Mutual Fund

It is an investment vehicle or basket made up of a pool of funds

collected from many investors for the purpose of investing in securities
such as shares/stock, bonds, money market instruments and similar
assets. It works on the principle of ‘small drops of water make a big
ocean’. This is operated by money managers, who invest the funds
capital and attempt to produce capital gains and income for the
investors. In short, it is an investment program funded by shareholders
that trades in diversified holdings and is professionally managed.

Important features
1. A mutual fund belongs to those who have contributed to the fund and
thus, the ownership of the fund lies in the hand of the investors.
2. Since all investors cannot take part in the management of fund, it is
left in the hands of professional managers who earn a fee for their
service.
3. The pool of fund collected is invested in a portfolio of marketable
securities.
4. The investor’s share in the fund is represented by ‘units’ just like
share in the case of share capital of a company.
5. The investment portfolio of the fund is created according to the
objective or type of the fund. For example, a sectoral mutual fund
invests its fund in specific sector like IT sector, Oil Sector, etc.
Types of Mutual Fund
1. Equity Funds: It is that mutual fund which is invested in equity
shares. They carry the principal objective of capital appreciation of the
investment over a medium to long-term investment horizon. These are
high risk funds and their return are linked to the stock markets. They are
best suited for investors who are seeking long-term growth. There are
different types of equity funds such as Diversified Fund, Sector Specific
Fund and Index Based Funds.
2. Debt Fund/ Fixed Income Funds: These are invested predominantly
in fixed income securities like debentures, corporate bonds, government
securities, commercial papers and other money market instruments.
They are best suited for the medium and long-term investors who are
averse to risk and seeking regular and steady income. They are less risky
when compared to equity funds.
3. Tax Saving Funds: These funds offer tax benefits to the investors
under the IT Act.1961. Opportunities provided under this scheme are in
the form of tax rebates under sec-80C of IT Act. They are suitable for
long-term investors seeking tax rebate and looking for long-term growth.
4. Liquid Funds/ Money Market Mutual Funds: These are invested in
highly liquid money market instruments which provide easy liquidity.
The period of investment in this fund could be as short as a day. These
are ideal for corporate, institutional investors and business houses who
invest their funds for very short periods.
5. Gilt Edge Funds: The mutual funds invested in Central and State
government securities are known as Gilt Edge Fund. These are best
suited for the medium and long term investors who are averse to risk.
Government securities have no default risk.
6. Balanced Funds: These are invested in both equity and debt
instruments and strive to provide both growth and regular income. They
are ideal for medium to long term investors willing to take moderate
risk.
7. Sectoral Fund: These are invested in specific sectors like IT sector,
Agri-Sector, Oil sector, etc.
8. Exchange Traded Fund: These funds are invested in commodity or a
basket of assets as closely as possible., which are traded like shares in
stock exchange. They are backed by physical holdings of the
commodity, and invest in stock of companies, precious metals or
currencies. ETFs gives the flexibility to buy and sell units throughout the
day, on the stock exchange.
9. Close-ended Funds: Under these scheme, the corpus of the fund and
its duration are prefixed. In other words, the fund and the number of
units are determined in advance. Once the subscription reaches the
predetermined level, the entry of investors is closed. After the expiry of
the fixed period, the entire corpus is dis-invested and the proceeds are
distributed to the unit holders in proportion to their holding.
10. Open-ended Funds: It is just the opposite of close-ended funds.
Under this scheme, the size of the fund or the period of the fund is not
predetermined. The investors are free to buy any number of units at any
point of time.
11. Specialized Funds: These are invested in special schemes
introduced by the government or any agency such as pensioners,
widows, defense, etc.
12. Property Fund/Real Estate Mutual Fund: It is an investment
vehicle which buys , develops, manages and sells real estate assets. Its
investment also includes shares/ bonds of companies involved in real
estate and mortgage-backed companies.
13. Fund-of-Funds: It is a mutual fund scheme that invests in other
mutual fund scheme. It is widely prevalent in abroad.
14. Offshore mutual Funds: It is meant for non-residential investors. In
other words, the source of investment for these funds is from abroad.

Role of Mutual Fund

1. Mobilization of Savings
2. Instrument of Investment Money
3. Protection to Small Investors
4. Offering Tax Benefits
5. Diversified Investment opportunity
6. Multi-purpose Service/ Flexible investment schedule
7. Keeping the Money Market Active
8. Boosting/Supporting Financial Market
9. Acting as Substitute for IPOs
10. Savings for retirement and education of children
11. Arrival of Foreign Capital
12. Promoting Industrial Development
Risk of Mutual Funds
1. Market risks- fluctuation in the prices shares as well the economy
condition.
2. Scheme risk – depending on the types of scheme/funds.
3. Investment risks – related to investment advice of experts
4. Business risks – related to the business risks of whose share
investment is made
5. Political risks – change in govt decision related to economic decision,
taxation, etc, MF also no exception.