For the individuals wanting to build their wealth over a long period, mutual funds can be the most important ingredient to their investment plan. It’s one of the most popular investment avenue in today’s dynamic and fast evolving markets.
Mutual Funds can help investors in virtually entering the equity market with hands-off approach. There is a wide range of Mutual Fund available in the market, each one having diverse specifications to meet your requirements.
Whether you simply have questions about how mutual funds work, or you’re ready to develop a personalized mutual fund portfolio, At NJ Wealth, you’ll enjoy access to a wide array of funds, foundation to build powerful and diversified portfolios, interactive planning tools as well as professional advice for Mutual Funds that’s available any time. Whenever you plan invest in Mutual Funds, you’ll find the advice and guidance you need to help you reach your investment goals. Investing your money with NJ Money can help move you closer to funding the dreams in your life.
Mutual Fund Fundamentals:
Definition:- A mutual fund is an investment that pools money from many individuals and invests it according to the fund’s stated objectives. Professional money managers make investment decisions on behalf of fund investors, buying and selling investments such as money market investments, bonds and stocks
Structure of Mutual Funds:
In India, mutual funds function as trust created under the Indian Trust Act, 1882. There are three layers of mutual fund in India. (i) Sponsors (ii) Trustee and (iii) Asset Management Company. Sponsors work as Promoters of the company. They take responsibility of starting mutual fund business. Sponsors contribute initial capital (40% of net worth of AMC) and appoint Trustees and Board of Trustees. Board of Trustees act as guardians of investors and ensure that money invested by investors is used according to the objective of the scheme. Asset Management Company is the public face of fund management business. Sponsors and Trustees together form AMC and appoint Fund Manager. Fund manager with help of fund management team makes all investment decisions.
How safe is investing in Mutual Funds?
In India mutual funds function as trusts. The sponsor of the fund appoints Board of Trustees who act as guardians of investor’s money. The board or Trustee Company, as an independent body acts as the protector of the unit holder’s money. These trustees ensure that investor’s interest is safeguarded and that the AMC’s operations and Fund Manager’s actions are along the professional lines. To ensure independence of Board of Trustees, SEBI mandates a minimum of two-third independent directors on the board of Trustee Company.
Apart from Trustees, the entire mutual fund industry functions under the preview of SEBI. This structure and stringent guidance make investing in mutual funds safe and easy. Fund Managers also have to function within the broad framework and rules & regulations designed by AMC.
Investing in Mutual Fund: Mutual funds are considered as favorable investment vehicle for individual investors particularly for investors who have limited resources available in terms of capital and ability to carry out their investment decisions.
Benefits of Investing through Mutual Funds:
For an investor mutual fund offer wide range of benefits. Some of the key benefits include:-
- Portfolio Diversification:- Mutual funds are a convenient and affordable way of gaining access to a wide range of investments that would be very difficult and time-consuming to purchase and manage individually. Because mutual funds typically hold 50 to 100 different investments, they offer a degree of diversification that would be difficult to achieve on your own.
- Professional management: Actively managed mutual funds also give you the benefit of professional investment management. The investments are selected by experienced professionals who devote themselves exclusively to tracking the markets, analyzing investments and implementing a consistent investment strategy.
- Flexibility to meet your needs and goals: A wide range of mutual funds are available to help meet the needs of every type of investor, from conservative to very aggressive. Mutual funds can also help you meet a variety of investment goals, from establishing an emergency fund to saving for a vacation, retirement or education.
- Convenient Administration: Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient.
- Return Potential: Over a medium to long term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities.
- Low Costs: Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.
- Liquidity: In open-ended schemes, you can get your money back promptly at AssetValue (NAV) related prices from the Mutual Fund itself. With close-ended schemes, you can sell your units on a stock exchange at the prevailing market price or avail of the facility of repurchase through Mutual Funds at NAV related prices which some close-ended and interval schemes offer you periodically.
- Transparency: You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager’s investment strategy and outlook.
- Flexibility: Through features such as Systematic Investment Plans (SIP), Systematic Withdrawal Plans (SWP) and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience.
- Choice of Schemes: Mutual Funds offer a variety of schemes to suit your varying needs over a lifetime.
- Well Regulated: All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors.The operations of Mutual Funds are regularly monitored by SEBI.
Types of Mutual Fund Schemes:-
There are a wide variety of Mutual Fund schemes that cater to your needs, whatever your age, financial position, risk tolerance and return expectations.
a) By Structure:
- Open Ended Schemes: These do not have a fixed maturity. The key feature is liquidity.You can conveniently buy and sell your units at Net Asset Value(NAV) related prices, at any point of time.
- Closed Ended Schemes: These funds have a stipulated maturity period (ranging from 3 years to 10 years). The ‘Unit Capital’ of such schemes is fixed as it makes a one time sale of a fixed number of units. After the offer closes, closed ended funds do no allow investors to buy or redeem units directly from funds. However, to provide liquidity to investors, closed ended funds are listed on stock exchanges. Some close-ended schemes give you an additional option of selling your units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations ensure that at least one of the two exit routes are provided to the investor under the close ended schemes.
- Interval Schemes: These combine the features of open-ended and close-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during predetermined intervals at NAV related prices.
b) By Investment Objective:
- Growth Schemes: Aims to provide capital appreciation over the medium to long term. These schemes normally invest a majority of their funds in equities and are willing to bear short term decline in value for possible future appreciation.These schemes are not for investors seeking regular income or needing their money back in the short term.
- Income Schemes: Aim to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.
- Balanced Schemes: Aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. They invest in both shares and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace or fall equally when the market falls.
- Money Market / Liquid Schemes: Aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short term instruments such as treasury bills, certificates of deposit, commercial paper and interbank call money. Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the market.
c) Other Equity related Schemes:
- Tax Saving Schemes: These schemes offer tax incentives to the investors under tax laws as prescribed from time to time and promote long term investments in equities through Mutual Funds.
- Sector Funds: Equity funds that invest in a particular sector/industry of the market are known as Sector Funds. The exposure of these funds is limited to a particular sector (say Information Technology, Auto, Banking, Pharmaceuticals or Fast Moving Consumer Goods) which is why they are more risky than equity funds that invest in multiple sectors.
- Index Funds: These funds have the objective to match the performance of a specific stock market index. The portfolio of these funds comprises of the same companies that form the index and is constituted in the same proportion as the index. Equity index funds that follow broad indices (like S&P CNX Nifty, Sensex) are less risky than equity index funds that follow narrow sectoral indices (like BSEBANKEX or CNX Bank Index etc). Narrow indices are less diversified and therefore, are more risky.
- Fund of Funds: Mutual funds that do not invest in financial or physical assets, but do invest in other mutual fund schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds maintain a portfolio comprising of units of other mutual fund schemes, just like conventional mutual funds maintain a portfolio comprising of equity/debt/money market instruments or non financial assets.