Now in the Stock trading for beginners next part is Mutual Fund. In this stock market articles you will get information of mutual Funds.What is a Mutual Fund?
A Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board of India) that pools money from individuals/corporate investors and invests the same in a variety of different financial instruments or securities such as equity shares, Government securities, Bonds, debentures etc.
Mutual funds can thus be considered as financial intermediaries in the investment business that collect funds from the public and invest on behalf of the investors. Mutual funds issue units to the investors. The appreciation of the portfolio or securities in which the mutual fund has invested the money leads to an appreciation in the value of the units held by investors.
The investment objectives outlined by a Mutual Fund in its prospectus are binding on the Mutual Fund scheme. The investment objectives specify the class of securities a Mutual Fund can invest in. Mutual Funds invest in 12 various asset classes like equity, bonds, debentures, commercial paper and government securities. The schemes offered by mutual funds vary from fund to fund. Some are pure equity schemes; others are a mix of equity and bonds. Investors are also given the option of getting dividends, which are declared periodically by the mutual fund, or to participate only in the capital appreciation of the scheme.
There are various mutual fund companies in the market and few are Sundaram, reliance, SBI, HSBC, Birla and many more. The mutual fund companies collect money from customers and invest on their behalf in various financial products. Investors who don’t want to expose to share market directly or who doesn’t have much knowledge of share market they prefer to invest in equity related mutual funds. Mutual funds consist of fund manager who manages all investments.
Available Mutual Funds in India
Many types of Mutual Funds Schemes available to provide the needs such as financial position, risk tolerance and return potential etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned below.
Existing Mutual Funds Category BY STRUCTURE:
1. Open - Ended Schemes:
One of the open-end mutual funds 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.
2. Close - Ended Schemes:
Close Ended Mutual Funds Schemes have a pre-specified maturity period. Any one invest directly in this mutual funds at the time of initial issue. Investors buy or sell the units of the scheme after mutual funds listed in stock exchange.
3. Interval Schemes:
Interval Mutual funds Schemes are that scheme, which combination of the open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.
Existing Mutual Funds Category BY NATURE :
1. Equity fund:
Equity funds invest a maximum part of their amount into equities holdings. The Equity Funds are sub-classified depending upon their investment objective, as follows:
- Diversified Equity Funds
- Mid-Cap Funds
- Sector Specific Funds
- Tax Savings Funds (ELSS)
The objective of Debt Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:
- Gilt Funds: Invest their corpus in securities issued by Government, Government of India debt papers. These schemes are safer as they invest in papers backed by Government.
- Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities.
- MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities.
- Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs).
- Liquid Funds: These funds provide easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs.
These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.
Pros & cons of investing in mutual funds:
Pros & cons is part of everywhere in world. Here I’ll give some pros and cons of mutual fund.
Advantages of Investment in Mutual Funds:
1. Professional Management - The basic advantage of funds is that, they are professional managed, by well qualified professional.
2. Diversification - Diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others.
3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors.
4. Liquidity - Mutual funds allows investors to liquidate their holdings like an individual stock,.
5. Simplicity - Investments in mutual fund is considered to be easy, compare to other available instruments in the market, and the minimum investment is small.
Disadvantages of Investing Mutual Funds:
1. Professional Management- Some funds doesn’t perform in neither the market, as their management is not dynamic enough to explore the available opportunity in the market.
2. Costs – The mutual fund industries are thus charging extra cost under layers of jargon.
3. Dilution - Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.
4. Taxes - when making decisions about your money, fund managers don't consider your personal tax situation.
