Mutual funds

 Mutual funds? We know it as one of the source to earn income through investments. But we don't it's history, it's types etc. So,  let’s know about mutual fund.

 What is "Mutual Funds" basically?

Mutual fund the word "mutual" means a group of peoples coming together and "fund" means pooling of money! 

Mutual fund is a financial tool made up of a pool of money collected from investors to invest in securities like stocks,bonds,money market instruments by professional money managers, who allocate the funds assets and attempt to produce capital gains or income for the funds investors.

History:

The first modern investment funds were established in the Dutch Republic. In response to the financial crisis occurred in the years between 1772-1773, Amsterdam-based businessman Abraham van Ketwich formed a trust named “Eendragt Maakt Magt”. His aim was to provide small investors with an opportunity to diversify

Mutual funds were introduced to the United States in the 1890s. Early U.S. funds were generally closed-end funds with a fixed number of shares that often traded at prices above the portfolio net asset value. The first open-end mutual fund with redeemable shares was established on March 21 1924, As the Massachusetts investors trust. 

In the U.S. closed-end funds remained more popular than open-end funds throughout the 1920s

 

Mutual funds are introduced in India in the year 1963, when the Government of India decided to  launch "Unit Trust of India" (UTI). UTI rule Indian mutual fund market until 1987, when a host of other government-controlled Indian financial companies established their own funds, including State Bank of India, Canara Bank, and by Punjab National Bank.

 

 

 

Types of Mutual Funds:

They are so many different types of mutual funds based on structure, assets, investment objection, specialty, and risk.

Types of mutual funds based on its structure are,

• Open-ended funds

• Close-ended funds

• Interval funds

Open-ended fund: Open-ended funds are which units open for purchase or redemption through the year. All purchases/redemption of these funds units are done at prevailing Net Asset Value (NAV). Basically these funds will allow investors to keep invest as long as they want. There are no limits on how much can be invested in the fund. They also tend to be actively managed. These funds also charge A high fee than passively managed funds because of the active management. These funds do not any specific maturity periods. Which means that investor can withdraw their funds at any time they want thus giving them the liquidity they need.

Close-ended funds: Close-ended funds which units can be purchased only during the initial offer period. Units can be redeemed at a specified maturity period. These schemes are often listed for trade on a stock exchange. Unlike open ended mutual funds, once the units/stock are bought, they cannot be sold back to the mutual fund, instead they need to be sold through the stock marker et the prevailing price of the shares.

 Interval funds:  This funds have features of both open and close ended funds in that they are opened for repurchase of shares at different intervals during the fund tenure. The funds management company offers to repurchase units from existing unit holders during these intervals. If unit holders wish to they can offline shares in favor of the funds.

  

Types of mutual funds based on asset classes

• Equity funds

• Debt funds

• Money market funds

• Balanced/Hybrid funds

Equity funds: Funds that invest in equity stocks/shares of companies. These are considered high risk funds also tend to provide high returns. Equity funds can include specialty funds like infrastructure, fast moving consumer goods and banking ETC.

Debt Funds: These are funds that invest in debt instruments like company debentures, government bond and fixed income assets. They are considered safe investments and provide fixed returns. These funds do not deduct TDS so if the earning from the investment is more than Rs. 10,000 then the investor is liable to pay the tax on it himself.

Money Market Funds: These are funds that invest in liquid instruments like T-Bills, CPs etc. They are considered safe investments for those looking to park surplus funds for immediate but moderate returns. Money markets are also referred to as cash markets and come with risks in terms of interest risk, reinvestments risk and credit risks.

Balanced/Hybrid Funds: These are funds that invest in a mix of both asset classes. In some cases, the proportion of equity is higher than debt while in other it is the other way round. Risk and returns are balances out this way. Eg: Franklin India Balanced Fund-DP(G) because in this funds 65%-80% of the investment is made in equities and the remaining 20%-35% is invested in the debt market. This is so because the debt markets offer a lower risk than the equity market.

  

Types of Mutual Funds based on investment objective

• Growth Funds
• Income Funds
• Liquid Funds
• Tax-Saving Funds(ELSS) 
• Capital Protection Funds
• Fixed Maturity Funds
• Pension Fund

Growth Funds: Growth funds are the risky funds. They are considered to be risky funds for investors with a long- term investment timeline. With higher returns

Income Funds:  This fund mainly invest in fixed-income instruments like debentures, bonds, etc. to provide capital protection and regular income to investors.

Liquid Funds: These fund are primarily in short-term like T-Bills, CPs      etc. they are considered to be low on risk with moderate returns

Tax-Saving Funds: Investment made in these funds qualify for deductions under the Income Tax Act. these funds are high on risk but also high returns

Capital Protection Funds: These funds are split between investment in fixed income instruments and equity markets. To protect the principal that has been invested

Fixed Maturity Funds: These are funds are invested in debt and money market instruments where maturity date is either the same as that of the funds or earlier than it

Pension Funds: Pension funds are invested in with a really long term goal. These funds provide regular returns around the time that the investor is ready to retire. Investments are split between equities and debt markets. The returns from these funds can be taken in lump sums.

 

Types of Mutual Funds Based on Specialty

• Sector funds
• Index funds
• Funds of funds
• Emerging market funds
• International funds
• Global funds
• Real estate funds
• Commodity focused stock funds
• Market neutral funds
• Inverse/leveraged funds
• Asset allocation funds 
• Gilt funds
• Exchange traded funds

 

 Advantages and Disadvantages of Mutual Funds

Advantages:

Liquidity: Mutual funds are easier to buy and easier to sell except close-ended mutual funds

Diversification: The fund manager spreads investment across stocks of companies and various industries and different sectors

Expert Management: Fund manager takes care of all decisions on what to do with investment.

Less cost for bulk transactions: The processing fees and other commission charges will be lower as compared to buying one mutual fund unit

Tax-efficiency: The funds like ELSS which qualifies for tax deduction.

Safety: Mutual funds are strictly under purview of statutory government bodies like SEBI and AMF

 

Disadvantages:

 

•   High expense ratios and sales charges
• Management abuses
• Tax inefficiency
• Poor trade execution
  

Finally, we know history, types, advantages and disadvantages of mutual funds. every mutual funds has their risks and returns. investing in mutual funds is better than keeping money in the savings bank account. it is advised to check the past performance of the company before investing in the company. keep updating yourselves about the market and be a better investor

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