Mutual Funds: All You Need To Know About It

Nowadays you are hearing more and more about mutual funds as a means of investment (Mutual Funds Sahi Hai is the most recent advertisement you may have come across – an investor education initiative powered by Association of Mutual Funds in India). If you are like most other individuals, you probably have most of your money either in a bank savings account or in government securities and your biggest investment may be in the form of home or gold.

It is fact that investing is something that requires time and knowledge to get involved in. This is the reason why investing in mutual funds has become such a popular way of investing these days. Let us get deep into this.

What is Mutual Fund?

A mutual fund is a trust that collects the money from a number of individuals and invests this money either in equity shares, bonds, money-market securities, government securities or in a combination of all these.

A mutual fund is the most suitable investment option for the general public as it offers an opportunity to invest in a diversified and professionally managed basket of securities at a relatively lower cost.

Investing in mutual funds is very much easy as compared to investing in stock and bonds on your own and investor can easily sell their units (shares) whenever they want.

Regulatory Authorities

To protect the interest of the investors, SEBI (Securities and Exchange Board of India) formulates policies and regulates the mutual funds in India.

Structure of Mutual fund

• Sponsor – Sponsor is the person who single-handedly or in a relationship with another person (corporate body), set up a mutual fund. The sponsor is not liable or responsible for any loss coming out because of the operation of the schemes.
• Trust – The mutual fund is formed as a trust in accordance with the provisions of the Indian Trusts Act, 1882. The trust title deed is registered under the Indian Registration Act, 1908.
• Trustee – Trustee is generally a company (corporate body) or a Board of Trustees ( a group of people). The fundamental job of the trustee is to protect the interest of the unit holders and also to ensure that the AMC (Asset Management Company) works in light of a legitimate concern of investors and as per the SEBI (Mutual Funds) Regulations, 1996.
• Asset Management Company (AMC) – The trustee assigns the AMC. The Asset Management Company is needed to be affirmed by the SEBI to work as an asset management company of the Mutual fund. The AMC must have total assets of at least Rs. 1000 lakhs at all circumstances.
• Custodian – A trust company, financial institution or a bank listed with SEBI is liable for holding and protecting the securities owned by the mutual fund.
• Registrar and Transfer Agent – The AMC, if so approved by the trust deed, chooses the registrar and transfer agent of the mutual fund. The registrar processes the application form, dispatches account statements and processes redemption requests of the investor.

Different Types of Mutual Funds

1) By Structure:

• Open-Ended Schemes – Open-ended schemes are mutual funds that can issue and redeem their units at any time. Open-ended funds don’t have a limitation on the amount of units the fund will issue. They offer units for sale without stating any duration for redemption.
• Close-Ended Schemes – Close-ended schemes are mutual funds with a fixed number of units. Close-ended funds raise a certain amount through a New Fund Offer (NFO).

2) By Investment Objectives:

Benefits of Investing In a Mutual Fund

• Professional Management – Qualified people manage your money. Apart from that, they also have a research team that continuously analyses the prospects and performance of the companies. These people (also known as fund managers) are in a better position to manage your money and deliver higher returns.
• Diversification – Mutual funds habitually spread investments across various asset classes. Thus, by investing in mutual funds, investors can avail the benefits of diversification without investing a large amount of money.
• Well Regulated – Mutual funds in India are monitored and regulated by the SEBI, which endeavors to protect the interests of investors. Mutual funds ought to present their investors with useful data about their investments as well as disclosures like various investments made by the fund and the proportion of investment in each asset classes.
• Flexibility – Mutual funds offer a variety of plans, like (1) regular investment, (2) regular withdrawal and (3) dividend reinvestment plans.
• Transparency – The performance of a mutual fund is regularly tracked by rating agencies and various publications, making it easy for investors to compare the fund with other. As a unit holder, you are provided with regular updates, for example, daily NAVs, as well as information on the fund’s holdings and the fund manager’s strategy.
• Rupee-Cost Averaging – You can invest a specific amount at a regular interval regardless of the fund’s unit price. Rupee-cost averaging allows you to discipline yourself by investing every month or quarter rather than making random investments.
• Tax benefits – Investments held by investors for a period of 1 year or more qualify for capital gains and will be taxed accordingly. These investments also get the benefit of indexation.