A Company that invests the funds of its
subscribers in diversified securities and issues units representing shares in
those holdings. It differs from an investment trust, which issues shares in the
company itself. While investment trusts have a fixed capitalization and a
limited number of shares for sale, mutual funds make a continuous offering of
new shares at net asset value (plus a sales charge) and redeem their shares on
demand at net asset value, determined daily by the market value of the
securities they hold.
What is a Mutual Fund?
A Mutual Fund is a body corporate that pools the
savings of a number of investors and invests the same in a variety of different
financial instruments, or securities. The income earned through these
investments and the capital appreciation realised by the scheme are shared by
its unit holders in proportion to the number of units owned by them. Mutual
funds can thus be considered as financial intermediaries in the investment
business who collect funds from the public and invest on behalf of the
investors. The losses and gains accrue to the investors only. The Investment
objectives outlined by a Mutual Fund in its prospectus are binding on the Mutual
Fund scheme. The investment objectives specify the class of securities a Mutual
Fund can invest in. Mutual Funds invest in various asset classes like equity,
bonds, debentures, commercial paper and government securities.
What is an Asset
An Asset Management Company (AMC) is a highly
regulated organisation that pools money from investors and invests the same in a
portfolio. They charge a small management fee, which is normally 1.5 per cent of
the total funds managed.
What is NAV?
NAV or Net Asset Value of the fund is the
cumulative market value of the assets of the fund net of its liabilities. NAV
per unit is simply the net value of assets divided by the number of units
outstanding. Buying and selling into funds is done on the basis of NAV-related
prices. NAV is calculated as follows:
How often is the
NAV= Market value of the fund's investments+Receivables+Accrued Income-
The NAV of a scheme has to be declared at least
once a week. However many Mutual Fund declare NAV for their schemes on a daily
basis. As per SEBI Regulations, the NAV of a scheme shall be calculated and
published at least in two daily newspapers at intervals not exceeding one week.
However, NAV of a close-ended scheme targeted to a specific segment or any
monthly income scheme (which are not mandatorily required to be listed on a
stock exchange) may be published at monthly or quarterly intervals.
What are the
benefits of investing in Mutual Funds?
1. Qualified and experienced professionals manage
Mutual Funds. Generally, investors, by themselves, may have reasonable
capability, but to assess a financial instrument a professional analytical
approach is required in addition to access to research and information and time
and methodology to make sound investment decisions and keep monitoring them.
Are there any risks
involved in investing in Mutual Funds?
2. Since Mutual Funds make investments in a number of stocks, the resultant
diversification reduces risk. They provide the small investors with an
opportunity to invest in a larger basket of securities.
3. The investor is spared the time and effort of tracking investments,
collecting income, etc. from various issuers, etc.
4. It is possible to invest in small amounts as and when the investor has
surplus funds to invest.
5. Mutual Funds are registered with SEBI. SEBI monitors the activities of Mutual
6. In case of open-ended funds, the investment is very liquid as it can be
redeemed at any time with the fund unlike direct investment in stocks/bonds.
Mutual Funds do not provide assured returns. Their
returns are linked to their performance. They invest in shares, debentures and
deposits. All these investments involve an element of risk. The unit value may
vary depending upon the performance of the company and companies may default in
payment of interest/principal on their debentures/bonds/deposits. Besides this,
the government may come up with new regulation which may affect a particular
industry or class of industries. All these factors influence the performance of
What are the
different types of Mutual funds?
(a) On the basis of Objective
Equity Funds/ Growth
What are the
different plans that Mutual Funds offer?
Funds that invest in equity shares are called equity funds. They carry the
principal objective of capital appreciation of the investment over the medium to
long-term. The returns in such funds are volatile since they are directly linked
to the stock markets. They are best suited for investors who are seeking capital
appreciation. There are different types of equity funds such as Diversified
funds, Sector specific funds and Index based funds.
These funds invest in companies spread across sectors. These funds are generally
meant for risk-taking investors who are not bullish about any particular sector.
These funds invest primarily in equity shares of companies in a particular
business sector or industry. These funds are targeted at investors who are
extremely bullish about a particular sector.
