Learn about Mutual Fund and its Features – Part 1

In this Article we will learn the fundamental basics of Mutual Fund, like: what is Mutual Fund? What are the types of Mutual Funds? Operation and administration of Mutual Fund, benefits of investing in Mutual Funds, and risk involved in it etc.

This article will help you in enhancing your understanding about the Mutual Funds, and it will be very help full to the beginners. So read the full article carefully.

What is Mutual Fund?

Mutual Fund is an investment vehicle to make investments in capital market. It is a trust of funds that is managed by professional fund managers, where many investors pool their savings to invest in Shares, debentures, Govt. Bonds and other securities. Here you must be clear on certain points about mutual fund:

• As Mutual fund is a pool of investment: The trust or the Fund managers receive the money from many investors, so your money is being invested along with the collective fund. Managers do not work separately on each of the investor’s fund. They make the portfolio out of the entire fund they receive in a certain period of time.
• The Fund is being invested in a diversified manner: Mutual fund is a diversified pool of investment, where your money gets invested in varieties of securities those are negatively co-related with each other (if one go up another goes down). Let’s understand this with the following example:

Suppose you invest Rs. 1, 000 every month in Mutual Fund, like wise many other investors invest their money in the same pool. Now the fund manager has a pool of fund from different investors, from this entire fund they make one portfolio and invest in various securities like: Stocks, Bonds, debentures, Govt. Bond and fixed income securities etc.

About share market managers select companies belong to different industries which are negatively co-related, like Company belongs to FMCG industry, IT Industry, Tele Com Industry, Pharma Industry etc. they do so because when market goes up or down the shares of every company do not move in the same direction.

Now the question arises why in different types of securities? It is so, because when share market as whole goes down bond market goes up and there is a regular flow of income from fixed income securities. In this way fund managers manage your portfolio and give you a good return.

What are the types of Mutual Fund?

Types of Mutual Fund are categorized on the basis of its investment purpose:

1. Based on Tenor/Maturity of the Fund

• Open–Ended Fund: – These funds are available for subscription and redemption on a regular basis. You can subscribe open-ended funds any time throughout the year and such funds do not have any fixed maturity date. Due to this feature these funds are more liquid than other funds.
• Close-ended Fund: – these funds have pre defined maturity period, like 2 years, 3 years, 4 years, 5 years etc. subscription is opened for these funds till the specified date. Generally close-ended funds are listed on well known stock exchanges.
• Interval Funds: – it is combination of both ‘open-ended funds and close-ended funds’ these funds are also list on recognized stock exchanges.

2. Funds Based on the type of Capital Market Securities

• Equity Funds: – Equity funds invest the major portion of the fund only in stock market. Minimum 65% of the corpus is being invested in the equities and securities related to equity. Equity funds also known as ‘Growth Fund’. The investment objective of these funds has a long-term view of capital growth. The investors of equity funds become the part owner of each security in the portfolio. These funds invest in stocks of the companies belong to the different industry.
• Debt Funds: – These funds invest in fixed income securities like ‘Bonds, Corporate debentures and Govt. Bonds also in money market instruments’. Minimum 65% fund of the corpus gets invested in such securities; these securities are known as debt instruments. This fund provides regular income.
• Balanced Funds: – It is a combination of ‘equity funds and debt funds’. These funds are good for regular or stable return and growth of capital. Around 60% funds goes in equity funds and remaining in fixed income instruments.
• Liquid Funds: – Liquid funds invest in money-market instruments like: Commercial Paper, Certificate of Deposit. Money market instruments also known as ‘Short-term instruments’, because it has a tenor of less than 91 days. These funds are liquid funds, prevent the capital and provide moderate income in short-term. Generally Corporates and High-individual-net-worth invest in such funds.
• Gilt Funds: – These funds invest only in Govt. Securities, these funds are safer because these funds carry no default risk, but they carry interest rate risk.