Mutual funds are those financial firm( or person, such as broker or consultant) which channelize savings from the people who share a common financial goal and invest them in government securities. They are also called as institutional investors. Mutual funds are the form of NBFI (Non-banking financial institutions) for promoting as well as mobilizing financial savings.
A mutual fund is a trust that collects the money(savings) from investors and the collected money is then invested in the financial markets such as debentures, shares, and other securities and earn income through interest and dividends. The fund manager invests the money in a large and well-diversified portfolio of securities, like, corporate and government bonds, money market institutions, equity shares of joint stock companies, etc. Diversification reduces risk.
Definition of Mutual Fund
SEBI (mutual funds) Regulations, 1993 defines a mutual fund as “a fund established in the form of a trust by a sponsor to raise the money by the trustees through the sale of units to the public, under one or more schemes, for investing in securities by these guidelines.”
Features of Mutual Funds
- The ownership remains in the hand of investors.
- It is managed by investment professionals team and service providers.
- Regulated by agencies like SEBI.
- Mutual funds mobilize funds from small as well as large investors.
- They contribute to the economic development of the country.
- Schemes offered by mutual funds provide tax benefits.
Types of Mutual Fund
Based on the Fund Scheme/Operations:
- OPEN-ENDED SCHEMES: In the open-ended scheme, investors are free to buy and sell units without specifying any duration for redemption. These are not trade in the stock exchange. The prices are linked to the NAV(Net asset value) because units are not listed on the stock exchange. Subscriptions are received by offering units or shares continuously. They have no fixed maturity period.
- CLOSE-ENDED SCHEMES: This is the just reverse of open-ended funds. The size of the fund and its durations are fixed in advance. Close-ended funds have a fixed collection and a stipulated maturity period between 2 to 5 years. Once the period is over, the subscription will be closed. They are listed and traded in the stock exchange. Subscriptions are received only for a stipulated or limited period.
Difference between Open-ended scheme and Close-ended scheme
|Open-Ended Scheme||Close-Ended Scheme|
|No fixed maturity period||Fixed maturity period|
|Traded in the company||Traded at the stock exchange|
|Investors can withdraw the fund at any time||They are not allowed to withdraw funds at their choice.|
|Always open to be subscribed all the time.||Open to the public for a limited period.|
Based on Asset Invested
- EQUITY FUNDS: These funds mainly consist of equity related investments. Equity funds are considered to be more risky funds as compared to others. They also provide higher returns. The investor invests in the long run if they invest in equity funds. They have less tax liability as compared to debt funds. It concentrates mostly on capital gains.
- DEBT FUNDS: These funds mainly consist of fixed income securities like bonds and debentures. They are less risky as compared to equity funds. It carries a lower risk. Close-ended funds have a more secure and steady income, but there is no chance of capital appreciation. They preferred regular interest payments.
- HYBRID FUNDS: Hybrid funds are the combination of equity as well as debt funds. Because of this mix, these funds are less risky than equity funds but more than debt funds.
Based on Investment/Return:
- GROWTH FUND: They offer the advantage of capital appreciation, which means growth funds focus on long-run gains. These are higher risky schemes because they mostly invest in equities. Growth funds pay lower dividends. They meet the investor’s need for capital appreciation. This is best suited for salaried and business people.
- FIXED-INCOME FUND: They are kind of debt funds. This scheme aims at generating regular and periodical income to the members. Such funds provide two forms. The first scheme earns a target constant income at low risk, and the second scheme offers the maximum possible income.
- BALANCED FUND: As the name is given, the balanced fund maintains the balance between risk and return. They invest in both equity and debt instruments.