Mutual Fund is a vehicle that enables a
collective group of individuals to:
- Pool their
invest able surplus funds
and collectively invest in instruments
/ assets for a common investment
objective.
- Optimize the knowledge and
experience of a fund manager, a
capacity that individually they may
not have
- Benefit from the economies of scale
which size enables and is not
available on an individual basis
Types
of Mutual Fund
Open-end funds
Open-end mutual funds must be willing to buy back their
shares from their investors at the end of every business
day at the net asset value computed that day. Most
open-end funds also sell shares to the public every
business day; these shares are also priced at net asset
value. A professional investment manager oversees the
portfolio, buying and selling securities as appropriate.
The total investment in the fund will vary based on
share purchases, share redemptions and fluctuation in
market valuation. There is no legal limit on the number
of shares that can be issued. Open-end funds are the most
common type of mutual fund.
Closed-end funds
Closed-end funds generally issue shares to the public
only once, when they are created through an initial
public offering. Their shares are then listed for
trading on a stock exchange. Investors who no longer
wish to invest in the fund cannot sell their shares back
to the fund (as they can with an open-end fund).
Instead, they must sell their shares to another investor
in the market; the price they receive may be
significantly different from net asset value. It may be
at a "premium" to net asset value (meaning
that it is higher than net asset value) or, more
commonly, at a "discount" to net asset value
(meaning that it is lower than net asset value). A
professional investment manager oversees the portfolio,
buying and selling securities as appropriate.
Price (NET ASSET VALUE)
Net asset value or NAV
A fund's net asset value or NAV equals the current
market value of a fund's holdings minus the fund's
liabilities (sometimes referred to as "net
assets"). It is usually expressed as a per-share
amount, computed by dividing net assets by the number of
fund shares outstanding. Funds must compute their net
asset value according to the rules set forth in their
prospectuses. Funds compute their NAV at the end of each
day. Valuing the securities held in a fund's portfolio
is often the most difficult part of calculating net
asset value. The fund's board typically oversees
security valuation.
Benefits
of mutual funds?
- Professional Financial Experts
- Diversify Risk
- Low Cost
- Liquidity
- Varity Of Investment
Why
One should invest in mutual funds?
Reason
1:
They are investments instruments
which are capable of giving high returns .
An average mutual fund scheme returns
easily beats inflation in longer run and a
good scheme can give far superior returns.
Reason
2:
Our Mutual Fund industry is one of the
best regulated industry in the world. They
are governed by the strict guidelines
layed down by SEBI(Securities &
Exchange Board of India).
Reason
3:
Investments decision of a Mutual Fund is
taken by their AMCs and Fund Managers.
They are experts who make investments
decisions after doing intensive research
and analysis of a company & industry.
(Individuals generally don't have time and
resources to do research hence best option
is to let MF manage your investments)
Reason
4:
This industry is highly liquid. Even more
liquid than stock markets. Payments are
generally made through cheques or in some
cases they are directly credited to your
bank accounts , If your bank is allowing
RTGS & electronic clearing and mutual
fund AMC is providing such facility.
Reason
5:
Investments are diversified into many
companies & sectors. Which make our
investments safer and consistent growth
prospects. Diversifying is usually not
done by small investors , for such a
actions one requires lots of funds.
Reason
6 :
Tax treatments- Governments encourage
investments in capital markets and has
given many tax sops. Under i) 80(c)
investments done upto one lakh in specific
mutual funds schemes which is called
ELSS(Equity Linked Saving Schemes.) are
exempt from tax. ii) Any units held for
more than one year if redeemed is treated
under long term capital gain tax which is
zero percent currently i.e. the whole
profit is tax free. If one plans to redeem
before one year then he has to pay tax of
only15% on the profits.
Reason
7:
Mutual Funds are much cheaper compared to
direct exposure to capital market since
one does not need demat account ,annual
charge to maintain account, charges
imposed on demat holdings, stamp duty on
transaction are not levied .
Now, let's assume that this group of
individuals is a novice in investing and
so the group turns over the pooled funds
to an expert to make their money work for
them. This is what a professional Asset
Management Company does for mutual funds.
The AMC invests the investors' money on
their behalf into various assets towards a
common investment objective.
Hence, technically speaking, a mutual fund
is an investment vehicle which pools
investors' money and invests the same for
and on behalf of investors, into stocks,
bonds, money market instruments and other
assets. The money is received by the AMC
with a promise that it will be invested in
a particular manner by a professional
manager (commonly known as fund managers).
The fund managers are expected to honor
this promise. The SEBI and the Board of
Trustees ensure that this actually
happens.
