What is a Mutual Fund?

A mutual fund is a pool of money from numerous investors who wish to save or make money just like you. Investing in a mutual fund can be a lot easier than buying and selling individual stocks and bonds on your own. Investors can sell their shares when they want.

Why should I consider investing in a Mutual Fund?
  • Professional Investment Management
    Mutual funds hire full-time, high-level investment professionals. Funds can afford to do so as they manage large pools of money. The managers have real-time access to crucial market information and are able to execute trades on the largest and most cost-effective scale.
  • Diversification
    Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security.
  • Low Cost
    A mutual fund let’s you participate in a diversified portfolio for as little as Rs.5,000/-, and sometimes less. And with a no-load fund, you pay little or no sales charges to own them.
  • Convenience and Flexibility
    You own just one security rather than many; yet enjoy the benefits of a diversified portfolio and a wide range of services. Fund managers decide what securities to trade, collect the interest payments and see that your dividends on portfolio securities are received and your rights exercised. It also uses the services of a high quality custodian and registrar in order to make sure that your convenience remains at the top of our mind.
  • Liquidity
    In open-ended schemes, you can get your money back promptly at net asset value related prices from the mutual fund itself.
  • Transparency
    You get regular information on the value of your investment in addition to disclosure on the specific investments made by the mutual fund scheme.
What is a Unit?

Let’s take an example to explain it:

In a class, teacher ask student to come with two pencils tomorrow. The shopkeeper was selling full box of 10 pencils @ Rs.20 & no loose pencil. 5 students decided to buy this box but since they only have Rs.4 each, they pooled there money & collectively paid Rs.20 to buy the pencil box. Basis individual contribution by each one of them, they each receive 2 pencils or 2 UNIT (as per Mutual Fund Terminology).

Computation of cost of 1 UNIT = 20/10= Rs.2.

This results in each student being a unit holder in the box of pencil that is collectively owned by all of them, with each person being a part owner of the box.

What is a Net Asset Value (NAV) ?

Net asset value (NAV) is a mutual fund’s price per share or exchange-traded fund’s (ETF) per-share value. In both cases, the per-share dollar amount of the fund is calculated by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding.

Formula: (Market value of each security in the fund’s portfolio + All other assets – All liabilities) ÷ Number of outstanding shares (units).

What are Debt Mutual Funds?

Debt Mutual Funds as the name suggest predominantly is a portfolio/pool of instruments used for borrowing funds. It mainly invest in a mix of debt or fixed income securities such as Treasury Bills, Government Securities, Corporate Bonds, Money Market instruments and other debt securities of different time horizons. Debt  securities have fixed maturity date & are at fixed rate of interest.

Interest Income & Capital Gain are the two incomes that are being generated under Debt Fund.

The Credit Rating are issued by various independent agencies to evaluate the credit worthiness of issuers of debt securities.

There is a wide range of fixed income or Debt Mutual Funds available to suit the needs of different investors, based on their:

  • Investment horizon
  • Risk Appetite
  • Cash Flow requirements
What are Equity Mutual Funds ?

An equity fund is an open or closed-end fund that invests primarily in stocks, allowing investors to buy into the fund and thus buy a basket of stocks more easily than they could purchase the individual securities. There isn’t any assurance on the principal, rate of interest or tenure when investing in Equity Funds. When you invest in equity, you are considered as an owner of the particular company that you’ve invested in, to the extent of your investment, your profit is linked with the performance of the company. The higher the profits of the company, the better is the share price and hence the better your gains.

Equity involves High Risk & High Return based on Principle of ‘Risk return- Trade off’.

Mutual Funds are Flexible?

Most people have differing patterns of earning and spending, which is why investments need to be flexible so as to allow you to invest as per your situation. In order to ensure this flexibility Mutual Funds have certain characteristics like: There are various types of Mutual Funds that invest in various schemes, from money market instruments to equities, thus catering to people who’d like to invest for duration ranging from a day to years. Minimum amounts of investment range from as low as Rs. 500, with no upper limit. In the case of open ended funds, daily investment and withdrawal is possible. Invested funds can be received within 1 to 5 working days. There is no maintenance charge on portfolios. You can invest either directly with the Asset Management Company or through a Financial Intermediary.

Does investing in Mutual Funds mean investing in equities?

No, this is not necessary. Mutual Funds can be divided into various types depending on asset classes. They can also invest in debt instruments such as bonds, debentures, commercial paper and government securities apart from equity.

Are Mutual Fund Liquid ?

All Open ended Mutual Funds can be bought & sold at any point of time. There isn’t any minimum holding period requirement in this fund category.

Are Mutual Funds Safe & Transparent ?

You get regular information on the value of your investment in addition to disclosure on the specific investments made by the mutual fund scheme. Mutual Funds publish a monthly fact sheet which basically lists out all the important facts you need to know about the scheme you’ve invested in. In Mutual Funds, your money is handed over to a professional, whose entire job is to keep track of markets and look out for the best opportunities for you.

Is Diversification possible under Mutual Funds?

Yes, Under Equity funds one can diversify by spreading his investments across sectors e.g IT, Pharma, Banking, Oil & Gas, Real estate, Telecom, FMCG,etc. Investor are not restricted to one specific sector. They diversify their allocations across sectors and thus minimise the risk of over-concentration in any one particular sector

Whereas Debt Funds invest in government securities, NCD, CDs, CPs bonds and other fixed income securities. Thus as an investor, you will be able to have a diversified investment basket.

What is the difference between Open-ended and Close- ended funds?

Open-ended funds do not have a fixed maturity whereas close-ended schemes have a stipulated maturity period. In an Open-ended Scheme, the investors can purchase and redeem units anytime. New investors can join this kind of scheme by directly applying to the mutual fund at applicable NAV-related prices, whereas in the case of Close-ended Schemes new investors can either invest at the time of the Initial Issue and thereafter units can be bought or sold from the stock exchange where it is listed. As a result, the number of units in an Open-ended Scheme may keep fluctuating on a daily basis, while this is not the case in Close-ended Schemes.

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