A Mutual Fund is a pool of money collected from various investors, which is then invested in a diversified portfolio of securities such as stocks, bonds, or money market instruments. The purpose of a mutual fund is to provide investors with an opportunity to invest in a variety of assets, managed by professional portfolio managers.
Mutual funds offer several key features that make them an attractive investment option for many people. These features include:
By pooling money from many investors, mutual funds invest in a wide range of assets, which helps reduce the overall risk of the portfolio.
Mutual funds are managed by professional portfolio managers who have the expertise and resources to make investment decisions on behalf of the investors.
Investors can buy or sell mutual fund units at any time, providing liquidity to their investments. This makes mutual funds a flexible investment option.
Mutual funds allow investors to start with a relatively low amount of capital, making them accessible to a wide range of investors.
There are several types of mutual funds, each designed to meet the needs of different investors. Some of the most common types are:
Invest in stocks and are suitable for investors seeking long-term capital growth.
Invest in bonds and other fixed-income securities, providing regular income with lower risk compared to equity funds.
Invest in a combination of stocks, bonds, and other assets to provide a balanced approach to growth and income.
Invest in short-term debt instruments, offering low risk and high liquidity, suitable for short-term investment goals.
Investing in mutual funds offers several benefits:
The investment objective of a mutual fund defines the primary goal for which the fund was created. This objective provides direction for the fund manager’s investment decisions and helps investors understand the type of returns they can expect. Investment objectives can vary, such as:
A unit represents a share in the mutual fund and signifies the proportionate ownership of an investor in the mutual fund’s portfolio. When you invest in a mutual fund, you purchase units at the prevailing Net Asset Value (NAV). The total value of your investment is calculated by multiplying the number of units you hold by the NAV.
Net assets represent the total value of the mutual fund’s holdings, less its liabilities. This value is used to calculate the Net Asset Value (NAV) and reflects the fund’s size and the value of its investments at any given time. The formula is:
Net Assets = Total Assets - Liabilities
The Net Asset Value (NAV) of a mutual fund is the per-unit market value of the fund’s holdings. NAV is calculated by dividing the total net assets of the fund by the number of units outstanding. NAV is updated daily and reflects the value of the fund’s portfolio, taking into account the market prices of the underlying securities.
Formula:
NAV = (Total Assets - Liabilities) / Total Outstanding Units
Cut-off timings refer to the deadline by which an investor must submit an order (purchase or redemption request) in order to receive the NAV of the same day. Mutual funds typically set a cut-off time, such as 3:00 PM, after which the NAV of the next business day is applied to the transaction.
Mark to market (MTM) is an accounting method used to value a mutual fund’s assets based on their current market price, rather than their book value. This process helps in accurately reflecting the true market value of the fund’s holdings. The MTM method is important for providing investors with an up-to-date view of the fund’s value, especially in volatile markets.
An open-ended scheme is a type of mutual fund that allows investors to buy and sell units at any time at the prevailing Net Asset Value (NAV). The number of units in an open-ended scheme is not fixed and can change depending on the inflows and outflows from investors. These funds are ideal for investors who want flexibility and liquidity.
A closed-end scheme, unlike open-ended schemes, has a fixed number of units that are issued to investors through an Initial Public Offering (IPO) and are listed on a stock exchange. Investors can buy and sell units only on the exchange and not directly from the fund. The price is determined by market forces, not just the NAV.
Interval funds are a hybrid type of fund that combines features of both open-ended and closed-end schemes. These funds are open for subscription and redemption only at specified intervals, which could be monthly, quarterly, or annually. They offer the flexibility of being traded on the exchange like closed-end schemes but with limited liquidity at fixed intervals.
Exchange Traded Funds (ETFs) are a type of investment fund that is traded on stock exchanges, much like stocks. ETFs hold a collection of assets, such as stocks, bonds, or commodities, and aim to replicate the performance of a particular index or sector. ETFs combine the diversification of mutual funds with the liquidity and trading flexibility of individual stocks.
Investor Service Standards are a set of guidelines and regulations designed to protect and enhance the experience of mutual fund investors. These standards are developed to ensure that mutual funds provide consistent, transparent, and efficient services to investors.
The Securities and Exchange Board of India (SEBI) regulates and oversees the mutual fund industry in India, ensuring that investors are treated fairly and their interests are safeguarded. The SEBI has laid down various rules for mutual funds to follow, which include the following investor service standards:
These standards are designed to enhance investor confidence in mutual fund investments and ensure that they have a positive and transparent experience with the fund houses.
Equity funds primarily invest in stocks and are aimed at capital appreciation over the long term. These funds seek to take advantage of the growth potential of the stock market. Equity funds are suitable for investors who are willing to take on higher risk in exchange for potentially higher returns. The growth of the economy, company performance, and the overall market environment directly impact the performance of equity funds.
Debt funds invest primarily in fixed-income securities like bonds, corporate bonds, and government securities. These funds are designed to provide regular income with lower risk compared to equity funds. They are suitable for conservative investors who prioritize stability and income over high returns.
Hybrid funds combine investments in both equity and debt instruments. These funds aim to provide a balance of growth and income. They are designed to offer moderate risk with a diversified portfolio. Hybrid funds are suitable for investors looking for a balanced approach to growth and income.
Solution-oriented schemes are mutual funds designed for specific financial goals, such as retirement planning or saving for children’s education. These funds have a defined investment horizon and are aimed at meeting long-term objectives. They typically invest in a mix of equity, debt, and other instruments, depending on the time horizon and risk profile of the goal.
