Easy Guide to Mutual Funds

easy guide to mutual funds

These days much is being talked about amongst the investors and recommended by the finance advisor regarding mutual funds and investment in them. Although no legal definition of mutual fund is there but, it can be understood as a `collective investment tool regulated and sold to common investor `or as `an investment programme funded by the share/ holders for trading in diversified holdings by a professionally expert man or group of such expert professionals` or  ` a professionally managed investment fund that pools money from many investors to purchase and sell securities.

Many a groups/ companies are there, who deal with  investment of money collected from many a investors for purchase & sale of various securities. It is mandatory for all such financial managers/groups/companies to get registered with and, recognised by SEBI(Securities Exchange Board of India) before getting permission from SEBI for carrying the out the business.

Types of Mutual Fund:- Broadly, there are two types mutual funds viz. i) Open endedfund and, ii) closed ended fund

Open Ended Fund : facilitates an investor to enter in and exit out any time at own discretion i.e. investor can redeem  the investment made at any time at discretion.

Closed Emded Fund: Such fund invites  the investor to invest- in upto a specific date and  for a specific period . After the completion of the term of the fund, investor is returned the money i.e. redeemed.

The redemption so made, in both schemes  is generally higher than to the initial investment made depending upon the NAV of the fund and period of investment, at the time of redemption.

It is observed that higher is the term of investment greater are the profits/ returns earned by the investor but on the other hand (not contrary,of course), redemption made pre-mature/ after a short period of investment, investor may suffer loses.

Types of Investment made by Managers of mutual Funds:-

The Managers of mutual funds make investment in a diversified manner in various types of securities such debts, shares,bonds,debenures and their assets` base may be classified as :-

  1. Equity Fund- as the investment made in shares of blue chip companies, securitiesa like Equity Linked Savings Schems, Rajiv Gandhi Equity Savings Savings (both have a lpck-in period of 3 years) and like wise schemes which have a lower risk and higher returns.
  2. Sectoral Fund- are based on investments made in securities of sectors like banks, infra-structure,Informati & Technology etc. Such investment are with higher risk but higher returns.
  3. Index Fund- are made through investment made in such companies which are part of index in stock markets/exchanges. Uch investments are highly volatile in the context of risk and returns being based on indices of stock exchanges/markets.
  4. Debt Funds- can be furthur catagorised as  in vestment made in (i) Liquid Income Schemes (ii) Gilt Fund accumulated by investment made in Securities of Coropoarte and Govt. viz. bonds,debentures,etc., are with lower risks and range bound returns with may or may not be relief in income tax (iii) are based on investments made in schemes giving fixed returns. Such investments are having a higher risk factor.
  5. Hybrid Funds- are subjected to investments made in all possible schemes/securities. Such investments are more secure and higher returns giving.

Advantages and Draw backs: Investment made in mutual funds, since are  managed by highly qualified and experienced managers, are(i) high yield giving tools coupled with handsome returns in a long term based investment(say for 3 or more years),(ii) require a lump sum investment in a single instance for a stipulated period. On the other hand(not contrary,of course) investments made in shares are normally not asking for a lump sum investment with time binding period and returns can be controlled by the investor judiciously and promptly for profits and loss,both.

Risk Factor  – The risk of loss in investments made is linked with every type of investment for being dependent on the market who in turn is dependent on the golbal markets,Govt. Policies, events like  results of elections etc.,wars,floods and  natural calamities earth quakes etc.,that affect the conditions of nation or international factors.

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