Mutual Funds-Types

-Hareesh.M2014600120

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.

How do I make money from a mutual fund?

1. Capital appreciation:

As the value of securities in the fund increases, the fund's unit price will also increase. You can make a profit by selling the units at a price higher than at which you bought

2. Coupon / Dividend Income:

Fund will earn interest income from the bonds it holds or will have dividend income from the shares

3. Income Distribution:

The fund passes on the profits it has earned in the form of dividends

Mutual Funds Schemes

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

Mutual Funds Schemes-By Structure1. 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.

2. 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.

3. Interval Schemes : Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes.

Mutual Funds- By Investment Objectives

1) 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.

Mutual Funds- By Investment Objectives

2) 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.

Mutual Funds- By Investment Objectives

3) 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).

Mutual Funds- By Investment Objectives

4) 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.

By Investment based classification• Equity fund: Such fund invest in equity shares they carry a

high degree of risk such fund do well in favorable market conditions. Investments are made in equity shares in diverse industries and sectors.

• Debt funds: Such fund invest in debt instruments like bonds and debentures. These funds carry the advantage of secure and steady income there is little chance of capital appreciation. Such funds carry no risk.

• Balanced funds: Such scheme have a mix of debt and equity in their portfolio of investments. The portfolio is often shifted between debt and equity depending upon the prevailing market conditions.

By Investment based classification• Sectoral fund: Such fund invest in specific sectors of the economy.

The specialized sectors may include real estate infrastructure, oil and gas etc, offshore investments, commodities like gold and silver.

• Fund of Funds: Such funds invest in units of other mutual funds there are a number of funds that direct investments into specified sectors of economy. This makes diversified and intensive investments possible.

• Leverage funds: The funds that are created out of investments with not only the amount mobilized from investors but also from borrowed money from the capital markets are known as leveraged funds. Fund managers pass on the benefit of leverage to the mutual fund investors. Additional provisions must be made for such funds to operate. Leveraged funds use short sale to take advantage of declining markets in order to realize gains. Derivative instruments like options are used by such funds.

By Investment based classification• Gilt fund : These funds seek to generate returns through

investment in govt. securities. Such funds invest only in central and state govt. securities and REPO/ reverse REPO securities. A portion of the corpus may be invested in call money markets to meet liquidity requirements. Such funds carry very less risk. Their prices are influenced only by moment in interest rates.

• Indexed funds: These funds are linked to specific index. Funds mobilized under such schemes are invested in securities of companies included in the index of any exchange. The fund performance is linked to the growth in concerned index.

• Tax saving schemes: The amount invested in tax-saving funds (ELSS) is eligible for deduction under Section 80C, However the aggregate amount deductible under the said section cannot exceed Rs 100,000 (in a financial year).

Rating Agencies

CRISIL~CPR Rankings and Value Research Star Rating are prominent ones

Role of Rating Agencies

1. Facilitate informed investment decision making

2. Provide independent and reliable opinion of schemes

3. The quality of the Fund’s management and operations

4. Help meet specific investment objective

Mutual Fund: How to buy?

Financial Goals

Identify ‘What to Buy’

Evaluate Funds from various Mutual Fund Cos.

Online Offline

Mutual Fund Co. and others Financial Distributor

Fill Up Form

Attach Relevant Documents

Submit

Banks,

Financial Svc. Cos.,

Brokers,

Individual Agents

Mutual Fund: How to redeem?

Fill-up relevant details(You could do partial redemption as well)

Sign the Form(All applicants to the units need to sign)

Submit(Submit the form to the Branch of the specific Mutual Fund Co.)

Money into your Bank Account(Money gets credited to you as per the scheme-specific turnaround time)

Choose ‘redemption’

Download Common Transaction Slip(Download from Mutual Fund Company’s website or get it from the branch)

Advantages of Mutual Funds

1.Professional Management

2.Diversification

3.Convenient Administration

4.Return potential

5.Low cost

6.Liquidity

7.Transparency

8.Flexibility

9.Choice of schemes

10.Well regulated

11.Tax benefits

Types of risks associated with Mutual Fund InvestmentRisk is an inherent aspect of every form of investment. For Mutual Fund investments, risks would include variability, or period-by-period fluctuations in total return.

Market risk: 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'.

Inflation 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.

Credit risk: 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 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:

Investment risks Liquidity risk Changes in the government policy

Various Mutual Funds in India

State Bank of India mutual fund

ICICI prudential mutual fund

TATA mutual fund

HDFC mutual fund

Birla sun life mutual fund

Reliance mutual fund

Kotak Mahindra mutual fund etc..

by: Gurmeet Singh

moneycontrol.com money.rediff.com wikipedia.co.in

REFERENCES