This category includes a variety of specialized funds that do not fit into the standard categories of equity, debt, or hybrid funds. These may include sectoral funds, index funds, fund of funds, and international funds. Each type has a unique investment approach focused on specific sectors, indices, or geographic regions.
Specialized investment funds are those that invest in specific asset classes, sectors, or regions. These funds are designed to offer targeted exposure to particular markets or investment themes. Specialized funds provide a way for investors to gain access to niche markets, industries, or strategies that may not be available through traditional mutual funds.
Sectoral funds are mutual funds that invest in specific sectors of the economy, such as technology, healthcare, energy, or infrastructure. These funds are ideal for investors who want to focus on a particular industry with high growth potential.
Thematic funds invest in trends or themes that span multiple sectors or industries. For example, a thematic fund might focus on emerging technologies like artificial intelligence, clean energy, or robotics. Thematic funds allow investors to capitalize on broad, long-term trends.
International funds invest in securities outside of an investor’s home country. These funds provide exposure to global markets and are an excellent way to diversify a portfolio. They can include emerging markets, developed markets, or even regional funds.
A Fund of Funds (FoF) invests in other mutual funds rather than directly in securities like stocks or bonds. This provides investors with diversification across various asset classes and fund managers. It is an ideal choice for those who prefer a hands-off investment approach.
Real estate funds invest in properties, real estate investment trusts (REITs), and other real estate-related assets. These funds provide a way for investors to gain exposure to the real estate market without directly owning property.
Triggers in mutual fund investment are predefined instructions or conditions set by investors to automate their investment decisions. These triggers are used to manage investments efficiently and reduce the need for manual intervention in response to market movements. Investors can set triggers for buying, selling, or switching investments in mutual funds based on specific price points, NAV levels, or other criteria.
A buy trigger is an automatic instruction to buy more units of a mutual fund when a certain condition is met. This could be based on a predefined NAV level or when the market reaches a specific threshold.
A sell trigger is an instruction to sell mutual fund units automatically when a specific condition is met, such as when the NAV rises to a target level or when a certain profit threshold is achieved.
A switch trigger allows investors to switch their investments between different mutual fund schemes based on market conditions or performance. For example, you can set a trigger to move your investment from an equity fund to a debt fund if the equity market drops below a certain level.
Investors can set triggers through their mutual fund distributor, advisor, or directly through online platforms provided by asset management companies (AMCs). These triggers can be customized based on the investor’s risk profile, investment goals, and market conditions.
A fresh purchase refers to the initial investment made by an investor in a mutual fund. This purchase involves buying new units in the fund, typically at the prevailing Net Asset Value (NAV) on the day of the transaction. A fresh purchase can be made through a one-time investment or through a Systematic Investment Plan (SIP) that allows for regular investments.
Additional purchases refer to further investments made by an investor in a mutual fund after the initial purchase. This could be in the form of lump sum investments or regular contributions via SIP. Additional purchases are processed at the current NAV on the day the transaction is completed.
Redemption refers to the process of selling mutual fund units back to the mutual fund in exchange for cash. Investors can redeem their units at the prevailing NAV, and the funds are typically credited to the investor’s bank account after the transaction is processed. Redemption can be done partially or in full.
A switch refers to the process of transferring funds from one mutual fund scheme to another within the same mutual fund house. This allows the investor to change their investment strategy, such as switching from an equity fund to a debt fund, depending on their risk tolerance and financial goals.
Dividend reinvestment allows mutual fund investors to reinvest the dividends earned from their investments into additional units of the same fund, rather than receiving the dividend in cash. This feature helps investors compound their returns over time.
A Systematic Investment Plan (SIP) is a disciplined way of investing a fixed amount regularly (monthly, quarterly) in mutual funds. It allows investors to invest in small amounts over a long period, helping them to benefit from the power of compounding and rupee cost averaging.
A Systematic Withdrawal Plan (SWP) allows investors to withdraw a fixed amount of money periodically (monthly, quarterly) from their mutual fund investments. It is ideal for investors who require regular income from their investments while still maintaining exposure to the market.
A Systematic Transfer Plan (STP) allows investors to transfer a fixed amount from one mutual fund scheme to another, typically from a debt fund to an equity fund. It helps investors gradually shift from low-risk to high-risk investments without making large, lump-sum transfers.
A Dividend Transfer Plan (DTP) allows investors to automatically transfer the dividends earned from one mutual fund scheme to another scheme, typically from an income-oriented fund to an equity fund or a high-growth fund. This ensures that dividends are reinvested into the fund automatically, increasing the potential for long-term growth.
The Value Averaging Investment Plan (VAIP) is an investment strategy where the investor invests varying amounts in a mutual fund at regular intervals, aiming to keep the portfolio’s value on track with a predetermined growth path. The amount invested changes according to market performance to maintain the target growth.
Mutual funds typically offer two types of investment plans: Direct Plan and Regular Plan. Both plans offer the same portfolio and returns, but the difference lies in the fees and commissions.
The Direct Plan is purchased directly from the asset management company (AMC), without the involvement of any distributor or agent. This plan has a lower expense ratio, as there are no commissions paid to intermediaries.
The Regular Plan is purchased through an intermediary or distributor, such as a financial advisor or broker. This plan includes a higher expense ratio because of the commission paid to the distributor.
An investment adviser is a professional who provides guidance and recommendations to investors about their financial and investment decisions. They analyze a client’s financial goals, risk tolerance, and other factors to create a tailored investment strategy.
Investors seeking personalized investment strategies, financial planning, and portfolio management often turn to investment advisers to guide their decisions. The value provided by an investment adviser lies in their expertise, experience, and ability to tailor solutions to individual needs.