Mutual Funds Definition – NAV , Types of Mutual Fund , Brief History of MFs in India : With reducing saving bank interest rates, deposit rates, mutual fund is emerging as good investment opportunity for the investors. Mutual funds also carry certain risks like all other investments. Before investing in mutual fund, you should compare the variety of schemes offered by mutual fund companies and also risks they carry before making investment decision. There are many investment options to meet your financial objectives or goals. So to give our readers an overview about what is mutual fund and what are different schemes / types of mutual fund?

Mutual Funds Definition – What is a Mutual Funds ?

Mutual Fund’ is an investment fund, created by pooling money from many investors by issuing of units to the investors. The funds so collected is used to buy securities such as stocks, bonds, money market instruments and other asset class as per the investment objective disclosed in offer document.

Investments in such securities are diversified across different industries, companies and sectors. As all stocks may not move in the same direction in the same proportion at same time so it reduces the risk.

You can also call mutual fund as a financial intermediary (usually called Asset Management Company) setup with an objective to professionally manage the fund pooled from the investors at large.

Portfolio : The combined grouping of financial assets such as stocks, bonds or other assets forms a mutual fund also known as Portfolio. Each investor in the fund owns shares, which represent a part of these holdings.

Money Managers / Portfolio Managers / Investment Managers :

The pooled money or funds is managed by people having expertise in selection of investment options , called money managers who invest the fund to make capital gains and income for their investors. They are also known as Portfolio Managers or Investment Managers.

Unit holder :

Investors of the mutual funds are known as Unitholders. As we said earlier the investor in a mutual fund get assigned units in his portfolio which are according to the amount invested by him. Units represent an investor’s proportionate ownership into the assets of a scheme and his liability in case of loss to the fund is limited to the extent of amount he invested.

Also Read ►   Securities Transaction Tax (STT) in India

Net Asset Value (NAV) Definition in Mutual Fund ?

NAV also called Net Asset Value denotes the performance of a mutual fund scheme. Net Asset Value is the market value of the securities after held by the scheme in portfolio after deducting liabilities. Like Share has a price, a mutual fund unit has an NAV. NAV is calculated on daily basis, reflect the market value of securities held by the scheme on any particular day.

NAV changes every day according to change in market rates of equity and bond markets.

Types of Mutual Fund

  • Based on Maturity Period

Mutual Fund scheme can be classified mainly into open ended scheme and close ended scheme depending on its maturity period.

Open – ended scheme

Open ended funds or schemes are those in which you can buy and sell units on a continuous basis. Thus it allow investor to enter and exit as per their convenience. Investors can buy and sell units at NAV related prices which are declared on a daily basis as already discussed. These funds can be purchased even after the initial offering period (NFO).

Close ended scheme :

Close ended schemes / funds have fixed maturity period. In this type of scheme, fund is available for purchase or subscription only during a specific period at the time of launch of the scheme. Investors can not purchase after the subscription period is over. Also existing investor can not exit from the scheme or sell the units till the maturity period of scheme completes.

Interval Funds :

These schemes are a cross between an open-ended and a close-ended structure. These schemes are open for both purchase and redemption during pre-specified intervals (viz. monthly, quarterly, annually etc.) at the prevailing NAV based prices. Interval funds are very similar to close-ended funds, but differ on the following points:

They are not required to be listed on the stock exchanges, as they have  an in-built redemption window

They can make fresh issue of units during the specified interval period, at the prevailing NAV based prices.

Also Read ►   Securities Transaction Tax (STT) in India

Maturity period is not defined.

  • Based on Asset class

    1. Equity Fund / Scheme
    2. Debt / Income Fund or Scheme
    3. Diversified / Balanced fund or scheme
    4. Money market / Liquid Funds
    5. Hybrid Funds
    6. Gilt Funds
    7. Index funds
  • ELSS – Tax Rebate schemes / funds

Some schemes offer tax rebate for investors under INCOME TAX ACT, 1961. These schemes are called Equity Linked Saving Scheme (ELSS). You can invest in such funds to get income tax rebate ₹1.5 lakh under section 80C. ELSS schemes have a lock in period of 3 years and invest a majority of their portfolio in the stock market.

Investment Plans and Options for Investors

Investment Plans

Direct Plan – Investors directly invest with a fund house with no agent in between thus saving the cost. The direct plan has a separate NAV, which is generally higher than normal or regular plan as direct plan charges lower expenses because it does not entail paying any commission to agent/distributor and thus gets reflected in the form of higher NAV.

Regular or Normal Plan – Investors invest through an agent or distributor in order to avail their investment advice/services. The regular plan too has a separate NAV, which is generally lower than direct plan as former charges higher expenses in order to pay commission to an intermediary involved.

Investment Options

Growth Option – Under growth option, dividends are not paid out to the unit holders. Income attributable to the unit holders continues to remain invested in the scheme and is reflected in the NAV of units under this option.

Dividend Payout Option – Dividends are paid out to the unit holders under this option. However, the NAV of the units falls to the extent of the dividend paid out and applicable statutory levies.

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Dividend Re-investment Option – The dividend that accrues on units under option is re-invested back into the scheme at ex-dividend NAV. Hence investors receive additional units on their investments in lieu of dividends.

Mutual Funds in India – Brief history

First Mutual Fund of India was Unit Trust of India (UTI) setup under the UTI Act, 1963. It became operational in 1964 with a major objective of mobilizing savings through the sales of units and investing them in corporate securities for maximizing yield and capital appreciation. In 1987, SBI Mutual Fund and Canbank Mutual Fund were set up as trusts under the Indian Trust Act, 1882.

Also Read ►   Securities Transaction Tax (STT) in India

In early 1990s, Government allowed public sector banks and institutions to set up mutual funds.

Two nationalised insurance giants, LIC and GIC, and nationalised banks, namely Indian Bank, BOI , and PNB had started operations of wholly-owned mutual fund subsidiaries. By 1993, the assets under management of the industry increased seven times to Rs. 47,004 crores. However, UTI remained to be the leader with about 80% market share.

SEBI – Securities and Exchange Board of India

SEBI is regulatory agency for securities market in India. Estabilshed in year 1988 and given statutory powers in January 1992 under Securities and exchange Board of India (SEBI) Act 1992.

Objective of SEBI– to protect the interest of investors in securities and to promote the development of and to regulate the securities market.

As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors.

All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type.

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