Mutual Funds are a managed fund where many people put in money into the fund. The Mutual Fund (MF) with the money collected, will buy financial instruments like Shares and Bonds which are known as the Assets of the Mutual Fund. The Mutual Fund will have expert managers who will buy and sell these financial instruments, almost on a daily basis, to make profits.
For a new individual Investor, investing in Mutual Funds (MF) is much easier and safer than trying to pick Shares from the Stock Market. Experts manage mutual Funds and normally do not have negative returns. This means that capital invested in a Mutual Fund is safe with steady growth.
Every day at the end of trading hours they will have computers to calculate the total value of their Assets which are the total value of all their holdings in Share, Bonds, etc. This Total Asset Value minus any liabilities the MF (Mutual Fund) Company has (for example salaries, rent, etc.) gives the Total Net Asset Value of the MF Company. This Total Net Asset value divided by the number of shares or units issued by the MF Company provides the Net Asset Value per Unit or Share. This is called the Net Asset Value per unit or NAV.
How mutual funds work and make money
Let us take for example a Mutual Fund (MF), which has a capital of Rs.100 Million or Rs.10 Crores. The Rs.10 Crores is divided into one crore Units of Rs. 10 each. An individual investing Rs.1000 in the MF will receive 100 Units in the MF Company. The MF invests its capital of Rs.10 crores in Shares of different Companies and Government and other reliable Bonds. In the course of time these investments will gain in value. In our example let us say the total investments or ‘Assets’ of MF increased to Rs.12 Crores, then the value of each Unit becomes Rs.12. This value is known as the ‘Net Asset Value’ or ‘NAV’ of the unit. Mutual fund Companies declare their NAV daily at the end of business hours. Daily NAV of Indian Mutual Funds are usually declared after 5PM every working day.
The Units or Shares of the MF Company can be bought from or sold to the Unit Holders directly by the MF Company at the latest NAV price. The Units of MF can also be bought and sold in a Stock Exchange. There are mainly three types of Mutual Funds: Open-End Funds, Closed-End Funds and Exchange Traded Funds – ETF.
Examples of mutual fund types in India
These are the types of mutual funds available in India with examples
Open-End Mutual Funds in India
Open- End Mutual Funds sell their Units to anyone, or buy their Units from their Unit Holders (redemption), at the prevailing declared NAV price. If the demand is more with more and more people wanting to buy into their Fund, they will keep on selling and increase their Capital. The Capital of the MF will vary daily based on share purchases, share redemptions and the daily NAV price. Thus Open Ended Mutual Funds have no restrictions on their Capital and the number of Shares or Units issued.
Closed-End Mutual funds in India
Closed-end funds issue shares to the public only once at the time of their IPO (Initial Public Offering). The prices quoted on the stock exchange will most likely vary from the declared NAV. This is due to the perception of the investors as to how good or bad the fund is, and how it will perform in the future. Investors cannot sell their shares back to the fund. They can only sell their shares in the Stock Exchange same way as selling ordinary Stocks.
ETF or Exchange Traded Mutual Funds in India
ETF or Exchange Traded Funds are those Mutual Funds whose shares or Units are quoted on the Stock Exchanges and are traded on these exchanges just like if it were a Stock. Closed End Funds described above would qualify to be an ETF.
Value Mutual Fund in India
Mainly buy Stocks of Companies whose value determined by a low Price to Earning (P/E) Ratio and paying regular dividends. The aim of the fund is that these undervalued Companies will gain in value and thus making profits for the investor.
Growth Mutual Fund in India
Invests in Stocks of firms with good steady performance over many years, and having good growth prospects and thus increase in value of their shares
Large, Mid, and Small Cap Mutual Funds in India
Invests in Stocks of Companies according to the relative size or Capital of the Companies. The market cap of such companies varies from country to Country. In India for example, a Capital of Rs.6,000 crores ($1 billion) and above may be classified as large caps. Companies with a market capitalisation between 1,500 crores ($200 million) and 6,999 crores ($1 billion) are classified as mid caps. Companies with a market capitalization of less than 1,500 crores ($200 million) may be classified as small caps. Whereas in the USA a large Cap Company would be having a Capital of over $2 Billion; between $2 and $1 Billion for midcap and below $1 billion for small cap.
Income Mutual Fund in India
The fund aims to create regular income for the investor and invests in Stocks or Financial instruments paying good dividends or interest.
Index Mutual funds in India
These funds invest in the same Stocks as those in the particular index. For example, a ‘NIFTY’ Index Fund will invest in the 50 shares which make up the ‘NIFTY’ index of India’s NSE.
Balanced Mutual funds in India
Balanced funds aim to get healthy growth but at the same time at a reduced risk. Therefore it invests about half its Assets in very secure securities like Government Bonds and only with the other half, invests in the more riskier Equities or Stocks of Companies.
Tax Saving Mutual Funds in India
Tax saving Funds are mutual funds schemes where investments are in tax incentive schemes like special Government Bonds, etc. The idea is for the bondholder to claim tax rebates.
Sectoral Industries Mutual Funds in India
Here the MF aims to invest in Stocks of a particular sector. Thus a ‘Banking Sector Fund’ would invest in stocks of Banks and similarly, you will have other sectoral Funds like ‘Real Estate Sectoral Fund’ or ‘Auto Industries Sectoral Fund’ or ‘Infrastructure Development Sectoral Fund’, etc.
How to buy Mutual Funds online in India
Once you have a Savings bank account and a PAN card you can buy Units of the best Mutual Fund Companies in India. On the Internet, the latest NAV of Indian Mutual Funds are published daily, and you can know in advance at what price you can get the MF units. So far the best Indian Mutual Funds performance has been much better than either the BSE or NSE Sensex.
Advantages and disadvantages of investing in mutual funds in India
The benefits of investing with MF funds are first: the MF invests in many different Companies and different types of Financial instruments thus spreading any risks in the investments. Secondly, the MF Companies are managed by experts who have had many years of experience and exposure in the Stock and Financial Markets and are thus much more qualified investor.
The mutual fund industries in the various countries are run by leading Banks and even Government owned Companies. For example, in India the State Bank of India’s Mutual fund is known as SBI Mutual Fund. The Government Company, Unit Trust of India or UTI and SBI Mutual Fund are leading Mutual fund players. In many countries, Pension Funds are some of the leading investors in Mutual funds.
Mutual funds can invest in many kinds of financial instruments or securities. The investment objectives of the MF are declared in the fund’s prospectus. The investment objective describes the type of securities the MF will be investing into, for example, a ‘Growth Fund’ would try to get its returns by the increase in the market price of the securities it holds. A ‘Dividend Yield Fund’ on the other hand invests in Stocks of Companies who are known to pay out handsome dividends regularly while at the same time their share value also appreciates. A ‘Balanced Fund’ invests about half its Assets in very secure securities like Government Bonds and only with the other half invests in the more riskier Equities or Stocks of Companies.
Also finally it is very easy to invest in Mutual funds. How to invest in Mutual Funds in India online is very easy. All you have to do is to go to the website of the MF Companies like UTIMF.Com or SBIMF.Com, create an account online and payments for the units can also be made online through your account with a Bank.
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- Home Page of WhyShares.com
- Share Market Basics
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- Indian Mutual Funds explained
- SIP Investments in Mutual Funds in India
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