Mutual Funds

Mutual Fund is a common pool of money into which the investors place their contributions and amount so collected are to be invested in marketable securities in accordance with the stated objective of the schemes.Mutual Fund is a trust that pools the savings f a number of investors who share a common financial goal. Professional investment mangers then invest these funds in a way that helps the investors to achieve heir goal. The investments will be done in accordance with the scheme objective.

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Mutual Funds are specialized investment institutions which are act as investment conduits. They pool the savings of many individual investors and combine them into a fairly large and well-diversified portfolio of investments.

Mutual Funds are financial intermediaries which pools savings of numerous individuals and invest the money thus raised in a diversified portfolio of securities, including equity, bonds, debentures and other instruments thus spreading and reducing risk. The object is to maximize the return to the investor who participates in the equity indirectly through mutual funds.

Mutual fund unit holders are like shareholders of a company and they collectively own the fund. Unit holders are beneficial owners and not lenders or deposit holders like bank deposits. The amount invested in the Mutual Fund belongs to the investors; hence they have a proportionate beneficial ownership in the asset of the scheme. he market value of investor’s fund is called Net Asset. Since the amount collected in mutual fund schemes are invested in listed/marketable securities, the value of investment may go up or come down based on the performance of the each individual securities included in the scheme portfolio. Hence the NAV of a mutual fund fluctuates with market price movements and the value of investor holding also changes in tandem with market movement.

If the scheme’s name implies that it will invest primarily in a particular type of security or in certain industry/industries, then its policy should be to invest at least 65% of the value of its total assets in the indicated type of security/industry.

Mutual Funds were first launched as early as 1924 in U.S

Advantages of investing in mutual funds:

a) Portfolio diversification

b) Professional management

c) Reduction/diversification of risk

d) Reduction of transaction cost

f) Liquidity

g) Convenience and flexibility

Disadvantages of investment in mutual funds :

a) No control over costs

b) No tailor made portfolios

c) Problems of managing a large portfolio of funds

Mutual funds can be open ended or close ended:

Open-ended Mutual Fund :

In an open-ended fund, sale and repurchase of units happen on a continuous basis. An investor can buy or redeem units from the fund at a price based on the Net Asset Value (NAV) per units. The corpus of open-ended funds therefore changes everyday.

Close-ended Fund:

A close-ended fund offers units for sale only during the period of NFO. Close ended funds are normally listed in the Stock Exchanges for liquidity. Now a days close-ended MFs are offering the redemption facility in a limited way like once in a month or once in a quarter etc .

Usually close-ended funds listed in the stock exchanges sell at a discount to NAV.

In case, the exit option is available only through stock exchanges, the corpus of a close ended schemes will remain unchanged. Otherwise the corpus will come down proportionally to the number of units periodically redeemed by the investors.


The one time fee payable by the investor to allow the fund to meet its various expenses such as distribution/sales/marketing etc. Presently mutual funds are not allowed to charge entry load.

Load Fund - Fund that charges entry load, exit load and deferred loads

No-load fund - Funds that make no such charges/loads

  1. Entry Load or Front-end load – charged at the time of purchase of units by way of deducting a specific amount from the investor’s contribution.
  2. Exit Load or Backend load - deduction of a specific amount from the repurchase amount payable to the investor at the time of exit from the fund.
  3. Deferred Load – by charging the fund/scheme with a fixed amount each year during the specified number of years/period.
  4. Contingent Deferred Sales Charge (CDS) – the load amount depends up on the period in which the investor stayed in the fund. (Eg. Exit Load upto six months 2%, 6-12 months 1.5%, 1-2 years 1%, beyond 2nd year – Nil etc.)

Tax-Exempt Vs. Non-Tax Exempt fund - Funds that invest in tax-exempt securities are called Tax-exempt funds. Equity mutual fund schemes are tax-exempt investment avenues, while other funds are taxable for distributable income.

Mutual fund products can be broadly classified as Equity, Debt and Money market

Equity funds are those funds which are investing more than 65% of its corpus in equity shares or other related equity instruments. High potential for growth and capital.

Equity funds have the following categories:

Growth Funds – investing in companies whose earning are expected to rise above the average rate

  1. Aggressive Growth Funds - very volatile & riskier
  2. Specialty Funds – Invest in companies that meet predefined criteria. Sector Funds (funds which focus on a sector like Technology Fund Pharma Fund etc.), Foreign Securities Funds, Mi-cap or Small-cap funds, Option Income funds
  3. Diversified Equity Funds -

i) Index funds which replicate an index

ii)Value Funds – invest in fundamentally sound companies whose shares are

currently under-priced in the stock market.

ii) Equity Income or Dividend Yield Funds – investing mainly in companies with

high dividend yields.

iv)Equity Linked Saving Schemes (ELSS)

Equity Income or Dividend Yield Funds

ELSS Schemes, that have the following features:

a) Three years lock in period

b) Under Section 80C of IT Act an amount invested up to Rs. 100000 can be

deducted from the total income (along with other specified investments). c) Minimum investment of 90% in equity shares at all times.

v) Exchange Traded Funds (ETF)

  1. Hybrid Funds - Quasi Equity/Quasi Debt (mix different types of securities in the portfolio. Eg. Debt, Equity, money market instruments etc.). Balanced Fund, Growth and Income Funds, Asset Allocation Fund
  2. Commodity Funds- Invests in commodities Options & Futures or specialize in investing in different commodities directly or through shares of commodity companies.
  3. Real Estate Funds – Investing the real estate directly or in the equities of real estate developers or housing finance companies.
  4. Exchange Traded Funds (ETF) - An Exchange Traded Fund (ETF) is a mutual fund scheme, which combines the best features of open end and closed end structures. It tracks a market index and trades like a single stock on the Stock Exchange. Its pricing is linked to the index and units can be bought/sold on the Stock Exchange. EFT offers investor the benefit of flexibility of holding a single share as well as the diversification and cost efficiency of an index. These funds are popular abroad and have recently been introduced in India.

Funds of Funds – A Fund of funds invests in other mutual funds. Just as a normal mutual fund invests in portfolios of securities such as debt or equity, a fund of funds invests in a portfolio of units of other Mutual fund schemes. Availability of a fund of funds to an investor helps him select the right funds from a wide variety of schemes offered by different asset management companies. It also helps the investor to diversify his risk not only in terms of the types of securities held in the portfolio, but also in terms of the types of securities held in the portfolio, but also in terms of schemes of different fund managers and investment styles. For example, a fund of fund can invest in top performing equity fund of different AMCs and offer the most widely diversified portfolio to the investor. It can also invest in equity and income schemes of other AMCs simultaneously offering the investor balanced or diversified portfolio across asset classes. The risk level associated with this type of fund is generally lower than that of conventional mutual fund schemes. Investors in such funds also enjoy the advantages of diverse management styles. A fund of funds could, however, result in higher expenses as the expenses of the AMC that manages the fund of funds get added to the expenses of the other schemes it invests in.

Foreign Security Fund – These funds invests in equities in one or more foreign countries thereby achieving diversification across the country’s borders. However they also have additional risks – such as the foreign exchange rate risk – and their performance depends on the economic conditions of the countries they invest in. Foreign Securities Equity Funds may invest in a single country (hence riskier) or many countries (hence more diversified

  1. Diversified funds that invest in the broad markets
  2. Debt funds are of the following types
  3. Diversified debt funds which invest in the broad debt market
  4. Focused Debt Funds – ( Sector, Specialised and Offshore Debt Funds, Mortgage Backed Bond Funds)
  5. High Yield Debt Funds – investing in debt instruments that are considered “ below investment grade” eg. Junk Bond Funds.
  6. Assured Return Funds
  7. Gilt funds or Government Security Fund : that invest only in Government securities
  8. Money market funds or liquid funds which invest only in short term securities- Short term funds which invest in debt of tenor higher than the money market funds.
  9. Fixed Term Plans - that invest in securities and hold them to maturity, for a fixed period.
  10. Asset Allocation Funds – that follows more flexible fund allocation policies ( investments in shares/securities will change based on the fund manager’ outlook) are more akin to aggressive growth or speculative funds.
  11. Equity funds are risky and liquid funds have the lowest risk.
  12. Equity funds are meant for the long term investors and liquid funds are for the short term investors.
  13. Investors are required to choose funds based on their objective, risk appetite, time horizon and return expectations. The fund objective should match with investor objective.
  14. Feeder Funds - Feeder funds would act as a fund of funds and would invest in a portfolios of global funds. Feeder funds is to help domestic investors to invest in global funds.
  15. Other Schemes - Floating Rate Funds, Flexi Debts, Frontline Equity, Midcap Fund, Small Cap Funds, Large Cap funds, Multi Cap Funds, Select Stock Fund, Contra Funds, Blue Chip funds, Leadership funds, Sovereign Security Fund, Treasury Funds etc

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