Various Types Of Mutual Funds are available in the market. Before we pick a type of Mutual Funds, we have to check out its advantages & previous history & fundamentals. A mutual fund is a trust that pools money from multiple investors who share a common financial goal for investing. All the funds raised have made diversified investments in capital and money market instruments such as equity, debt, commodities, private shares and other securities.
The profit has earned on these investments is shared to shareholders number of units owned by them. Thus mutual fund is the most suitable investments for common man since it offers an opportunities to invest in a diversified, professionally managed and basket of securities at a relatively low cost.
What is Mutual Fund?
A mutual fund is a type of investment option that collect funds from multiple investors for invest in a diversified of equity, debts, government bonds and others private equities. These funds are managed by a experienced mutual fund manager or a group of Fund Managers. Fund manager handle these capitals under a metric unit value called “NAV”. NAV is a average price of the Mutual Funds which is used to buy & sell by investors. Many types of Mutual Funds are available for investment. As in Equity Funds, Hybrid Funds, Debt Funds, Money Funds, Growth Funds & Income Funds etc. We need to understand its advantages before choosing to invest which types of Mutual Funds.
Entities involved in mutual fund
A mutual fund enterprise has five entities which are discussed in below;
- Sponsor- A sponsor establishes the mutual fund and gets it registered with SEBI. A sponsor should have sound track record and general reputation of fairness in all its business transaction. Sponsor should contribute atleast 40 % to the net worth of AMC. A sponsor should be carrying on business in financial services for a period of not less than five years.
- Trustees- trustee means the board of trustees who hold the property of the mutual fund in trust for the benefit of the unit holders. Two-third of trustee shall be independent and shall not associated with sponsor.
- Asset management company- A AMC manages the various schemes of mutual fund. It plays a key role in the running of a mutual fund and operates under the supervision and guidance of a trustee. It involves in the appointment of a large number of professional for investment, research and agent servicing. AMC should be headed by independent non-interested and non-executive chairman.
- Custodian- The custodian handles the investment back office operations of a mutual fund. The sponsor of mutual fund cant act as a custodian. This custodian is meant to ensure that the assets of the mutual fund not falls in the hands of its sponsor.
- Distributors- Distributors earn commission for bringing the investors into the schemes of a mutual fund. This commission is an expense for the scheme.
Types of mutual funds schemes
On the basis of operation:
- Open ended fund- When the units are sold and redeemed everyday, continuously on an all-going basis at the price determined by the fund’s NAV, then they are called open ended mutual fund. These funds have to announce their sale and repurchase price from time to time and these price and NAV remain close to each other.
- Close ended fund- A close ended fund has a stipulated maturity period which generally range from 3 to 15 year. The fund is open for subscription only for a specified period. The investor can invest in the scheme only at the time of new fund offer. The corpus remain fixed till their redemption .
On the basis of investment objectives:
- Growth fund- It is primarily aimed at achieving capital appreciation over medium to long term. In this scheme a higher amount of fund is invested in equity and equity linked instruments and the remains are in debt and money market securities. The investor’s benchmark to manage medium to high risk.
- Income fund- it provides regular and constant income to the investors. Such scheme generally invest in fixed income securities such as bonds, corporate debenture and government securities.
- Balanced fund- it provides both capital appreciation and periodic returns over a long period of time. The portfolio of these funds constitutes both equity and debt as indicated in offer document.
- Gilt fund- these funds exclusively put their funds in government securities, both central and state govt and treasury bill. These funds aim at highest safety with low return.
- High yield debt fund- These funds generate a higher interest income as they park their fund in instrument having low credit rating. These fund also known junk bond fund and popular abroad but not prevalent in India.
- Floating rate fund- These funds focus on the securities that pay a floating rate interest such as bank loan, bonds and other debt securities.
Advantages of mutual fund
- Investor’s funds are managed by highly experienced and skilled professionals.
- It reduces administrative jargons, saves time and make investing easy.
- Investors bear low cost by investing in mutual fund as brokerage, custodial and other fees are relatively low as compared to directly investing in the capital market.
- Mutual fund company regularly disclose the information related to the amount invested by the investors. A proper transparency is obtained by the MF company.
- Wide range of market to invest and choosing the fund.
- All the mutual funds are registered under the SEBI and they function within the strict regulation.
Limitations of mutual funds
- Investor has no option while choosing the securities they want to invest in.
- Investors rely upon the past performance of mutual funds and it may not be a guarantee for a good return.
- Many mutual fund give positive return but well below the benchmark level.
- Sometimes excessive management fees charged by the fund, which reduce the return available to an investor.
Conclusions
If you don’t have sufficient time to operate in security market and then you can choose to invest in mutual fund which can be managed by expertise personnel called fund manager with a hope of benchmark return.