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About Mutual Fund

What is a Mutual Fund?

Mutual fund is a pool of money contributed by individuals to invest in a predetermined security like Stocks, bonds, money markets, etc. The mutual fund is managed by a fund manager who is responsible for investing the money into various securities.

Mutual funds are very lucrative investment instruments because of their low cost, ease of handling, liquidity and most of important of all, diversification. This makes them low risk instruments.

Types of Mutual Funds   – – – – – See More   – – – – – View Less

Mutual Funds can be majorly classified by: Structure and Nature.1. By Structure: There are two types – Open Ended and Close Ended

a) Open ended funds are open throughout the year for subscription with no fixed maturity. Units can be bought and sold at Net Asset Value or NAV making these funds highly liquid.

b) Close ended funds are can be subscribed only during the offer. Once listed on exchange, this can be bought and sold in secondary market at Net Asset value which depends on demand –supply situation, expectations of unit holder and other market factors. Repurchase schemes are also available on a periodic basis.
There are also interval schemes available which is a combination of the above 2 types. These can be traded on stock exchange or may be open for sale or redemption during pre-determined intervals at NAV.

2. By Nature: They can be classified as follows:

a) Equity Funds- invests primarily into stocks. Based on the stocks they can be further sub classified into Diversified Equity, Mid Cap, Sectoral Funds and ELSS.

Diversified Equity Fund- is a fund which invests in stocks across various sectors like auto, pharma, infrastructure, etc.

Sectoral Fund- invest in specific sectors E.g. Pharma fund, Bank Fund, etc.

Cap Fund- These funds invest in large cap stocks, mid cap or small cap stocks.

ELSS- Equity Linked Savings Schemes are diversified equity funds with tax savings benefit.

b) Debt Funds- invest in government or corporate bonds, money markets, Commercial papers, etc. These provide steady income and are low on risk.

c) Balanced Funds- As the name suggests, these invest in stocks and debt instruments.

Returns from Mutual Funds  – – – – – See More  – – – – – View Less

Mutual Fund investment provides good returns. Returns in funds can be 2 types-a) Capital Appreciation- which is due to increase in NAV and one can avail the benefits upon sale.

b) Dividends- Mutual Funds pay dividends on a yearly basis based on the performance of the fund. And this can be part of the returns.

Advantages and Disadvantages  – – – – – See More  – – – – – View Less

Mutual funds have following advantages over investing directly in individual securities:1. Increased Diversification: A mutual fund scheme normally holds many securities; diversification reduces risk.

2. Professional Investment Management: Mutual Funds hire portfolio managers to supervise the fund’s investments. In very low cost the investor gets his investment managed by experts.

3. Scale Advantage : The transaction costs of a single individual is very less because mutual funds buy and sell in big volumes.

4. Liquidity and Simplicity : You can sell or buy mutual funds anytime. So mutual funds are good if you want to invest in something which you can liquidate easily . Also MF are very simple to buy and sell.

5. Government oversight: Mutual funds are regulated by SEBI and AMFI.

6. Ease of comparison: All mutualfunds are required to report the same information to investors, which makes them easy to compare.

Mutual funds have disadvantages as well, which include:

1. Risks and Costs: Changing market conditions can create fluctuations in the value of a mutual fund investment. Also there are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly.

2. No Fixed Return: As Mutual funds invest in debt as well equities , there are no sure returns . Returns depends on the market conditions .

3. No Control: Investor does not have control on investment , all the decisions are taken by the fund manager.