A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities.[1] While there is no legal definition of the term "mutual fund", it is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public. They are sometimes referred to as "investment companies" or "registered investment companies". Hedge funds are not mutual funds, primarily because they cannot be sold to the general public.
istered with the U.S. Securities and Exchange Commission, overseen by a board of directors or board of trustees, and managed by a Registered Investment Advisor. MutuaIn the United States, mutual funds must be regl funds are subject to an extensive and detailed regulatory regime set forth in Investment Company Act of 1940. Mutual funds are not taxed on their income and profits if they comply with certain requirements under the U.S. Internal Revenue Code.
Mutual funds have both advantages and disadvantages compared to direct investing in individual securities. Today they play an important role in household finances, most notably in retirement planning.
- There are three types of U.S. mutual funds—open-end funds, unit investment trusts, and closed-end funds. The most common type, open-end funds, must be willing to buy back shares from investors every business day. Exchange-traded funds (ETFs) are open-end funds or unit investment trusts that trade on an exchange. Non-exchange-traded open-end funds are most common, but ETFs have been gaining in popularity.
- Mutual funds are generally classified by their principal investments. The four main categories of funds are money market funds, bond or fixed income funds, stock or equity funds, and hybrid funds. Funds may also be categorized as index (or passively managed) or actively managed.
- Investors in a mutual fund pay the fund’s expenses, which reduce the fund's returns and performance. There is controversy about the level of these expenses.
ABOUT MUTUAL FUNDS
What are the benefits of investing in mutual funds?
Following are the benefits of investing in mutual funds:
Small investments: Mutual funds accept investments as low as few thousand rupees, which is invested across the markets. Such a spread is difficult for an investor to do.
Professionalism: Professionals manage the money collected by a mutual fund. They analyze the markets to pick good investments.
Spreading risk: An investor with a small amount of money would be able to invest in only one or two stocks / bonds, thus increasing risk. However, a mutual fund will spread its risk by investing in various sound stocks or bonds. A fund normally invests in companies across a wide range of industries, so the risk is spread.
Transparency and interactivity: Mutual funds provide investors with information on the value of their investments. Mutual funds also provide complete picture of the investments made by their various schemes and the proportion invested in each asset type.
Liquidity: Open-ended funds can be sold back to mutual funds at NAV based prices subject to exit loads and close-ended funds can be sold at the stock exchanges where they are traded.
Choice: The funds can be picked from a wide array. This enables the investor to choose what suits him best according to his risk and return expectation.
Professionalism: Professionals manage the money collected by a mutual fund. They analyze the markets to pick good investments.
Spreading risk: An investor with a small amount of money would be able to invest in only one or two stocks / bonds, thus increasing risk. However, a mutual fund will spread its risk by investing in various sound stocks or bonds. A fund normally invests in companies across a wide range of industries, so the risk is spread.
Transparency and interactivity: Mutual funds provide investors with information on the value of their investments. Mutual funds also provide complete picture of the investments made by their various schemes and the proportion invested in each asset type.
Liquidity: Open-ended funds can be sold back to mutual funds at NAV based prices subject to exit loads and close-ended funds can be sold at the stock exchanges where they are traded.
Choice: The funds can be picked from a wide array. This enables the investor to choose what suits him best according to his risk and return expectation.
Who regulates mutual funds?
All mutual funds are registered with SEBI and they function within the provisions of strict regulation designed to protect the interests of the investor.
What are the different types of Mutual funds?
Broadly the different types (and sub types) of MFs are:
Equity Funds
Sub-type Investments Made
Diversified Across all industries
Sector / theme specific In that particular sector or its allies such as infrastructure or energy or software
Dividend yield In stocks which pay high dividend
Sector / theme specific In that particular sector or its allies such as infrastructure or energy or software
Dividend yield In stocks which pay high dividend
Debt Funds
Sub-type Investments Made In
Income Fund / Long term bond Bonds of corporate, government and other issuers
Short Term Income Fund / Short term bonds Issuers including corporate, government, banks
Floating Rate funds Bonds whose interests are reset at preset time periods, like your floating rate housing loan interest is reset when interest rates go up or down
Liquid / Liquid Plus Fund/ Very Short Term Bonds: Is an alternative to short term deposits Very short term bonds and money market instruments that mature within a year so that high liquidity can be had
Short Term Income Fund / Short term bonds Issuers including corporate, government, banks
Floating Rate funds Bonds whose interests are reset at preset time periods, like your floating rate housing loan interest is reset when interest rates go up or down
Liquid / Liquid Plus Fund/ Very Short Term Bonds: Is an alternative to short term deposits Very short term bonds and money market instruments that mature within a year so that high liquidity can be had
Hybrid Funds
Equity oriented – Have an equity exposure of more than 60% rest in debt investments.
Debt oriented – Have debt exposure of more than 50% rest in equities.
Monthly income plans – Have equity exposure ranging from 10- 25% and rest in bonds.
Debt oriented – Have debt exposure of more than 50% rest in equities.
Monthly income plans – Have equity exposure ranging from 10- 25% and rest in bonds.
What are the different plans that mutual funds offer?
The different plans available for the investors are:
Growth – Distribution of profits (dividend) are not given out. Only way an investor can realise profits is through capital gain by selling the units.
Dividend – There are two sub types in this plan:
Dividend – There are two sub types in this plan:
Dividend Payout – Dividend would be paid to the investor periodically depending on available surplus to distribute, either by direct credit or through a cheque.
For example: If a fund declared Rs 2 / unit (20% dividend) and the investor has 100 units he gets Rs 2 * 100 or Rs 200 as dividend.
For example: If a fund declared Rs 2 / unit (20% dividend) and the investor has 100 units he gets Rs 2 * 100 or Rs 200 as dividend.
Dividend Reinvestment: Dividend amount declared is used to buy more units of the fund.
For example: A fund declared Rs 2 / unit and the NAV is Rs 12. If the investor has 100 original units and has opted for dividend reinvestment he will have: Rs 200/12 = 16.67 units. Total units after the dividend is reinvested = 100 original + 16.67 Units reinvested = Total 116.67 Units.
For example: A fund declared Rs 2 / unit and the NAV is Rs 12. If the investor has 100 original units and has opted for dividend reinvestment he will have: Rs 200/12 = 16.67 units. Total units after the dividend is reinvested = 100 original + 16.67 Units reinvested = Total 116.67 Units.
