Mutual Funds: An Insight
Mutual Fund was first setup in Indian in 1963 with the creation of Unit Trust of India (UTI) and it enjoyed the monopoly through chain of financial intermediaries and amassed around `6800 crores of assets under its Asset Management setup. Later on other Public Sector Units like Life Insurance Corporation (LIC), Banks, General Insurance Corporation (GIC) were allowed to enter the Mutual Fund Market. However with the creation of SEBI in 1993 the private sector players were also allowed to enter the market as a proper regulatory body had been setup. As of now Indian Mutual Fund Industry manages assets worth `9,00,000 crores (9 trillion) approximately. According to estimates as of February,2014 the Mutual Fund Industry has witnessed a growth of 9.4% over the last year. So we can say the Investment in Mutual Fund is on the high and the future of the industry looks very promising.
The investments in Mutual Fund are subject to one’s ability to analyze the market scenario compared with future requirements. You can plan your investment according to needs. Every individual can look at the risk to return ratio, span of investment, benefits and thus decide on the investment. It involves better management of your investments by the professionals and ensures that maximum return comes to the investor.
The features and characteristics of Mutual Funds are:
- Mutual Funds are a form of diversified investments.
- Mutual Funds generally carry certain amount of risk and return depends on market performance.
- Investment can be made on periodic basis or lumpsum at the start depending on preference and fund opted.
- Funds are managed by professional Asset Management Companies.
- Performance of the fund can be checked by an Investor whenever he feels so.
- Some funds also provide tax benefits to the Individuals.
How it works???
In a nutshell, let’s understand how do Mutual Fund work and mean.
Mutual Fund is pooling of Investment from investors by the Asset Management Company (AMC) and the same is invested in various classes of investments with certain financial objectives. These funds are professionally managed and the profits earned out of the investments are used for further investments and distribution of profit among investors. Since the investment is diversified it reduces the risk. Since these funds perform in the market their performance is marked daily. Hence depending on how market performs is reflected in their performance. To measure the performance of these funds Net Asset Value (NAV) concept was adopted. It is the price at which the investor buys and sells the Fund. It is arrived at by dividing the total assets (i.e cash & securities) minus liabilities if any, by number of shares outstanding.
The AMC charges a fee for the service provided. However when you are making an investment be sure that you choose your Company carefully as many companies are reeling under economic slowdown and smaller companies are finding it difficult to continue. All the Mutual Funds are regulated by the Association of Mutual Funds of India (AMFI) and Securities Exchange Board of India (SEBI).
There are two types of funds closed and open ended. Closed End have fixed amount of shares and are for fixed term. Investments in these funds are available for specified term. While Open End funds can be entered anytime and buy and sell is linked to the NAV. However most of the Mutual Funds are open in nature.
Mutual Fund as you now know is diversified in nature. I will discuss about different types of Mutual Fund Investment and their features in my upcoming blogs. Also I will put a monthly Mutual Fund tracker for individuals who want to invest and keep a track on best movers.