Mutual Fund is a trust managed by Sponsor, Trustees, Asset Management Company (AMC). The trust is established by a sponsor(s) who is like a promoter of a company and the said Trust is registered with Securities and Exchange Board of India (SEBI) as a Mutual Fund.
Mutual Fund is an investment scheme that pools the money from different investors and invests in securities like stocks, short-term money market instruments, bonds and commodities such as precious metals. This investment is professionally managed, so, the investors are free from the burden as where to invest. There is a common financial goal of the mutual fund investors so according to the fund’s investment objective, their money is invested in different asset classes.
In Mutual Funds, each investor owns units, that represents a portion of the holdings of the fund. From this collective investment, the income generated is distributed proportionately amongst the investors after deducting certain expenses, by calculating the mutual fund scheme’s “NAV”. NAV stands for Net Asset Value. NAV is defined as the total asset value (net of expenses) per unit of the fund. It is calculated as the current market value of the fund’s assets less the liabilities (if any) and is divided by the number of shares outstanding.
Mutual Funds are categorized into different segments depending on various parameters.
Mutual Funds based on geographical locations-
- Domestic Fund
- International Fund
- Global Fund
Mutual Funds based on investments-
- Equity Funds
- Large/Mid-cap/Small cap Fund
- Index Fund
- Sectoral Fund
- Value Fund
- Growth Fund
- Diversified Equity Fund
- Dividend-yield Fund
- Hybrid Funds
- Capital Protection Fund
- Monthly Income Plans (MIPs)
- Debt Fund
- Corporate Bond Fund
- Dynamic Bond Fund
- Income Fund
- Floating Rate Fund
- Liquid Fund
- Short-term Bond Fund
- Treasury Management Fund
- Ultra short-term Fund
- Gilt Fund
- Money Market Fund
- Medium-term Income Fund
Other Mutual Fund types are-
- Fund of Funds
- Tax Saving Fund
- Exchange Traded Fund
- Pension Fund
- Leverage Fund
Mutual Fund is the most viable investment scheme for a common individual.
Here, are some of the benefits of Mutual Fund-
- Liquidity– Mutual Fund offers liquidity i.e, the ability of the investor to get in and out with ease. Investors have the opportunity to redeem their investments at any given time. The investors can redeem at the time of need or when the NAV is higher than the NAV at the time of the purchase. During market fall at the lower NAV, investors can buy units of mutual funds. In a short period of time, investors can sell their mutual funds without having much difference in the current market value and the sale price.
- Simplicity– Mutual Fund is simple portfolio investments which do not need any experience in financial markets or economics to become an outstanding investor. Mutual Fund is the portfolio or basket of investment. Each basket hold huge types of securities like- stocks, bonds or short-term money market instruments. So, investing in mutual funds involves buying a portfolio of investment securities.
- Diversification– Investing in Mutual Fund provides diversification and asset allocation without spending a huge amount of money to make individual portfolios. Mutual Funds widens investment in asset classes. So, mutual fund investment involves mixing different types of investment within a portfolio, offering asset diversification. Asset diversification increases if you invest in different mutual funds.
- Flexibility– Investing in Mutual Fund involves flexibility to the investors. The investors can invest in a wide range of mutual fund schemes. An individual can invest in mutual funds depending on his risk-taking attitude and convenience. In most open-ended mutual fund schemes, systematic investment and withdrawal option is available to the investors. For both beginner and experienced investors, systematic withdrawal, short-term savings, automatic deposits, dividends, long-term savings, annuity-sub accounts, and various investment strategies make mutual fund, the best investment scheme.
- Professional Management of Fund– Mutual fund enjoys the benefit of management of funds by expert professionals. A whole team of experts are involved in market research to decide as to where to invest to get maximum yield. You don’t have to spend time in market research as professionals will invest which is a quality investment. Mutual Fund professionals study about the past and future performances of sectors and companies, where they invest our money.
- Systematic Investment– The facility of Systematic Investment Plan (SIP) is available to the investors. SIP refers to investing in mutual funds at regular intervals through Equated Monthly Installments(EMIs). This helps in reducing the burden on the beginners to invest in equity mutual fund schemes. These invested small sums help to buy stocks. This systematic investment helps to develop the habit of investing which is very helpful in long-run wealth creation.
- Choice of Risk– Mutual funds provides the option of low, medium, high-risk funds. To satisfy different types of risk taker investor, different types of risk level funds are available. A low-risk fund yields least risk of losses and also low return. A medium risk fund yields a balanced level of risks and returns. Whereas a high-risk fund yields the highest losses but also highest returns.
- Well regulatory body– Securities and Exchange Board of India (SEBI) regulates the functioning of Mutual Funds, to protect the interest of the investors. SEBI ensures transparency of information through annual reports, offer documents. Moreover, disclosures like certain investments and quantity of investment in each asset class are also available to the investors.
- Low-transaction cost– Mutual Fund pays low transaction cost due to economies of scale. So, as a result, the mutual fund investors bears a low cost.
- Benefit of Tax– Under Section 80C of the Income Tax Act, the benefit of tax benefit on mutual fund investment is available. In equity mutual fund schemes, if the investment period is more than 1 year, the capital gain is excluded from tax liabilities. Under Section 80C of Income Tax Act 1961, equity-linked saving schemes (ELSS) ensures tax