What Is Mutual Fund?
The ownership of the fund is thus joint or mutual, the fund belongs to all investors. A mutual funds business is to invest the funds thus collected, according to the the wishes of the investors who created the pool It is a pool of money, collected from investors, and is invested according to certain investment objectives.
Characteristics Of Mutual Fund
The ownership is in the hands of the investors who have pooled in their funds so it is joint or mutual.
It is managed by a team of investment professionals and other service providers.
The pool of funds is invested in a portfolio of marketable investments.
The investors share is denominated by ‘units’ whose value is called as Net Asset Value (NAV) which changes everyday.
The investment portfolio is created according to the stated investment objectives of the fund.
Mutual Funds are also known as Financial Intermediaries
In India, Mutual Funds are constituted as TRUSTS.
Mutual Fund Advantages
Benefits of mutual funds includes diversification and professional money management. Mutual funds offer choice, liquidity, and convenience, but charge fees and often require a investment. Various other benefits of mutual funds are-
- Convenient Administration
- Return potential
- Low cost
- Choice of schemes
- Well regulated
- Tax benefits
- Portfolio diversification
- Professional Management
- Reduction in Risk and Transaction costs
- Convenience and Flexibility
- Safety – Well regulated by SEBI
Classification & Types Of Mutual Fund
Open Ended Funds
In an open ended fund, investors can buy and sell units of the fund, at NAV related prices, at any time, directly from the fund.
Open ended scheme are offered for sale at a pre- specified price, say Rs. 10, in the initial offer period.
After a pre-specified period say 30 days, the fund is declared open for further sales and repurchases Investors receive account statements of their holdings,
The number of outstanding units goes up and down
The unit capital is not fixed but variable.
The corpus of an Open-ended scheme changes everyday
Close Ended Funds
A closed -end fund is open for sale to investors for a specified period, after which further sales are closed.
Any further transactions happen in the secondary market (stock exchange) where closed-end funds are listed.
The price at which the units are sold or redeemed depends on the market prices, which are fundamentally linked to the NAV.
The number of units of closed ended funds remains unchanged.
The unit capital is fixed because of one time sale.
Types Of Funds
Fixed Income Funds,
Liquid Funds/Money Market Funds,
Exchange Traded Funds.
Category Of Investor Eligible To Buy Mutual Fund
- Resident Individuals
- Indian Companies
- Indian trusts and charitable institutions
- Insurance companies
- Provident funds
- Non-resident Indians / PIO
- SEBI registered FII’s
Broadly 2 options- Growth option and Dividend Option
Automatic Reinvestment Plans (ARP) – Reinvestment of amount of dividend made by fund in the same fund and receive additional units. It gives Benefit of Power of Compounding.
Systematic Investment Plans(SIP) – For regular investment
Systematic Withdrawal Plan (SWP) – For regular income (SWP is not similar to MIP as SWP allow investor to get back the principal amount)
Systematic Transfer Plan (STP) – Transfer on a periodic basis a specified amount from one scheme to another within the same fund family.
KYC (Know your client)
KYC means “Know your Client”, a term commonly used for Client Identification Process. SEBI has prescribed certain requirements relating to KYC norms for Financial Institutions and Financial Intermediaries including Mutual Funds to ‘know’ their clients. This would be in the form of verification of identity and address, financial status, occupation and such other personal information. KYC Application for Individual (any resident and Non- Resident ) and Application For Non- Individual (companies and corporate Bodies)
For Individual :
PAN Card mandatatoy (with out PAN card mutual fund investment are not possible).
Address proof (Voter ID, Driving License, Passport , Latest Bank a/c statement & Pass book etc).
The documents must be current and valid. Document copy shall be self attested by the investor/attested by the ARN holder mentioning the ARN number.
For Non – Individual :
Copies of the Memorandum and Articles of Association and certificate of incorporation, Board Resolution , Authorized signatories list with specimen signatures.
Photograph, POI, POA, PAN and DIN numbers of whole time directors.
Copy of the balance sheets for the last 2 financial years (to be submitted every year).
Fresh Purchase :Full application Form is to be filled for a first time investment in a mutual fund through the offline route. The mutual Fund would need the application form with prescribed documentation and the requisite investment amount to allot an investment folio in the name of the investor.
Additional Purchase : Once an investor has a folio additional investment in the same mutual fund are simpler. Only transaction slip would need to be filled.
Switch :In the case of market fluctuations schemes switch to another schemes.
Statement Of Account
The statement of Account shows for each transaction (Pudchase / Repurchase / Redemption, Switch), the value of the transaction ,the relevant NAV and the number of units transacted. Besides, it also provides the closing balance of units held in that folio, and the value of these units based on the latest NAV.
Income From Mutual Fund
As the value of securities in the fund increases, the fund’s unit price will also increase. There would be capital appreciation when you sell your available units at a price higher than the price at which you bought.
Fund will earn interest income from the bonds it holds or will have dividend income from the shares.
The fund passes on the profits it has earned in the form of dividends
Steps Involved in Mutual Fund Investments
Step 1 – Identify your investment needs
What are my investment objectives and needs?
How much risk am I willing to take?
What are my cash flow requirements?
Step 2 -Choose the right mutual fund
- The track record of performance over the last few years in relation to the appropriate Benchmark and similar funds in the same category.
- How well the mutual fund is organised to provide efficient, prompt and personalised service.
- Degree of transparency as reflected in frequency and quality of their communications.
Step 3 – Select the ideal mix of schemes
- Investing in just one scheme may not meet all your investment needs.
- You may consider investing in a combination of schemes to achieve your specific goals.
The amount invested in tax-saving funds/Equity Linked Saving Schemes (ELSS) is eligible for deduction under Section 80C upto a limit of Rs.1,00,000/- (in a financial year).
Dividend from Mutual Fund Schemes is Tax-Free in the hands of the Investor/receipient.
ndexation Benefit under Long term Capital Gain in Debt schemes.
ndexation Benefit under Long term Capital Gain in Debt schemes.
Risk is an inherent aspect of every form of investment.
At times the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. This change in price is due to ‘market risk’.
Sometimes referred to as ‘loss of purchasing power’. Whenever the rate of inflation exceeds the earnings on your investment, you run the risk that you’ll actually be able to buy less, not more.
In short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are promised or repay your principal when the investment matures?
Interest rate risk
Interest rate movements in the Indian debt markets at times can be volatile leading to the possibility of large price movements up or down in debt and money market securities and thereby to possibly large movements in the NAV.Other risks associated are liquidity risk and changes in the government policy