What is Mutual Fund ?

By mani / Published on Wednesday, 18 Jan 2017 11:12 AM

What is Mutual Fund ?

A mutual fund is made up of a pool of funds collected from many investors for the purpose of investing in securities such as equity/stocks, bonds and similar assets. Mutual funds are operated by fund managers, who invest the capital in various money market instruments and produce capital gains for the investors. The mutual fund’s portfolio maintained to match the investment requirements stated in its prospectus.

Main advantage of mutual fund is investors are given access to professionally managed diversified portfolios and participates proportionally in the gain or loss of the fund.

Mutual fund units 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. A fund’s NAV is derived by dividing the total value of the securities in the portfolio by the total amount of shares outstanding.

Mutual funds can be broadly classified in the following types:

Aggressive growth means that you will be buying into stocks which have a chance for dramatic growth and may gain value rapidly. This type of investing carries a high element of risk with it since stocks with dramatic price appreciation potential often lose value quickly during downturns in the economy. It is a great option for investors who do not need their money within the next five years, but have a more long-term perspective. Do not choose this option when you are looking to conserve capital but rather when you can afford to potentially lose the value of your investment.

As with aggressive growth, growth seeks to achieve high returns; however, the portfolios will consist of a mixture of large, medium and small sized companies. The fund portfolio chooses to invest in stable, well established, blue-chip companies together with a small portion in small and new businesses. The fund manager will pick, growth stocks which will use their profits grow, rather than to pay out dividends. It is a medium – long-term commitment, however, looking at past figures, sticking to growth funds for the long-term will almost always benefit you. They will be relatively volatile over the years so you need to be able to assume some risk and be patient.

A combination of growth and income funds, also known as balanced funds, are those that have a mix of goals. They seek to provide investors with current income while still offering the potential for growth. Some funds buy stocks and bonds so that the portfolio will generate income whilst still keeping ahead of inflation. They are able to achieve multiple objectives which may be exactly what you are looking for. Equities provide the growth potential, while the exposure to fixed income securities provide stability to the portfolio during volatile times in the equity markets. Growth and income funds have a low-to-moderate stability along with a moderate potential for current income and growth. You need to be able to assume some risk to be comfortable with this type of fund objective.

That brings us to income funds. These funds will generally invest in a number of fixed-income securities. This will provide you with regular income. Retired investors could benefit from this type of fund because they would receive regular dividends. The fund manager will choose to buy debentures, company fixed deposits etc. in order to provide you with a steady income. Even though this is a stable option, it does not go without some risk. As interest-rates go up or down, the prices of income fund shares, particularly bonds, will move in the opposite direction. This makes income funds interest rate sensitive. Some conservative bond funds may not even be able to maintain your investments’ buying power due to inflation.

The most cautious investor should opt for the money market mutual fund which aims at maintaining capital preservation. The word preservation already indicates that gains will not be an option even though the interest rates given on money market mutual funds could be higher than that of bank deposits. These funds will pose very little risk but will also not protect your initial investments’ buying power. Inflation will eat up the buying power over the years when your money is not keeping up with inflation rates. They are, however, highly liquid so you would always be able to alter your investment strategy.

How to invest ?

Before investing in mutual funds, Have CKYC (Central KYC record) updated.

Steps to update KYC:
Step 1 : Contact the Mutual Fund division of company or your stock broker.
Step 2 : Procure KYC form from branch of the company or stock broker.
Step 3 : Fill the KYC (if applicable) form, provide necessary information i.e. name, address, PAN, email address, mobile number, etc. This email address and mobile number will be used for further communication, and can also be used to register for online transaction services.
Step 4 : Attach copies of relevant documents and submit duly signed KYC at the branch.

Then after deciding the mutual fund you can buy through the fund company by providing cheque and required documents or can buy online through any stock broker if you have account with them.

Please note, Mutual funds are subject to market risk.