Why Mutual Fund?
In Mutual Fund many investors contribute to form a common pool of money. This fund is invested in accordance with a stated objective. This fund belongs to all the members in the proportion of their investment or it can be said that the ownership of the fund is joint or mutual. Fund Manager uses the money collected from investors to buy those assets which are specifically permitted by its stated investment objective. Fund Managers carry out detailed research and market monitoring on regular basis. This may not be possible for every investor. The risk of the investor is limited to their investment. Risk is reduced when the fund is diversified.
Advantages of Mutual Fund:
Portfolio Diversification: A diversified portfolio serves to minimise risk by ensuring that a downtrend in some securities or sectors is offset by an upswing in the others. Mutual funds pool the resources of many investors and thus have the funds necessary to build a diversified portfolio, and by investing even a small amount in a mutual fund, an investor can, through his proportionate share, reap the benefit of diversification.
Professional Management: Mutual funds specialise in the business of investment management, and therefore employ professional management for carrying out their activities. Professional management ensures that the best investment avenues are tapped with the aid of comprehensive information and detailed research. It also ensures that expenses are kept under tight control and market opportunities are fully utilised.
Reduction of Risk: Mutual funds specialise in this area and possess the requisite resources to carry out research and continuous market monitoring. As the funds are professionally managed the risk reduces.
Investment Objectives: Mutual funds focus their investment activities based on investment objectives such as income, growth or tax savings. An investor can choose a fund that has investment objectives in line with his objectives. Therefore, funds provide the investor with a vehicle to attain his objectives in a planned manner.
Reduction of Transaction Cost: Direct equity investing involves a high level of transaction costs per rupee invested in the form of brokerage, commissions, stamp duty, etc. While mutual funds charge a management fee, they succeed in keeping transaction costs under control because of the economies of scale they enjoy.
Convenience & Flexibility: Mutual Funds offer a variety of schemes as suits the need of the investor, ranging from low risk to very high risk. Funds allow the flexibility to switch, sweep or transfer between schemes within a family of funds. They also offer facilities such as cheque writing and accumulation plans.
Liquidity: Mutual funds offer liquidity through listing on stock exchange (for close-end funds) and repurchase options (for open-end funds). In case of direct equity investing, several stocks are often not traded for long periods. While some close-end funds may not be traded frequently, they are nevertheless more liquid than many stocks. In any case, all funds provide one of the two avenues for liquidity.
A) On the Basis of Objectivity:
Liquid Fund / Money Market: The strengths of money market or liquid funds are liquidity & safety of principal that the corporate & individual investors can normally expect from short term investments. Liquid Funds invest in the short term, interest-bearing instruments like Treasure Bills, Certificate of Deposit & Commercial Papers. Liquid Funds contains interest rate risks. Returns on these schemes fluctuate much less.
Income / Debt oriented Funds: Income Funds invest in long term securities like debt instruments issued not only by government but also by private companies, banks and financial institutions. These funds target low risk and stable income for the investor as their key objective. Gilt Fund: Gilts are government securities with medium to long-term maturities, typically over one year. Gilt Funds invest in government papers called dated securities & face interest rate risk. Debt securities prices come down when interest rate increase and Vice Versa. Fund of Fund: Fund of fund invests in the other Mutual Funds. Just as a normal mutual fund invests in a portfolio of securities such as debt or equity, a fund of funds invests in a portfolio of the units of other mutual fund schemes. Risk is low compared to conventional mutual fund schemes. Investor also enjoys the advantage of diversified management. A fund of fund could, however, result in high expenses. Balance Fund: Balance fund is one that has a portfolio comprising of debt instruments, convertible securities, preference shares and equity shares. Their assets are generally held in more or less equal proportions between debt / money market securities and equities providing moderate capital appreciation and prevention of capital with a conservative long term appreciation.
Growth / Equity oriented Schemes: The aim of Growth scheme is to invest the major part of their corpus in equity shares issued by the companies through initial public offerings or through the secondary market. Equity funds contain high level of risks and capital appreciation in the long term, but investment in diversified equity fund reduces the risk.
Equity Linked Savings Scheme (ELSS): Equity Linked Savings Scheme, these schemes are open-ended growth schemes. Tax concession u/s. 80(C) of Income Tax Act, up to maximum of Rs.1,00,000/- is given to the investors investing in the ELSS fund and usually has a lock in period of three years. Investor should clearly look for where the Fund Management Company proposes to invest and accordingly judge the level of risk involved.
Index Fund:An index fund tracks the performance of a specific stock market index such as BSE Sensitive Index (Sensex), S&P NSE 50 Index (Nifty). The fund invests in the shares that constitute the index and in the same proportion as the index. These are less diversified and more risky.
Sector Specific Funds: Objective of this fund is to invest only in the equity of those companies existing in a specific sector, as laid down in the fund’s offer document.
B) On the Basis of Flexibility:
Open Ended Fund: An open-ended fund is available for subscription throughout the year. Open Ended fund is flexible and any part of the investment can be easily bought or sold.
Close Ended Fund: A close-ended fund has a fixed duration i.e. lock-in-period generally ranging from 3 years to 15 years. A fund would be open for subscription for a specified period. Close-ended funds are listed on the stock exchange and are traded like a stock. Investor can redeem their units on a specified date.
Interval Funds: This is a combination of open-ended and close-ended schemes. Interval funds may be traded on the stock exchange or may be open for sale or redemption.
Mutual Fund Categorizationhttps://www.sebi.gov.in/legal/circulars/oct-2017/categorization-and-rationalization-of-mutual-fund-schemes_36199.html
What is an Entry Load?
The costs of the fund management process that includes marketing and initial costs are charged when you enter the scheme. These charges are termed the entry load. It is the additional charge you pay when you join a scheme.
What is an Exit Load?
Exit load is levied when some fund imposes a fee while you leave the scheme i.e. redeem the units.
The table below shows Lump Sum Investment of Rs. 5000/-
The table above is merely indicative in nature and should not be considered as investment advice. It does not in any manner imply or suggest performance of any scheme.
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