What is a Mutual Fund - Everything You want to know about Mutual funds in India

MUTUAL FUNDS IN INDIA

Mutual Fund Definition : or What is a Mutual Funds and How does these work

Mutual Fund Definition: A mutual fund is made up of money that is pooled together by a large number of investors who give their money to a fund manager to invest in a large portfolio of stocks and / or bonds

Mutual fund is a kind of trust that manages the pool of money collected from various investors and it is managed by a team of professional fund managers (usually called an Asset Management Company) for a small fee. The investments by the Mutual Funds are made in equities, bonds, debentures, call money etc., depending on the terms of each scheme floated by the Fund. The current value of such investments is now a days is calculated almost on daily basis and the same is reflected in the Net Asset Value (NAV) declared by the funds from time to time. This NAV keeps on changing with the changes in the equity and bond market. Therefore, the investments in Mutual Funds is not risk free, but a good managed Fund can give you regular and higher returns than when you can get from fixed deposits of a bank etc.

Why Should I Invest in a Mutual Fund when I can Invest Directly in the Same Instruments :

We have already mentioned that like all other investments in equities and debts, the investments in Mutual funds also carry risk. However, investments through Mutual Funds is considered better due to the following reasons :-

Your investments will be managed by professional finance managers who are in a better position to assess the risk profile of the investments;
Your small investment cannot be spread into equity shares of various good companies due to high price of such shares. Mutual Funds are in a much better position to effectively spread your investments across various sectors and among several products available in the market. This is called risk diversification and can effectively shield the steep slide in the value of your investments.

Thus, we can say that Mutual funds are better options for investments as they offer regular investors a chance to diversify their portfolios, which is something they may not be able to do if they decide to make direct investments in stock market or bond market. For example, if you want to build a diversified portfolio of 20 scrips, you would probably need Rs 2,00,000 to get started (assuming that you make minumum investment of Rs 10000 per scrip). However, you can invest in some of the diversified Mutual Fund schemes for an low as Rs.10,000/-.

WHAT ARE VARIOUS TYPES OF MUTUAL FUNDS

    A common man is so much confused about the various kinds of Mutual Funds that he is afraid of investing in these funds as he can not differentiate between various types of Mutual Funds with fancy names. Mutual Funds can be classified into various categories under the following heads:-

(A) ACCORDING TO TYPE OF INVESTMENTS :- While launching a new scheme, every Mutual Fund is supposed to declare in the prospectus the kind of instruments in which it will make investments of the funds collected under that scheme. Thus, the various kinds of Mutual Fund schemes as categoried according to the type of investments are as follows :-

               (a) EQUITY FUNDS / SCHEMES

               (b) DEBT FUNDS / SCHEMES (also called Income Funds)

               (c ) DIVERSIFIED FUNDS / SCHEMES (Also called Balanced Funds)

               (d) GILT FUNDS / SCHEMES

               (e) MONEY MARKET FUNDS / SCHEMES

               (f) SECTOR SPECIFIC FUNDS

               (g) INDEX FUNDS

B) ACCORDING TO THE TIME OF CLOSURE OF THE SCHEME :- While launching a new schemes, Mutual Funds also declare whether this will be an open ended scheme (i.e. there is no specific date when the scheme will be closed) or there is a closing date when finally the scheme will be wind up. Thus, according to the time of closure schemes are classified as follows :-

          (a) OPEN ENDED SCHEMES

          (b) CLOSE ENDED SCHEMES

C) ACCORDING TO TAX INCENTIVE SCHEMES :- Mutual Funds are also allowed to float some tax saving schemes.   Therefore, sometimes the schemes are classified according to this also:-

         (a) TAX SAVING FUNDS

         (b) NOT TAX SAVING FUNDS / OTHER FUNDS

(D) ACCORDING TO THE TIME OF PAYOUT :- Sometimes Mutual Fund schemes are classified according to the periodicity of the pay outs (i.e. dividend etc.). The categories are as follows :-

         (a) Dividend Paying Schemes

         (b) Reinvestment Schemes
The mutual fund schemes come with various combinations of the above categories. Therefore, we can have an Equity Fund which is open ended and is dividend paying plan.   Before you invest, you must find out what kind of the scheme you are being asked to invest.   You should choose a scheme as per your risk capacity and the regularity at which you wish to have the dividends from such schemes.

Various Types of Mutual Funds based on allocation of funds : These days asset managers give very attractive names to some of their schemes, which may just another type of the above referred schemes. Some of the most popular type of Mutual Funds these days are "Aggressive Growth Fund"; "Balanced Fund"; "Blend Fund"; "Capital Appreciation Fund"; "Crossover fund"; "Global Fund"; "Growth and Income Fund"; Money Market Fund"; "Liquid Fund"; "Prime Rate Fund"; "Hedge Fund"; "Index Fund"; "International Fund".

Association of Mutual Funds in India : It is popularly known as AMFI (www.amfindia.com). The site provides valuable information about mutual fund industry in India. For getting the details of the latest NAVs of various Mutual Fund schemes in India, you can click on link provided at the top.

SOME OF THE TERMS USED IN MUTUAL FUNDS

Net Asset Value (NAV)

Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.