These funds invest in the same pattern as popular market indices like S&P 500
and BSE Index. The value of the index fund varies in proportion to the benchmark
Tax Saving Funds
These funds offer tax benefits to investors under the Income Tax Act.
Opportunities provided under this scheme are in the form of tax rebates U/s 88
as well saving in Capital Gains U/s 54EA and 54EB. They are best suited for
investors seeking tax concessions.
Debt / Income Funds
These Funds invest predominantly in high-rated fixed-income-bearing instruments
like bonds, debentures, government securities, commercial paper and other money
market instruments. They are best suited for the medium to long-term investors
who are averse to risk and seek capital preservation. They provide regular
income and safety to the investor.
Liquid Funds / Money Market Funds
These funds invest in highly liquid money market instruments. The period of
investment could be as short as a day. They provide easy liquidity. They have
emerged as an alternative for savings and short-term fixed deposit accounts with
comparatively higher returns. These funds are ideal for Corporates,
institutional investors and business houses who invest their funds for very
These funds invest in Central and State Government securities. Since they are
Government backed bonds they give a secured return and also ensure safety of the
principal amount. They are best suited for the medium to long-term investors who
are averse to risk.
These funds invest both in equity shares and fixed-income-bearing instruments
(debt) in some proportion. They provide a steady return and reduce the
volatility of the fund while providing some upside for capital appreciation.
They are ideal for medium- to long-term investors willing to take moderate
These funds adopt highly speculative trading strategies. They hedge risks in
order to increase the value of the portfolio.
(b) On the basis of Flexibility
These funds do not have a fixed date of redemption. Generally they are open for
subscription and redemption throughout the year. Their prices are linked to the
daily net asset value (NAV). From the investors' perspective, they are much more
liquid than closed-ended funds. Investors are permitted to join or withdraw from
the fund after an initial lock-in period.
These funds are open initially for entry during the Initial Public Offering
(IPO) and thereafter closed for entry as well as exit. These funds have a fixed
date of redemption. One of the characteristics of the close-ended schemes is
that they are generally traded at a discount to NAV; but the discount narrows as
maturity nears. These funds are open for subscription only once and can be
redeemed only on the fixed date of redemption. The units of these funds are
listed (with certain exceptions), are tradable and the subscribers to the fund
would be able to exit from the fund at any time through the secondary market.
These funds combine the features of both open-ended and close-ended funds
wherein the fund is close-ended for the first couple of years and open-ended
thereafter. Some funds allow fresh subscriptions and redemption at fixed times
every year (say every six months) in order to reduce the administrative aspects
of daily entry or exit, yet providing reasonable liquidity.
(c) On the basis of geographic location
These funds mobilise the savings of nationals within the country.
These funds facilitate cross border fund flow. They invest in securities of
foreign companies. They attract foreign capital for investment.
Is there is any tax applicable on the redemption of mutual funds?
Yes. The tax applicable is called as STT i.e. Security transaction tax which is
0.25%. STT is applicable only in case of redemption of equity linked schemes
Growth Plan and Dividend Plan
A growth plan is a plan under a scheme wherein the returns from investments are
reinvested and very few income distributions, if any, are made. The investor
thus only realises capital appreciation on the investment. This plan appeals to
investors in the high income bracket. Under the dividend plan, income is
distributed from time to time. This plan is ideal to those investors requiring
Dividend Reinvestment Plan
Dividend plans of schemes carry an additional option for reinvestment of income
distribution. This is referred to as the dividend reinvestment plan. Under this
plan, dividends declared by a fund are reinvested on behalf of the investor,
thus increasing the number of units held by the investors.
Automatic Investment Plan
Under the Automatic Investment Plan (AIP) also called Systematic Investment Plan
(SIP), the investor is given the option for investing in a specified frequency
of months in a specified scheme of the Mutual Fund for a constant sum of
investment. AIP allows the investors to plan their savings through a structured
regular monthly savings program.
Automatic Withdrawal Plan
Under the Automatic Withdrawal Plan (AWP) also called Systematic Withdrawal Plan
(SWP), a facility is provided to the investor to withdraw a pre-determined
amount from his fund at a pre-determined interval.