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What is Mutual Funds

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time.

Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders.

The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time.

Mutual Funds History:

The global mutual funds industry traces its roots back to 1868 when the Foreign and Colonial Government Trust was formed in London. The Trust promised “the investor of modest means the same advantages as a large capitalist …..by spreading the investment over a number of different stocks”.

It resembled to-day’s closed end funds. The daily price was determined by supply and demand in the market instead of by the Net Asset Value (NAV) of the securities. It is interesting to note that most early mutual funds in England and the USA mostly resembled to-day’s closed end funds. Their shares were traded on one of the stock exchanges and had to be purchased and sold through a broker.

The first open-end fund or the first modern mutual fund, in U.S. Massachuseth Investment Trust (MIT), was launched in Boston in March,1724. The Trust, which celebrated its 75th anniversary recently, commenced its business with 50,000$ in assets and a portfolio of 45 stocks. Thus, first U.S. mutual fund is a common stock fund.

MUTUAL FUNDS – USA:

The growth of mutual funds as an investment outlet for individual investors can be gauged by the fact that U.S. investors have added to their mutual fund holdings at the rate of more than 100 billion annually during the period 1989 to 1992.
The tremendous popularity of the fund investment among U.S. investors is reflected in their number and their aggregate assets.
At the end of 1997, there were about 9,000 mutual funds – 53% in stock funds, 23% in bond funds and 24% in money market funds. The total assets of the industry were close to $5 trillion. It is estimated that about 63 million individual Americans in 37 million households own mutual fund shares.

CONSTITUTION OF M F:

SEBI Regulations envisage four key players connected with the setting up of a mutual fund.
Sponsor : is defined as any body corporate, acting alone or in association with another body corporate, establishes a mutual fund meeting the required formalities.
Trustee : is a person who holds the property of the trust for the benefit of the unit-holder
Asset Management Company : Signifies a company formed and registered under the Indian Companies Act,1956, for the purpose of managing the affairs of the mutual fund and operates the schemes floated by such funds and
Custodian : is a person carrying on the activity of safe keeping of the securities or participating in any clearing system on behalf of the clients to effect deliveries of securities.

ADVANTAGES OF MUTUAL FUNDS:

Professional Management
Diversification
Convenient Administration
Return Potential
Low Costs
Liquidity
Transparency
Flexibility
Choice of schemes
Tax benefits
Well regulated

TYPES-BY STRUCTURE:

Open-end Funds
An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value (“NAV”) related prices. The key feature of open-end schemes is liquidity.

Closed-end Funds
A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed.

Interval Funds
Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices.

Growth Funds
The aim of growth funds is to provide capital appreciation over the medium to long term. Such schemes normally invest a majority of their corpus in equities. It has been proved that returns from stocks, have outperformed most other kind of investments held over the long term. Growth schemes are ideal for investors having a long term outlook seeking growth over a period of time.

Income Funds
The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income.

Balanced Funds
The aim of balanced funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls. These are ideal for investors looking for a combination of income and moderate growth.

Money Market Funds
The aim of money market funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for Corporate and individual investors as a means to park their surplus funds for short periods.