Mutual Fund BasicsLearn How to Invest in Mutual Funds

Table of Contents

• What are Mutual Funds

• How Mutual Funds Work

• Mutual Fund Schemes

• Types of Mutual Funds

• Mutual Funds Money Investments & Objectives

• Mutual Fund Scheme Benefits

• Advantages of Investing in Mutual Funds

What are Mutual Funds

•A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal.

•The money thus collected is then invested in capital market instruments such as shares, debentures and other securities.

•The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them.

•Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

How do Mutual Fund Work

• Each fund's investments are chosen and monitored by professionals who use this money to create a portfolio.

• Professionals are called Fund Managers.

•That portfolio could consist of stocks, bonds, money market instruments or a combination of those.

• The Portfolio comprises of the assets the investment is diversified into.

• As an investor, you own shares of the mutual fund, not the individual securities. Mutual funds permit you to invest small amounts of money, however much you would like, but even so, you can benefit from being involved in a large pool of cash invested by other people. All shareholders share in the fund' s gains and losses on an equal basis, proportionately to the amount they've invested.

• The investment objective is the goal that the fund manager sets for the mutual fund when deciding which stocks and bonds should be in the fund's portfolio. For example, an objective of a growth stock fund might be long-term capital appreciation.

Mutual Funds Schemes

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its

maturity period.

• Open-ended Fund/ Scheme - An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.

• Close-ended Fund/ Scheme: A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed.

• Interval Schemes : Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices

Types of Mutual Funds… (1)

Mutual Funds

Equity Funds Debt Funds Balanced Funds

Diversified Mid Cap Specific ELSS

Gift Funds Income Funds

MIPS Short Term Plans Funds

Liquid Funds

Types of Mutual Funds… (2)

Equity Funds

Debt Funds

Balanced Funds

Equity funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund manager’s outlook on different stocks.

The objective of Debt Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors.

Balanced Funds, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.

Mutual Funds Money Investments & Objectives

Growth Schemes

Income Schemes

Balanced Schemes

Money Market Schemes

Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.

Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.

Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).

Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.

Mutual Funds – Other Beneficial Schemes

Tax Savings

Index Schemes

Sector Specific Mutual Funds

Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.

Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the CNX S&P Nifty. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index.

Sector funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries.

Advantage of Investing in Mutual Funds

Asset Allocation: Asset Allocation involves diversifying your investments in various assets. For example, by choosing to buy stocks in the retail

sector and offsetting them with stocks in the industrial sector, you can reduce the impact of the performance of any one security on your entire

portfolio. So if one asset doesn’t perform well, you can fall back on another.

Economics of Scale: Purchasing multiple securities at a time will reduce the cost of the securities.

Divisibility : Smaller denominations of mutual funds provide mutual fund investors the ability to make periodic investments through monthly

purchase plans while taking advantage of dollar-cost averaging.

Liquidity: Another advantage of mutual funds is the ability to get in and out with relative ease. In general, you are able to sell your mutual funds in a short period of time without there being much difference between

the sale price and the most current market value.

Professional Management & Benefits: When you buy a mutual fund, you are also choosing a professional money manager. This manager will use

the money that you invest to buy and sell stocks that he or she has carefully researched. Therefore, rather than having to thoroughly

research every investment before you decide to buy or sell, you have a mutual fund's money manager to handle it for you. For the average

investor, there is an option of Tax rebates under section 80cc.

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