Pure Basics Of Mutual Funds
Basics of Mutual Fund
A Mutual Fund is a trust that collects money from investors and invests the proceeds in different asset classes like equity, bonds etc. An investor in a mutual fund scheme receives units which are in accordance with the quantum of money invested by him. These units represent an investor’s proportionate ownership into the assets of a scheme and his liability in case of loss to the fund is limited to the extent of the amount invested by him.
The funds collected are then invested by the fund managers who take the investment decisions pertaining to the selection of securities and the proportion of investments to be made into them. However, these decisions are governed by certain guidelines which are decided by the investment objective(s), investment pattern of the scheme and are subject to regulatory restrictions.
Today, there are a variety of schemes offered by mutual funds in India, which cater to different categories of investors to suit different financial objectives e.g. some schemes may provide capital protection for the risk-averse investor, whereas some other schemes may provide for capital appreciation by investing in mid or small cap segment of the equity market for the more aggressive investor.
Structure of Mutual Fund
A Mutual Fund is set up in the form of a trust, which has a Sponsor, Trustees, Asset Management Company (AMC) and Custodian. The trust is established by a sponsor or more than one sponsor who is like a promoter of a company and registered with Securities and Exchange Board of India (SEBI). The trustees of the mutual fund hold its property for the benefit of the unit holders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over the AMC. They monitor the performance and compliance of SEBI regulations by the Mutual Fund.
Types of Mutual Fund Schemes
Mutual Fund schemes can be classified into different categories and subcategories based on their investment objectives or their maturity periods.
Open-ended funds
An open-ended fund or scheme is one that is available for subscriptions and redemptions on a continuous basis. Investors can buy and sell their units at Net Asset Value (NAV) which is declared on a daily basis.
Close-ended funds
A close-ended fund or scheme has a stipulated maturity period which can range from a few months to a few years, e.g. 6 months, 5 years or 7 years. i.e. fund is open for subscription only during a specified period at the time of launch of the scheme which is the New Fund Offer (NFO). Investors can invest in the scheme at the time of the NFO and thereafter, they can buy or sell the units of the scheme on the stock exchanges where the units have to be mandatorily listed.
Exchange Traded Funds (ETFs)
Exchange Traded Funds or ETFs are essentially Index Funds that are listed and traded on exchanges like stocks. For example there are ETFs that track S&P CNX Nifty, BSE Sensex etc. Gold ETF are mutual fund schemes where the underlying investment is in physical gold.
Fund of Funds
Fund of Funds (FoF) are the funds that invests in other mutual fund schemes.
Equity Funds
Equity oriented schemes are those schemes which predominantly invest in equity and equity related instruments.
- Multi-Cap Funds
- Large Cap or Blue Chip Funds
- Mid Cap Funds
- Small Cap Funds
- Tax Saving Funds
- Equity–International Funds
- Sectoral/Thematic Funds
- Arbitrage Funds
- Index Funds
- Gilt Funds
- Money Market or Liquid Funds
- Hybrid or Balanced Funds
Investment Options in Mutual Fund Schemes
Growth Option:
Under the growth option, dividends are not paid out to the unit holders. Income attributable to the unit holders continues to remain invested in the scheme and is reflected in the NAV of units under this option. Investors can realize capital appreciation if any, by way of an increase or decrease in NAV of their units by redeeming them.
Dividend Payout Option:
Dividends are paid out to the unit holders under this option. However, the NAV of the units falls to the extent of the dividend paid out and the applicable statutory levies.
Dividend Re-investment Option:
The dividend that accrues on units under option is re-invested back into the scheme at ex-dividend NAV. Hence, investors receive additional units on their investments in lieu of dividends.
Investment Style in Mutual Fund
Systematic Investment Plan (SIP):
It is a regular and fixed periodic investments, ideal for long term wealth building and averaging out market fluctuations. The SIPs can be created depending on the investor requirements of tenure and amount. SIPs enables rupee cost averaging as an investor buys more units when prices are low and fewer units when prices are high which lowers an investor average cost per unit. Further, it helps in compounding your wealth as by saving a small amount of money regularly over time can grow your investment exponentially.
Lumpsum Investments
Lumpsum are the single large investments suitable for an investor who has a large amount of money available and want to potentially benefits when the market is low.
Systematic Withdrawal Plan (SWP)
This involves regular withdrawal from your existing investment which is often used as a retirement income.
