“Mutual Funds” Know How
An Overview on Mutual Funds
MFs are funds operated by investment companies.They raises money from the public and invests in a group of assets like shares, debentures, bonds, govt. securities etc with certain objectives. MF’s is a substitute for those who are unable to invest directly in equities or debt instruments because of time or knowledge constraints. Mutual fund units are issued and redeemed by a Fund Management Company which is registered with SEBI (Securities Exchange Board of India). Mutual Funds are usually long term investment scheme but there some categories of mutual funds, which are short term instruments. The fund management company will diversify the money we invest into various sectors like Bonds,equities etc. So the underlying effect is we are investing in a highly sensitive area with the help of a company who knows the market.But that doesn’t mean we are in a risk free zone.There are risks in MF’s also but the amount of risk varies on the plan we select. Some funds are purely equity schemes, others are a mix of equity and bonds. Certain funds will invest in govt. bonds where risk will be comparitively less.Different funds have different risk profile which is stated in its objective.
Mutual funds issue units to the investors. The appreciation of the securities in which the Fund Management Company(FMC) has invested the money leads to an appreciation in the value of the units held by investors. The value of units is assessed in terms of NAV(Net Asset Value). NAV is calculated as the value of all the shares held by the fund, minus expenses, divided by the number of units issued.All investments in shares, debentures, has infinite risk, but if you have knowledge and courage to invest your money directly then its fine.Mutual funds are for those light hearted people like me who will not dare risk loosing the hard earned money.Mutual funds can be Open ended and Closed ended.A closed-ended fund is a collective investment scheme with limited number of shares.New share issue is a rare thing to happen once the fund is launched.In this fund, shares are not redeemable for cash or securities normally. An open-ended fund transactions involve the fund management company creating new shares on the run or even redeeming shares (for cash or securities).
Now categorising of mutual funds based on Risk and Return. Both R’s are directly propotional.Which means if risk is high return also will be high.
1.Fixed-Income Funds:- These are low risk Mf’s , which invest in government securities.So returns will be almost fixed.
2. Equity Funds:- are funds made of investments in common stock, so the first R(Risk) is high, but on the other side the returns also will be high.
3.Balanced Funds:- is a combination of both fixed -income and equity funds.They invest in stock and also in corporate & govt. securities.So risk is moderate.
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Allen Taylor
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