What Are Mutual Funds?

 

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A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds.

These investors buy units of a particular Mutual Fund scheme that has a defined investment objective and strategy. The money thus collected is then invested by the fund manager in different types of securities. These

could range from shares to debentures to money  market instruments, depending upon the scheme’s stated objectives. The income earned through these investments and the capital appreciation realised by the scheme are shared by its unit holders in proportion to the number of units owned by them.

Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

 

TYPES OF MUTUAL FUND SCHEMES

There are a wide variety of Mutual Fund schemes that cater to his needs, whatever his age, financial position, risk tolerance and return expectations.

Whether as the foundation of his investment programme or as a supplement, Mutual Fund schemes can help investor meet his financial goals.

 BY STRUCTURE

OPEN-ENDED SCHEMES:

These do not have a fixed maturity. Investor deal directly with the Mutual Fund for his investments and redemptions. The key feature is liquidity. Investor can

conveniently buy and sell his units at Net Asset Value (“NAV”) related prices.

 

CLOSE-ENDED SCHEMES:

Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called close-ended schemes. Investor can invest directly in the scheme at

the time of the initial issue and thereafter investor can buy or sell the units of the scheme on the stock exchanges where they are listed. The market price

at the stock exchange could vary from the scheme’s NAV on account of demand and supply situation, unitholders’ expectations and other market factors.

 

One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but closer to maturity, the discount narrows.Some close-ended schemes give investor an additional option of selling his units directly to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations ensure that at least one of the two exit routes is provided to the investor.

INTERVAL SCHEMES:

These combine the features of open-ended and close-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during predetermined intervals at NAV related prices.

BY INVESTMENT OBJECTIVE

 GROWTH SCHEMES:

Aim to provide capital appreciation over the medium to long term. These schemes normally invest a majority of their funds in equities and are willing to bear short-term decline in value for possible future appreciation.

 

These schemes are not for investors seeking regular income or needing their money back in the short term.

 

INCOME SCHEMES:

Aim to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate

debentures. Capital appreciation in such schemes may be limited.

 

BALANCED SCHEMES:

Aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. They invest in both shares  and fixed income securities in the proportion indicated in their offer documents. In a rising stock market. the NAV of these schemes may not normally keep pace, or fall equally when the market falls.

 

MONEY MARKET/LIQUID SCHEMES:

Aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments such as

treasury bills, certificates of deposit, commercial paper and interbank call money.

 

Returns on these schemes may fluctuate, depending