Have you ever imagined why concept of investing in mutual fund is on rise all over the world? Let’s find out the exact concept of these funds in this article and become a wiser investor.
“ Mutual “ by it’s name means “ shared by two or more people”. Hence mutual fund is the fund of two or more people in simple terms. In technical terms, It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities.
These Funds need to create an “Asset Management Company ( AMC) “ through which they manages money of investors.
There are large number of people who wants to invest their money but doesn’t have expert knowledge of investment. Also these are mainly small investors who can’t afford expert fees for investment advices. These funds help such investors to invest their money safely. As these funds have enough capital they hire an expert finance professionals for taking investments decisions. The funds collected from investors in mutual funds are invested by the fund managers in different financial assets such as stocks, bonds, and other assets, as defined by the fund’s investment objective. In return they charge a small fees from the investors.
These fees charged by these funds are regulated by Securities and Exchange Board of India (SEBI). Investors have different investment goals like some may want to plan for retirement while some may want to plan for financing their children’s marriage, etc. These funds provide variety of plans to cater diversified needs of investors.
Net Asset Value ( NAV ) in Mutual Funds
The NAV is the combined market value of the shares, bonds and securities held by a fund on any particular day (as reduced by permitted expenses and charges). The NAV is the combined market value of the shares, bonds and securities held by a fund on any particular day (as reduced by permitted expenses and charges).
NAV per unit can be calculated when ‘total NAV’ is divided by the number of units.e.g. if if the market value of the securities of mutual fund under that scheme is Rs 600 lakhs and if the number of units issued under that scheme is 60 lakhs then NAV per unit under that mutual fund scheme will be Rs 10 per unit.
As the market value of securities changes every day, NAV of scheme also varies on daily basis. As per SEBI Mutual Fund Regulations, NAVs of mutual fund schemes are announced at the end of each trading day after markets have closed.
These fund shares can typically be purchased or redeemed at the fund’s current NAV, which doesn’t fluctuate during market hours, but is settled at the end of each trading day.
How investors earn money from mutual fund investing?
Normally investors earn money from mutual funds investing in 3 ways –
- Dividend from stocks and interest received from the bonds in which the these funds invested it’s money. These funds give option to its investor whether to reinvest such money or to receive in bank.
- When the shares held by these fund in its portfolio increases in price, then mutual funds can sell such shares and profit can be pass on to the mutual fund investors.
- When the price of the these fund units is increased then investors can sell such fund units in the market and earn profit.
Types of Mutual Funds
Different types of mutual funds are designed to cater the diversified needs of the investors.
They are classified based on the maturity period, principal investment of capital, etc.
A) Types of Mutual funds based on maturity
period of the funds -
i) Open Ended Mutual Funds
Investors may purchase or sell units at any time under this plan.
It also doesn’t have a set maturity date. In order to invest in and redeem your investment, you deal directly with the Mutual Fund.
The liquidity is the crucial component. You can easily buy or sell your units at prices that are based on net asset value (“NAV”).
ii) Close Ended Scheme of Mutual Funds –
Investors may only invest in this sort of plan during its first launch phase, known as the New Fund Offer, which has a specified maturity time (NFO). There are no more investments accepted after the deal closes. Due to supply and demand fluctuations, expectations of unit holders, and other market factors, the market price at the stock exchange may differ from the scheme’s Net Asset Value (NAV).
iii) Combination of open and close ended scheme -
It functions as a composite open-ended and closed-ended plan and enables investors to trade units at set intervals. They may be sold or redeemed at NAV-related prices at set intervals, or they could be traded on the stock exchange.
B) Types of Mutual funds based on principal of investment of the funds –
i) Equity Oriented Mutual Funds
In this scheme, funds are invested in the shares of the companies listed on the stock exchanges. The stocks are selected by the team of professionals to get the maximum return and minimum risk. In short run, the equity funds may show up or down in return hence you need to be more patient while investing in this type of mutual funds. But in long run, mostly they show positive returns.
ii)Debt Oriented Mutual Funds
In this schemes, funds are invested in fixed income securities like corporate bonds, government securities, etc. These are less risky than equity funds. These funds provide regular income and does not much affected by the stock market fluctuations. Though they may provide lesser return as compare to equity funds in the long run.
iii)Hybrid Schemes
Hybrid funds invest in more than one asset classes. Most of the hybrid funds invest in equity as well as debt in their portfolio. Some hybrid funds may invest in other assets classes like gold, international equities, etc.
iv) Solution Oriented Schemes
Solution Oriented Mutual funds are designed to help an investor achieve composite goals like marriage, child education, retirement planning are achieved. Risk is lower in such funds as they are mostly long term funds. These funds have unique features and objectives.
v) Other Schemes - Index Funds
An index fund is a type of a fund that purchases similar stocks as in a particular market index e.g. Nifty, Sensex, etc. For example, a fund that tracks Nifty 50 will spread your investment over the same 50 stocks of Nifty 50. Index funds have low expense ratios since they don’t require regular monitoring by the fund manager. They are less risky as market performs well in the long run.
Read more about Emergency Funds here.