Mutual Fund:
A mutual fund (MF) is huge pool of capital created by many individual investors. The money is
invested by a professional fund manager in securities (stocks, bonds, short-term money market
instruments, other mutual funds, other securities or commodities) for a common share goal. The fund
manager will trade (buys and sells) the fund’s investments in accordance with the fund’s investment
objective. Equity funds, which consist mainly of stock investments, are the most common type of
mutual fund.
The price of mutual fund depends on its NAV. A mutual fund’s price per share or exchange-traded
fund’s (ETF) per-share value is termed as Net Asset Value (NAV). NAV per share is computed once
a day based on the closing market prices of the securities in the fund’s portfolio. There are costs
associated with mutual fund, which can be categorized in following two categories.
Expense ratio: Expense ratio is operating cost of a fund, includes management salaries and
other admin costs.
Loads: Transaction fee paid while buying or selling a particular fund.
How to find out investment details of a MF? In which stocks MF has investment ?
These types of above questions can be answered with the help of ‘MF fact sheet’
Mutual fund factsheet evaluate the performance of a fund. The MF Factsheet gives a list of equity and
debt securities, that fund or scheme has invested in. It even gives details of returns, performance
against its index at different time period. MF factsheet tells about minimum investment and exit load.
Factsheet gives the diversification of the scheme.
Fund Agencies update the factsheet every month on their website, but there is no standard format
available for these. So, a regular watch on Mutual fund factsheet gives details of portfolio, credit
quality and other needed information to evaluate a fund.
Risk Return Matrix
Intro of MF:
A Mutual Fund is a trust registered with the Securities and Exchange Board of India (SEBI),
which pools up the money from individual / corporate investors and invests the same on
behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call
money markets etc., and distributes the profits. The income earned through these investments
and the capital appreciation realised are shared by its unit holders in proportion to the number
of units owned by them. This pooled income is professionally managed on behalf of the unit-
holders, and each investor holds a proportion of the portfolio i.e. entitled not only to profits
when the securities are sold, but also subject to any losses in value as well.
Why should I choose to Invest in Mutual Fund?
For retail investor who does not have the time and expertise to analyze and invest in stocks
and bonds, mutual funds offer a viable investment alternative. This is because:
Mutual Funds provide the benefit of cheap access to expensive stocks.
Mutual funds diversify the risk of the investor by investing in a basket of assets.
A team of professional fund managers manages them with in-depth research inputs
from investment analysts.
Being institutions with good bargaining power in markets, mutual funds have access
to crucial corporate information which individual investors cannot access.
How Mutual Fund operates
The following chart gives us operational flow of a Mutual Fund
Given back to
Organisational Structure of MF:
There are many entities involved and the diagram below illustrates the organisational set up
of a mutual fund:
Advantages of Mutual Fund
Advantages
Affordability
Professional Management
Diversification
Variety of Investment according to Financial status of the Investor
Return potential
Flexibility
Transparency
Tax Benefits
Liquidity
Clear – Cut regulations [SEBI]
Limitations of Mutual funds
Investors cannot contain costs so long as SEBI specified limits are complied with.
Investors pay management fees so long as they remain invested in the fund.
No tailor made portfolios
Investors end up delegating investment decisions to fund managers and have no
say/control on their decisions
The availability of a large number of mutual fund schemes means that, except for the
empowered investor , others require advice when selecting a fund which best meets
their investment objectives
Types of Mutual Funds:
Index Schemes
What are open-ended and close-ended mutual funds schemes?
In an open-ended mutual fund there are no limits on the total size of the corpus. Investors are
permitted to enter and exit the open-ended scheme at any point of time at a price that is linked
to the net asset value (NAV). In case of close-ended funds, the total size of the corpus is
limited by the size of the initial offer.
Do both open-ended and close-ended funds come out with an initial offering?
Yes. But the only difference is that in case of open-ended funds, a month after the initial offer
closes the continuous offer period starts when the investor can enter and exit the fund at a
price linked to the NAV
History of Mutual Funds:
