BASICS OF MUTUAL FUNDS | WHAT IS MUTUAL FUND? | EXPLAINED.
A trust that pools the savings of investors who share a common financial goal is known as mutual fund. The money collected is then invested in financial instruments such as shares, debentures and other securities the income and capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them.
Investment in securities are spread over a wide cross section of industries and sectors reducing the risk of the portfolio. Mutual funds are mobilizers of saving of the small investors in instruments like stock and money market instruments. Mutual funds are corporation that accept money from investors and use this money to buy stocks, long term bonds, short term debt instruments issued by businesses or Govt.
In India, the mutual fund industry is highly regulated with a view to imparting operational transparency and protecting the investor's interest. The structure of a mutual fund is determined by SEBI regulations. These regulations require a fund to be established in the form of a trust under the Indian Trust Act, 1882.
A mutual fund is typically externally managed. It is now an operating company with employees in the traditional sense. Instead, a fund relies upon third parties that are either affiliated organizations or independent contractors to carry out its business activities such as investing in securities. A mutual fund operates through a four-tier structure. The four parties that are required to be involved are a sponsor, Board of Trustees, an asset management company and a custodian.
(MUTUAL FUNDS IN HINDI)
FEATURES OF MUTUAL FUNDS.
- Mobilizing small savings: mutual funds mobilize funds by selling their own shares known as units. This gives the benefit of convenience and satisfaction of owning shares in many industries. Mutual fund invest in various securities and pass on the returns to the investors.
- Investment Avenue: the basic characteristic of a mutual fund is that it provides an ideal avenue for investment for investors and enables them to earn a reasonable return with better liquidity. It offers investors a proportionate claim on the portfolio of assets that fluctuate in value.
- Professional management: mutual fund provides investors with the benefit of professional and expert management of their funds. Mutual fund employees professionals/experts who manage the investment portfolios efficiently and profitably. Investors are relieved from the responsibility of following the markets on a regular basis.
- Diversified investment: mutual fund have the advantage of diversified investment of funds in various industries and sectors. This is beneficial to small investors who cannot afford to buy shares of established companies at high prices. Mutual fund allow millions of investors who have investments in variety of securities of different companies.
- Better liquidity: mutual fund have the distinct advantage of better liquidity of investment. There is always a market available for mutual funds. In case of mutual funds it is obligatory that units are listed and traded thus offering our secondary markets for the funds. A high level of liquidity is possible for the fund holders because of more liquid securities in the mutual fund portfolio.
- Reduced risks: the risk on mutual fund is minimum. This is because of expert management diversification , liquidity and economies of scale in transaction cost.
- Investment protection: mutual funds are regulated by guidelines and legislative provisions put in place by regulatory agencies such as SEBI in order protect the investor interest the mutual funds are obligated to follow the provisions laid down by the regulators.
- Switching facility: mutual funds provide investors with the flexibility to switch from one scheme to another, this flexibility enables investors to switch from income scheme to growth scheme and from close ended scheme to open ended scheme.
- Tax benefits: mutual funds offer tax shelter to the investors by investing in various tax saving schemes under the provisions provided by the income tax act.
- Low transaction cost: the cost of purchase and sale of MF’s is relatively lower.
- Economic development: MF’s contribute to economic development by mobilizing savings and channelizing them to more productive sectors of the economy.
- Convenience: MF units can be traded easily with little or no transaction cost.
2. Professionally managed
Mutual funds are managed by skilled and professionally experienced managers with a backup of a research team. The fund managers help to channel the funds in the best available growth opportunities. Investors purchase mutual fund because they do not have a time or the expertise to manage their own portfolio. A fund manager on their behalf helps to resolve such issues.
3. Offers diversification
Mutual fund offers diversification in a portfolio which reduces the risk of fall in a value of investments. Purchasing units in a mutual fund is a best option, instead of buying individual stocks or bonds. The investment risk is spread out and minimized up to a certain extent.
4. Conveniently administered
In mutual fund, there is no administrative risk of share transfer, as many funds offer these services in their Demat trading accounts, which finally save investor's time. These proper and prompt services help the investor to grab the available growth opportunities.
5. Gives higher returns
Investor usually gets higher returns in mutual fund as compared to other avenues of investment.There are various schemes of mutual fund offered by, HDFC, ICICI, Franklin Templeton, etc. They have provided excellent returns. However, investors have to be cautioned that such high returns are not to be taken as consistent and regular returns.
6. Low cost management
As per the policy of the various statutory authorities, the organizations operating the mutual fund can only shift certain prescribed percentage of cost on the investors. The extra cost incurred such as management expenses has to be borne by the organization.Thus, mutual fund assures low cost management.
7. Offers liquidity
A mutual fund can be easily liquidated at the request of an investor. Just like an individual stock, it also allows investors to liquidate their holdings as and when they feel it necessary.
8. Provides transparency
Statutory authorities have compelled all the mutual fund companies to disclose their Net Assets Value (NAV). The NAV is calculated on daily basis and are regularly published through the available media.
9. Highly regulated
Mutual funds all over the world are highly regulated. The fund manager has to submit all necessary documents to the statutory authorities for their approval, to make investment in the required securities.
10. Allows switching to other schemes
Mutual fund gives an option to an investor, to switch to other schemes whenever they like, without any charges. This helps the investor to take benefit of the various available schemes which will finally help him/her to maximize returns on investment.
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