Mutual Funds are the professionally managed instrument that pools money fro the investors and invest in securities like stocks, bonds, short term money market instruments and commodities such as precious metals.Mutual funds offers an attractive way to manage savings in passive manner without paying high fees or constant attention from individuals of market. Since these funds are managed by professional fund managers hence it doesn’t requires good knowledge of traditional market and also free from complex investment decision.
Mutual Funds Set Up:
A mutual fund is set up in the form of trust that has a Sponsor, Trustees and Asset Management Companies. A trust is established by a Sponsor who is like a promoter of company and this trust is registered with SEBI as mutual fund. The Trustees of the mutual fund hold its property for the benefit of its unit holders. An Asset Management Company approved by SEBI manages the fund by making investments in various type of securities.
Operating A Mutual Fund:
A mutual fund company collects money from several investors and invest it in various options like stocks, bonds etc. This investment is managed by professionals who had good knowledge of market and tries to accomplish growth.
Investors get unit of funds according to amount they have invested. AMC is responsible for managing the investment from the various schemes operated by mutual fund.
Net Asset Value:
Mutual Funds are operated on the basis of NAV. Net Asset Value is the total asset value per unit of the fund and is calculated by the Asset management Companies at the end of every business day.
Types Of Mutual Fund:
Based on the maturity period
- Open-ended Fund An open-ended fund is a fund that is available for subscription and can be redeemed on a continuous basis. It is available for subscription throughout the year and investors can buy and sell units at NAV related prices. These funds do not have a fixed maturity date. The key feature of an open-ended fund is liquidity.
- Close-ended Fund A close-ended fund is a fund that has a defined maturity period, e.g. 3-6 years. These funds are open for subscription for a specified period at the time of initial launch. These funds are listed on a recognized stock exchange.
- Interval Funds Interval funds combine the features of open-ended and close-ended funds. These funds may trade on stock exchanges and are open for sale or redemption at predetermined intervals on the prevailing NAV.
- Professionally Managed
- Low transaction cost
- Well regulated
Risks Involved In Mutual Fund:
Mutual funds invest in different securities like stocks or fixed income securities, depending upon the fund’s objectives. As a result, different schemes have different risks depending on the underlying portfolio. The value of an investment may decline over a period of time because of economic alterations or other events that affect the overall market. Also, the government may come up with new regulations, which may affect a particular industry or class of industries. All these factors influence the performance of Mutual Funds.
- Risk and Reward: The diversification that mutual funds provide can help ease risk by offsetting losses from some securities with gains in other securities. On the other hand, this could limit the upside potential that is provided by holding a single security.
- Lack of Control: Investors cannot determine the exact composition of a fund’s portfolio at any given time, nor can they directly influence which securities the fund manager buys.