Definition of Mutual Fund.
Mutual Fund is a professionally managed investment vehicle that pools money from the investors sharing a common financial objective. It invests the money in different financial securities like- bonds, money market instruments, equities, stocks, and other assets. It is a diversified portfolio of financial instruments to produce capital gains and offset financial losses. Mutual Fund is operated by professional money managers and make easy for the investors to avoid the complications of investment decisions.
What are the Advantages of Mutual Funds?
- Transparency – Mutual Funds (MF) are very transparent in nature. Updates on the value of the investment are available on a regular basis. Investors are provided necessary information through offer documents, annual reports etc.
- Professional Management – MF enables professional management of money with the help of fund managers through advanced mathematical and scientific techniques. So, the investors did not have to engage them with the investment plan.
- Diversified – One of the best benefits of the Mutual Fund is that it is a diversified investment. Through diversified investment in different sectors, industries, companies, and countries, reduces the risk of volatility of returns. Diversification reduces the possibility of potential loss.
- Flexibility – MF provides simplicity and flexibility. The facility of short-term savings, annuity sub-accounts, Systematic Investment Plan (SIP), Systematic Withdrawal Plan (SWP), Systematic Transfer Plan (STP) etc. investment strategies are very convenient for the investors.
- Liquidity – Open-ended Mutual Funds provides an easy liquidity i.e you can easily sell them at the prevailing based price without worrying for the buyer at the right place.
- Economies of Scale – In Mutual Funds, pooling the money of the investors involves economies of scale as it is cheaper compared to investing in other capital markets involving higher prices.
- Low Transaction Cost – If you sum up the annual fees paid to a brokerage firm, transaction costs and cost for research tools, the cost of mutual funds are less expensive than any other portfolio stocks.
What are the different kinds of Mutual Funds?
Mutual Funds are classified by the following factors:-
- Open-ended Funds.
- Close-ended Funds.
- Interval Funds.
- Exchange Funds.
- Fund of Funds.
- Equity Funds
- Index Funds
- Income Funds
- Gilt Funds
- Money Market Funds
- Balanced Fund
- Growth Funds
State the different regulations governing Mutual Funds.
With the approval of The Securities and Exchange Board of India (SEBI), a Trust is created by the sponsors of the Mutual fund. The Trust then assigns an AMC- Asset Management Company which safeguards and regulates the portfolio management under the specified regulations.
What are the risks involved while investing in Mutual Funds?
Investment in Mutual Fund involves risk. The risk evolves because- Mutual Fund invests in different types of securities like bonds, equities etc whose price fluctuates for inflation, demand and supply, and many other factors.
Following are the different types of risks in Mutual Fund:-
- Market Risk – The external factors like fluctuation in interest rates, recession etc affects the market performance leading to market risk. This risk affects the investment in the Mutual Fund.
- Credit Risk – The situation where the issuing agency is failing to pay the interest to the customer give rise to the credit risk.
- Liquidity Risk – When you are unable to redeem your investment due to the lack of buyers. This involves a loss in the value of the investment.
- Interest Risk – There is an inverse relationship between interest rate and price of the securities. Higher the interest rates, lower the prices of the securities and vice-versa. This results in interest risk.
- Government Policy changes – Changes in the policies adopted by the government can have an impact on the business regulations which might lead to changes in the investment method.
What is the Asset Management Company (AMC)?
Asset Management Company (AMC) is associated with every Mutual Fund. AMC manages the investments in different types of schemes operated by the Mutual Fund. AMC works under the norms of SEBI.
Who is Custodian?
Custodian is a trust company responsible for managing the assets also the portfolio's record of the Mutual Fund. It safeguards the securities of the Mutual Fund but has no role in portfolio management.