Knowledge Desk Mutual Fund NJ Investment

7/27/2019 Knowledge Desk Mutual Fund NJ Investment

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Mutual Fund FundamentalsBack

1. Introduction to Mutual Funds2. Advantages of Investing through Mutual Funds3. Types of Mutual Fund Schemes

1. Introduction to Mutual Funds:

Definition: A mutual fund is an investment that poolsmoney from many individuals and invests it accordingto the fund's stated objectives. Professional money managers make investment decisions on behalf of fundinvestors, buying and selling investments such as money market investments, bonds and stocks

Structure of Mutual Funds:

In India, mutual funds function as trust created under the Indian Trust Act, 1882. There are three layers ofmutual fund in India. (i) Sponsors (ii) Trustee and (iii) Asset Management Company. Sponsors work as

Promoters of the company. They take responsibility of starting mutual fund business. Sponsors contributeinitial capital (40% of net worth of AMC) and appoint Trustees and Board of Trustees. Board of Trustees actas guardians of investors and ensure thatmoney invested by investors is used according to the objectiveof the scheme. Asset Management Company is the public face of fund management business. Sponsorsand Trustees together form AMC and appoint Fund Manager. Fund manager with help of fund managementteam makes all investment decisions.

How safe is investing in Mutual Funds?

In India mutual funds function as trusts. The sponsor of the fund appoints Board of Trustees who act asguardians of investor'smoney . The board or Trustee Company, as an independent body acts as theprotector of the unit holder's money. These trustees ensure that investor's interest is safeguarded and thatthe AMC's operations and Fund Manager's actions are along the professional lines. To ensureindependence of Board of Trustees, SEBI mandates a minimum of two-third independent directors on the

board of Trustee Company.

Apart from Trustees, the entire mutual fund industry functions under the preview of SEBI. This structure andstringent guidance make investing in mutual funds safe and easy. Fund Managers also have to functionwithin the broad framework and rules & regulations designed by AMC.

Investing in Mutual Fund: Mutual funds are considered as favorable investment vehicle for individualinvestors particularly for investors who have limited resources available in terms of capital and ability to carryout their investment decisions.
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2. Advantages of Investing through Mutual Funds

For an investor mutual fund offer wide range of advantages. Some of the key advantages include:-

o Portfolio Diversification:- Mutual funds are a convenient and affordable way of gaining access toa wide range of investments that would be very difficult and time-consuming to purchase andmanage individually. Because mutual funds typically hold 50 to 100 different investments, they offera degree of diversification that would be difficult to achieve on your own.

o Professional management: Actively managed mutual funds also give you the benefit ofprofessional investment management. The investments are selected by experienced professionalswho devote themselves exclusively to tracking the markets, analyzing investments andimplementing a consistent investment strategy.

o Flexibility to meet your needs and goals: A wide range of mutual funds are available to helpmeet the needs of every type of investor, from conservative to very aggressive. Mutual funds canalso help you meet a variety of investment goals, from establishing an emergency fund to savingfor a vacation, retirement or education.

o Convenient Administration: Investing in a Mutual Fund reduces paperwork and helps you avoidmany problems such as bad deliveries, delayed payments and unnecessary follow up with brokersand companies. Mutual Funds save your time and make investing easy and convenient.

o Return Potential: Over a medium to longterm, Mutual Funds have the potential to provide a higherreturn as they invest in a diversified basket of selected securities.

o

Low Costs: Mutual Funds are a relatively less expensive way to invest compared to directlyinvesting in the capital markets because the benefits of scale in brokerage, custodial and other feestranslate into lower costs for investors.

o Liquidity: In open-ended schemes, you can get yourmoney back promptly at Net Asset Value(NAV) related prices from the Mutual Fund itself. With close-ended schemes, you can sell yourunits on a stock exchange at the prevailing market price or avail of the facility of repurchasethrough Mutual Funds at NAV related prices which some close-ended and interval schemes offeryou periodically.

o Transparency: You get regular information on the value of your investment in addition todisclosure on the specific investments made by your scheme, the proportion invested in each classof assets and the fund manager's investment strategy and outlook.

o Flexibility: Through features such as Systematic Investment Plans (SIP), Systematic WithdrawalPlans (SWP) and dividend reinvestment plans, you can systematically invest or withdraw fundsaccording to your needs and convenience.

o Choice of Schemes: Mutual Funds offer a variety of schemes to suit your varying needs over a

lifetime.o Well Regulated: All Mutual Funds are registered with SEBI and they function within the provisions

of strict regulations designed to protect the interests of investors. The operations of Mutual Fundsare regularly monitored by SEBI.

