Mutual funds

Definition
• A mutual fund is a financial intermediary that pools the savings of investors for
collective investment in a diversified portfolio of securities.

• A fund is “mutual” as all of its returns minus its expenses are shared by the funds
investors.

• A mutual fund is both an investment and an actual company.

• The SEBI (Mutual Funds) Regulations 1996 define a mutual fund (MF) as
a fund established in the form of a trust by a sponsor to raise monies by the Trustees
through the sale of units to the public or section of public under one or more
schemes for investing in securities in accordance with these regulations.
• Mutual funds are operated by professional money managers, who allocate the
fund's investments and attempt to produce capital gains and/or income for the
fund's investors.

• A mutual fund's portfolio is structured and maintained to match the investment

objectives stated in its prospectus.

• Mutual fund units, or shares, can typically be purchased or redeemed as needed

at the fund's current net asset value (NAV) per share, which is sometimes
expressed as NAVPS.

• NAV = total value of the securities in the portfolio /the total amount of shares
outstanding.
• A mutual fund investor is buying part ownership of the mutual fund company
and its assets.

• Mutual funds pool money from the investing public and use that money to buy
other securities, usually stocks and bonds. The value of the mutual fund
company depends on the performance of the securities it decides to buy. So
when you buy a share of a mutual fund, you are actually buying the performance
of its portfolio.

• The average mutual fund holds hundreds of different securities, which means
mutual fund shareholders gain important diversification at a very low price.

• A mutual funds serves as a link between the investors and securities market by
mobilising savings from investors and investing them in securities market to
generate returns.
Difference between Mutual fund and Portfolio
management services
• PMS is offered to HNI taking into account their risk profile, there investments
are managed separately.
• In case of mutual fund, savings of small investors are pooled under a scheme
and returns are distributed in the same proportion in which the investments
are made by investors/unit holders.
Types of PMS

Non Discretionary Under

these services, the portfolio
Advisory Under these
manager only suggests the
Discretionary: Under these services, the portfolio
investment ideas. The choice
services, the choice as well as manager only suggests the
as well as the timings of the
the timings of the investment investment ideas. The choice
investment decisions rest
decisions rest solely with the as well as the execution of the
solely with the Investor.
Portfolio Manager. investment decisions rest
However the execution of
solely with the Investor.
trade is done by the portfolio
manager.
Difference between Mutual fund and collective
investment schemes

• They both pool the savings and invests them to generate

returns.

• While mutual fund invest in securities, CIS invest only in

plantations, real estate and art funds.
Benefits of Mutual funds
Professional Portfolio Reduction in
management diversification transaction costs

Liquidity Convenience Flexibility

Stability to
Tax benefits Transparency
stock market

Equity Protection of investors

research interest
Professional management

An average investor lacks the knowledge of capital market operations.

The advantage of mutual funds is that they are managed by professional experts who have
the requisite skills and experience to analyse the performance and prospects of the
companies.

They make an organised investment strategy which may not be possible for an individual
investor.

Once invested in a mutual fund, you can relax with the knowledge that an expert will make
necessary changes to the portfolio whenever required.
 Portfolio diversification
An investor undertakes risk if he invests all his funds in a single scrip.

Mutual funds invests in number of companies across various industries and sectors.

This diversification reduces risk of the investors.

The advantage of mutual funds is that diversification is automatically done. Instead of buying shares,
bonds, and other investments on your own, you outsource the task to an expert.

To diversify means to spread market risk by holding a variety of several different securities, rather than just a
few. Most mutual funds invest in dozens or hundreds of stocks or bonds within one portfolio.
Reduction in transaction costs
• Mutual funds are one of the best investment options
considering the costs involved
• Mutual funds are relatively cheaper and deduct only 1%
to 2% of the expense ratio. Debt mutual funds usually
deduct even lesser.

• Benefit of economies of scale is passed on to the investor.

• Depending upon the brokerage firm or investment
company, investors may be charged commissions for each
purchase or sale of single securities, such as stocks.
 Liquidity

One advantage of mutual funds that is often overlooked is liquidity.

In financial terms, liquidity basically refers to the ability to convert your

assets to cash with relative ease.

Mutual funds are considered liquid assets since there is high demand for
many of the funds. You can, therefore, retrieve money from a mutual fund
very quickly.

Investors can sell their units to the fund in case of open ended schemes
or selling them on stock exchange In case of closed ended funds.
Convenience
Makes
investment easy

Time saving

No paper work
Flexibility

• Many mutual fund companies manage several different funds (e.g., money
market, fixed-income, growth, balanced, sector funds, index funds and global
funds) and allow you to switch between these funds at little or no charge.

• This enables you to change your portfolio balance as and when your personal
needs, financial goals or market conditions change.
Tax benefits
• Investments in Equity Linked Savings Scheme (ELSS) qualify for tax
deduction of up to ₹1.5 lakh under Section 80C of the
Income Tax Act.
Transparency

Thus, an investor
Mutual funds knows where his/her
transparently declare money is being
their portfolio every deployed and in case
month. they are not happy
with the portfolio,
they can withdraw.
Stability to stock market

Mutual funds have a large amount of funds

which provide them economies of scale by
which they can absorb any losses in the
stock market and continue investing in stock
market.
Equity research

Mutual funds can afford information and data

required for investments as they have large amount
of funds and equity research teams available with
them.
Protection of investors interest

Being regulated by SEBI,mutual

funds have to adhere to the
strict regulation designed to
protect the interest of the
investors.