the kind of instruments in which it will make investments of the funds collected under that scheme.

  1. Equity Funds Scheme or Growth Funds.
  2. Debt Fund Scheme or Income Funds.
  3. Diversified Fund Scheme or Balanced Funds.
  4. Gilt Fund Scheme.
  5. Money Market Fund Scheme( Invest in safer short term instruments such as treasury bills, certificate of Deposit, Commercial Paper and Interbank Call Money)
  6. Sector Specific Funds (invest in shares of companies operating in specific sector or industry)
  7. Index Fund(Funds that specializes in the purchase of securities that represent a specific index)
C) According to Tax incentive Schemes
  1.  Tax Savings Funds.
  2. Non Tax Savings Funds.
D) According to the Time of Payout
  1. Dividend Paying Schemes- Pays dividends from time to time as and when the dividend is declared.
  2. Reinvestment Schemes- The share's dividend and capital gains will be reinvested in additional fund shares.

Advantages of Mutual Funds

  1. Your investments are managed by professional finance managers who are ina better position to asses the risk profile of the investments.
  2. In case of small investors, your investment cannot be spread into equity shares of various good companies due to high price of shares. Mutual funds are in a better position to spread your investments across various sectors, this is called risk diversification.

Difference between Mutual Funds And Portfolio Management Schemes

Mutual Fund Schemes
Portfolio Management Schemes
In Mutual Fund Schemes, the funds of large number of investors are pooled to form a common fund and the gains/losses are shared among the investors equally.
In Portfolio Management Schemes, the funds of a particular investor remains identifiable and gain/losses for that portfolio will be for him only.

Each investors funds are invested in a separate portfolio and there is no pooling of funds.


Courtesy: AllBankingSolutions

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