Mutual Fund

Mutual Fund

Mutual fund is an financial vehicle that pools investors’ money and invests the same for and on behalf of investors into stocks, bonds, money market instruments, and other assets. The money is received by the AMC with a promise that it will be invested in a particular manner by professional managers (commonly known as fund managers). The fund managers are expected to honour this promise. The SEBI and the Board of Trustees ensure that this actually happens

  • Professional Management: The mutual fund will have a fund manager who is responsible for investing the gathered money into specific securities (stocks or bonds).
  • Fund ownership: When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund.
  • Mutual Funds are Diversified:
    Mutual funds are considered as one of the best available investments as compared to others. They are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they try to do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & optimizing returns.
  • How are mutual funds regulated?
    SEBI and RBI (in case the AMC is promoted by a bank) regulates all Asset Management Companies (AMCs).In addition, every mutual fund has a Trustee who represents the unit holders’ interests in the mutual fund.
  • Mutual fund Objective:
    For example, an objective of a growth stock fund might be: This fund invests primarily in the equity markets with the objective of providing long-term capital appreciation towards meeting your long-term financial needs such as retirement or a child’s education.

Depending on investment objectives, funds can be broadly classified in the following types:

Equity Fund

  • These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary for different schemes and the fund manager’s outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows:
    • Large Cap Fund ,Multicap , Flexi cap, Mid-cap, Large and midcap , Small Cap Funds
    • Diversified Equity Funds
    • Thematic/Sector Specific Funds
    • Tax Savings Funds (ELSS)

    Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.

Debt Funds

  • The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions who are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:
    • Gilt Funds: Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government.
    • Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities.
    • Liquid Funds:  Also known as Money Market Schemes, these funds Provides easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.

Hybrid Funds

As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns. Investment in Mutual Fund can be made in lump sum or systematically Investment or Systematically Transfer plan.

  • Through Systematic Investment Plans ( SIP ) you can invest a fixed amount at regular intervals for any number of years. This way your investments will reap the benefit of rupee cost averaging i.e. buying more units when price is low and buying lesser units when price is high.
  • If you need regular withdrawals from your Mutual Fund investment, then Systematic Withdrawal Plan ( SWP ) is the best option. Here a fixed amount (set by you) will be automatically withdrawn for preset number of years. Depending on the fund available and withdrawal amount, this will continue.
  • If you are concerned about short term volatility while making a lump sum investment, then go for Systematic Transfer Plan ( STP ). Here, the lump sum money will be first invested in a liquid scheme (low risk debt fund) and then from there, a fixed amount will be transferred to a chosen equity scheme of the same fund house. This way, exposure in equity scheme will be made on a staggered basis and hence risk is minimized in case of volatile market movements.
Note:- Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio

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