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Understanding Mutual Funds

1. What is a Mutual Fund?
2. Advantages/Disadvantages
3. History of Mutual Funds
4. Types of Mutual Fund
5. Benefits of Investing in Mutual Funds

What is a Mutual Fund?

A common pool of money into which investors place their contributions to be invested in accordance with a stated objective. The ownership of the fund is joint or mutual & the fund belongs to all investors in the proportionate to contribution made by them.

Mutual Fund Structure

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Advantages		Disadvantages
* Portfolio Diversification		* No Control over Cost
* Professional Management		* No Tailor-made Portfolios
* Reduction / Diversification of Risk		* Managing a Portfolio Funds
* Liquidity
* Flexibility & Convenience
* Reduction in Transaction cost
* Safety of regulated environment

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History of Mutual Funds

* Phase 1 (1964-87) : Growth of UTI
* Phase 2 (1987-93) : Entry of PSU Banks and Financial Institutions’ MFs
* Phase 3 (1993-96) : Emergence of Private Sector Mutual Funds
* Phase 4 (1996-99) : SEBI Regulations for Investors’ Protection
* Phase 5 (1999-2004) : UTI Act 1963 repealed in Feb 2003
* Phase 6 (2004 onwards): Consolidation & Growth

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Types of Mutual Fund

Mutual Funds can be structurally classified as:

Close ended / Open-ended Funds
Load Fund / No-Load Funds
Tax-exempt / Non-Tax exempt Funds

Mutual Funds can be classified based on asset class as:

Equity Funds
Bond Funds
Money Market Funds
Balanced Funds

Mutual Funds can be classified based on investment objective:

Growth
Income
Value

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Benefits of Investing in Mutual Funds

Diversification: The best mutual funds design their portfolios so individual investments will react differently to the same economic conditions. Keep your eggs in different baskets

Professional Management: Most mutual funds pay topflight professionals to manage their investments. These managers decide what securities the fund will buy and sell.

Regulatory oversight: Mutual funds are subject to many government regulations that protect investors from fraud.

Liquidity: It's easy to get your money out of a mutual fund. Write a check, make a call, and you've got the cash.

Convenience: You can usually buy mutual fund shares by over the Internet or by simply submitting a signed application form at a POS (point of service).

Low cost: Mutual fund expenses are often no more than 1.5 percent of your investment. Expenses for Index Funds are less than that, because index funds are not actively managed. Instead, they automatically buy stock in companies that are listed on a specific index

Some more benefits are:

Transparency
Flexibility
Choice of schemes
Tax benefits
Well regulated

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