Mutual Fund

What is mutual fund?

Mutual Fund is a financial portfolio designed by using equity and debt products based on the investment objective choose for the particular mutual fund. Different Mutual fund has different ratio of equity and debt of various companies in different percentage in different mutual fund. Mutual fund is the fund which accumulates fund from investors to buy shares and debentures of various companies based on common goal to form a mutual fund portfolio. Investors buy shares in mutual fund. Mutual fund are operated by the Asset Management Companies having the research team which invest in the share market through the accumulated fund from the investors and give the return to their investors. A mutual fund is required to be registered with the Securities and Exchange Board of India (SEBI), which regulates securities markets before it can collect funds from the public.

How mutual fund is formed and worked out?

In India, the mutual fund industry is highly regulated with a view to imparting operational transparency and protecting the investor's interest. The structure of a mutual fund is determined by SEBI regulations. These regulations require a fund to be established in the form of a trust under the Indian Trust Act, 1882. A mutual fund operates through a four-tier structure. The four-tier structures that are required to be involved are a sponsor, Board of Trustees, an asset management company and a custodian.

Sponsor: A sponsor is a body corporate who establishes a mutual fund. It may be one person acting alone or together with another corporate body. Additionally, the sponsor is expected to contribute at least 40% to the net worth of the AMC. However, if any person holds 40% or more of the net worth of an AMC, he/she shall be deemed to be a sponsor and will be required to fulfil the eligibility criteria specified in the mutual fund regulation.

Board of Trustees: A mutual fund house must have an independent Board of Trustees, where two-thirds of the trustees are independent persons who are not associated with the sponsor in any manner. The Board of Trustees of the trustee company holds the property of the mutual fund in trust for the benefit of the unit-holders. They are responsible for protecting the unit-holder's interest.

Asset Management Company: The role of an AMC is highly significant in the mutual fund operation. They are the fund managers who manages the various funds i.e. they invest investors’ money in various securities (equity, debt and money market instruments) after proper research of market conditions and the financial performance of individual companies and specific securities in the effort to meet or beat average market return and analysis. They also look after the administrative functions of a mutual fund for which they charge management fee.

Custodian: The mutual fund is required by law to protect their portfolio securities by placing them with a custodian. Nearly all mutual funds use qualified bank custodians. Only a registered custodian under the SEBI regulation can act as a custodian to a mutual fund.

Is it a risky product?

Mutual fund is less risky than investing directly into the stock market. But, yes Mutual fund are the calculated risky funds. Diversified investment improves the risk return profile of the portfolio. Optimal diversification has limitations due to low liquidity among small investors. The large corpus of a mutual fund as compared to individual investments makes optimal diversification possible. Due to the pooling of capital, individual investors can derive benefits of diversification.

Is it a good option for investment?

Mutual Fund is a good option for investments rather than investing directly into the share market. Mutual Fund has big portfolio i.e. number of shares and debentures of various companies and govt. securities, etc. and the investors get the share of all mutual fund portfolio i.e. all no. of equity and debt. While, investor if invest directly into buying equity or debts they can buy only few stocks in the same amount. Hence mutual fund gives the hedge to the investor fund through huge amount of shareholding in various companies and make less risky for the investors who invest in share market directly. Mutual fund is also a good investment option as it gives the two ways of investment i.e. lump sum and SIP. The SIP, Systematic Investment Plan is a way where people can invest in small amount like Rs. 1000/- per month which gives the option to the investor to get the shares of mutual fund portfolio and get the return or benefit of the stock market with an averaging system.

How we should go for investing in the mutual fund?

For investing in mutual fund you need to understand your financial goal first then plan your strategy to achieve that financial goal i.e. doing financial planning. After this process understand the type of mutual funds and there returns based on various situations and conditions of the market. Then choose the mutual fund and ways of investing in mutual fund with duration, but it is always advisable to refer the financial advisor before investing in mutual fund.

What are the various types of mutual fund schemes available in the market?

Basically, there are four types of mutual funds: equity, hybrid, bond and money market. Equity funds concentrate their investments in equity stocks. Bond funds primarily invest in bonds and other securities. Hybrid Funds are the mix of Equity and bond funds. Equity, bond and hybrid funds are called long-term funds. Money market funds are referred to as short-term funds because they invest in securities that generally mature in about one year or less. Mutual funds offer a number of schemes to suit the investment objective of the investors.

What are the ways to invest in mutual fund?

Ways to invest in mutual fund are lump sum, SIP, SWP, and STP. Lump Sum is a method of investing in mutual fund by investing a certain amount for one time. Anyone can add more amounts or redeem some amount from this investment. SIP is a Systematic Investment Plan where one can invest a certain amount of money every month or every quarterly for certain time of period as chosen by the investor. SWP is a Systematic Withdrawal Plan as the name suggest it is particularly getting the particular amount of redeem amount every month or every quarterly or every half-yearly or yearly from the invested amount in a certain mutual fund earlier or purchased during that starting of this type of mutual fund. This type of investment one can use for getting the particular income regularly by purchasing a mutual fund through Lump sum or SIP invested earlier basically it is best used for retirement purpose. STP is Systematic Transfer Plan it is basically transfer a certain amount of money from one mutual fund purchased to another mutual fund every month or every quarterly, etc.

What are the factors we should consider before investing in mutual fund?

There are various factors to be considered before investing in mutual fund but the most important are choosing the way of investment, type of fund as per your financial goal and financial planning or portfolio management or wealth management, mutual fund portfolio and investment objectives,etc.

Is Mutual fund a Liquidity Product?

Yes, Mutual Fund is more Liquidity product than stock market. Liquidating a stock is not always easy. A fund house generally stands ready to buy and sell its units on a regular basis. Thus it is easier to liquidate holdings in a Mutual Fund as compared to direct investment in securities.