3. Types of Mutual Fund Schemes

There are a wide variety of Mutual Fund schemes that cater to your needs, whatever your age, financialposition, risk tolerance and return expectations.

o By Structure:

Open Ended Schemes: These do not have a fixed maturity. The key feature is liquidity.You canconveniently buy and sell your units at Net Asset Value(NAV) related prices, at any point of time.

Closed Ended Schemes: These funds have a stipulated maturity period (ranging from 3years to 10 years). The 'Unit Capital' of such schemes is fixed as it makes a one time saleof a fixed number of units. After the offer closes, closed ended funds do no allow investorsto buy or redeem units directly from funds. However, to provide liquidity to investors,closed ended funds are listed on stock exchanges. Some close-ended schemes give youan additional option of selling your units to the Mutual Fund through periodic repurchase atNAV related prices. SEBI Regulations ensure that at least one of the two exit routes areprovided to the investor under the close ended schemes.
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Interval Schemes: These combine the features of open-ended and close-endedschemes. They may be traded on the stock exchange or may be open for sale orredemption during predetermined intervals at NAV related prices.

o By Investment Objective: Growth Schemes: Aims to provide capital appreciation over the medium to long term.

These schemes normally invest a majority of their funds in equities and are willing to bearshort term decline in value for possible future appreciation. These schemes are not for

investors seeking regular income or needing their money back in the short term. Income Schemes: Aim to provide regular and steady income to investors. These

schemes generally invest in fixed income securities such as bonds and corporatedebentures. Capital appreciation in such schemes may be limited.

Balanced Schemes: Aim to provide both growth and income by periodically distributing apart of the income and capital gains they earn. They invest in both shares and fixedincome securities in the proportion indicated in their offer documents. In a rising stockmarket, the NAV of these schemes may not normally keep pace or fall equally when themarket falls.

Money Market / Liquid Schemes: Aim to provide easy liquidity, preservation of capitaland moderate income. These schemes generally invest in safer, short term instrumentssuch as treasury bills, certificates of deposit, commercial paper and interbank call money.Returns on these schemes may fluctuate, depending upon the interest rates prevailing inthe market.

o Other Equity related Schemes:

Tax Saving Schemes: These schemes offer tax incentives to the investors under tax laws asprescribed from time to time and promote long term investments in equities through Mutual Funds.

Sector Funds: Equity funds that invest in a particular sector/industry of the market areknown as Sector Funds. The exposure of these funds is limited to a particular sector (sayInformation Technology, Auto, Banking, Pharmaceuticals or Fast Moving ConsumerGoods) which is why they are more risky than equity funds that invest in multiple sectors.

Index Funds: These funds have the objective to match the performance of a specificstock market index. The portfolio of these funds comprises of the same companies thatform the index and is constituted in the same proportion as the index. Equity index fundsthat follow broad indices (like S&P CNX Nifty, Sensex) are less risky than equity indexfunds that follow narrow sectoral indices (like BSEBANKEX or CNX Bank Index etc).Narrow indices are less diversified and therefore, are more risky.

Fund of Funds: Mutual funds that do not invest in financial or physical assets, but doinvest in other mutual fund schemes offered by different AMCs, are known as Fund ofFunds. Fund of Funds maintain a portfolio comprising of units of other mutual fundschemes, just like conventional mutual funds maintain a portfolio comprising ofequity/debt/money market instruments or non financial assets.

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Knowledge Desk Mutual Fund NJ Investment