Mutual Fund: All You Need To Know
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 Rs 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 has grown enormously, Asset under Management (AUM) is valued at Rs 22.41 lakh crores (Rs 22.41 trillion) approximately till 31st January, 2018. The Mutual Fund Industry has grown almost 7 times in span of little more than a decade.
The investments in Mutual Fund are subject to one’s ability to analyze the market scenario compared with future potential. One may plan based on their future financial obligations. Every individual needs to analyze the risk to return ratio, span of investment, future financial obligations while planning investment. Investment in mutual funds is managed by professional Fund Managers who use their expertise to ensure favorable returns on the investment. Re-introduction of Long Term Capital Gains (LTCG) on Equities may impact the investment in Equity oriented Mutual Funds initially but overall scenario looks very promising for investment in Mutual Funds. Impact of LTCG on equity oriented Funds will be discussed separately.
Features and Characteristics of Mutual Funds
#Mutual Funds are a form of diversified investment in Securities.
#Mutual Funds generally carry certain amount of risk as return is market linked.
#Investment can be made on periodic basis via Systematic Investment Plan (SIP) or lumpsum depending on individual preference.
#Funds are managed by professional Asset Management Companies.
#Performance of the fund may be monitored by an Investor on regular basis on various platform designed for the purpose.
#Equity Linked Saving Scheme (ELSS) funds are tax saving plans for the Individuals.
#Mutual Funds may be classified into following funds Equity, Sector, Tax Saving, Index, Balanced, Debt, Money Market, Gilt, Exchange Traded Funds (ETFs), etc.
(Note: Types of Mutual Funds has been discussed in a separate post, long time back, I’m sharing the link below. However, it will be updated soon.)
How do Mutual Funds Work?
In a nutshell, let’s understand the manner in which Mutual Fund functions.
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. The funds are market linked with performance dependent on securities traded in Capital Markets. 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 purchases and redeems the units of the Fund. It is arrived at by dividing the total assets (i.e cash & securities) minus liabilities if any, by number of units outstanding.
The AMC charges a fee for the service provided. However, before investing one should carry out proper research regarding the Fund with respect to performance and cost. Consistent performance along with low expense ratio is essential attributes of a good fund. 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 Fund has defined number of shares for a fixed tenure. 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, Mutual Funds are primarily open in nature.