A mutual fund is a fund or trust where investors pool their marginal resources, invest in securities, and distribute the returns among them on co-operative principles. The company which manages mutual funds or where resources are pooled is known as Asset Management Company. Mutual funds are one of the fastest-growing investment sectors. Mutual funds are regulated and administered by SEBI(Mutual Fund) Regulations, 1996.
CONSTITUENTS OF MUTUAL FUNDS
There are various constituents of mutual funds which are as follows
- SPONSORS– These are persons like registered company, scheduled bank, or financial institution who generates an idea for setting up a mutual fund.
- TRUST/BOARD OF TRUSTEES– The main responsibility of the trustee is to safeguard the interests of investors who are also known as unitholders.
- ASSET MANAGEMENT COMPANY– It is an entity registered under the Companies Act,2013 for managing the money invested in mutual funds and to operate the schemes of mutual funds in accordance with governing regulations.
- CUSTODIAN– Custodian means an independent organization, which takes custody of securities and other assets of the mutual funds.
- TRANSFER AGENTS– AMC appoints transfer agents to the mutual funds. Transfer agents process the application form, redemption requests, and dispatch account statements to unitholders.
INVESTMENT IN MUTUAL FUND
An investor can subscribe to new fund offers of mutual fund schemes through Application Supported by Block Amount Facility (ASBA).
SCHEMES OF MUTUAL FUNDS
AS PER MATURITY PERIOD
- Open-Ended schemes
Open-ended mutual fund schemes are those schemes that offer mutual fund units for sale without specifying any time limit for redemption. As the name suggests they are open for sale and purchase at any time without any limit. They are not listed on any stock exchange. They are highly liquid in nature.
- Close Ended Scheme
Close-ended mutual fund schemes are those schemes that offer mutual fund units for sale specifying the time limit for redemption. As the name suggests they are closed means they should be redeemed within the specified time period. Once they are sold then all the transactions need to be done through the stock exchange. They are mostly liquid in nature but less than open-ended units.
AS PER INVESTMENT OBJECTIVES
- INCOME ORIENTED SCHEMES
These type of funds primarily offers fixed income to investors. Naturally enough, the main securities in which investments are made by such funds are the fixed income yielding ones like bonds, corporate debentures, Government securities and money market instruments, etc.
- GROWTH ORIENTED SCHEMES
These types of funds offer growth opportunities associated with an investment in the capital market, namely the high source of income from dividends and rapid capital appreciation. These funds focus on satisfying the growing needs of investors.
- HYBRID SCHEMES
These types of funds cater to both investment needs as well as growth orientation. They utilize the concept of balanced investment management thus also known as Balanced Funds.
- HIGH GROWTH SCHEMES
These types of funds, as the name suggests, focus on the high growth of capital. These funds invest in high risk and high return securities in the market and induce investors with high capital increment.
- CAPITAL PROTECTION ORIENTED SCHEMES
The main purpose of this type of fund is the protection of capital invested in mutual funds at the time when the market goes down.
- TAX SAVING SCHEME
These schemes offer tax rebates to investors under tax laws. Government authorities offer incentives for investment in specified sectors. Examples can be pension schemes and Equity Linked Saving Scheme.
- REAL ESTATE FUNDS
They are closed-ended mutual funds where investment is predominantly made in real estate and properties.
- OFF SHORE FUNDS
These types of funds invest in securities of foreign companies with prior approval of the Reserve Bank of India.
- HEDGE FUNDS
These type of funds employ their funds for speculative trading. Speculative trading is trading for buying shares whose prices are likely to rise and for selling shares whose prices are likely to fall.
- FUND OF FUNDS
These types of funds as the name suggests are funds of funds. They invest their funds in other mutual funds.
ADVANTAGES OF MUTUAL FUNDS
- PROFESSIONAL MANAGEMENT
A mutual fund is advantageous because of the professional known as fund manager managing it. There is no requirement for the investor to do research and see asset allocation.
Unless an investor opts for the close-ended scheme it is very easy to make an entry and exit from the mutual fund scheme. Units can be sold at any time.
In mutual funds, funds of investors are applied in various securities so that if one type of fund goes in loss, then other funds can compensate it because it is not possible that all types of funds in the market suffer loss at the same time. This is called diversification.
- RETURN POTENTIAL
Mutual funds guarantee a high rate of returns after a period of time. This is very advantageous for investors.
- AUTOMATED PAYMENTS
It is common as a person to forget or delay the installment of SIP’s or prompt lump sum investment due to any reason or negligence so one can adopt the feature of automated payments. By this, the investor will get emails and notifications about this.
RISKS INVOLVED IN MUTUAL FUNDS
- Excessive diversification may lead to loss of focus on securities of key sectors or segments.
- Poor planning of investment with minimum returns.
- Fund managers unaccountable for poor results.
- Failure to identify the risk of the scheme as distinct from that of the market.
- High costs charged by the fund managers to manage the funds.
So, investment in mutual funds should be only made after getting proper knowledge about the scheme one is investing in and fund managers should not only see his profit but work in the interest of investors.