Mutual funds are collective investment vehicles which pool money from the public, make investments and distribute surpluses either in the form of dividends or the surpluses are reflected in the form of a higher Net Asset Value (NAV) of the scheme. Mutual funds act as a pooling agent that collects money from various small investors and invests those funds in the market. The returns are distributed according to the scheme of the mutual fund.
An offer document is issued by a mutual fund containing proper details of the scheme, it’s investment horizon and class of securities in which it intends to invest. After the issue the collective money is pooled together to constitute a fund. The fund is managed by a fund manager who takes all the major investment decisions. A trust takes care that the mutual fund investments are in accordance with the scheme of the fund and that the fund is being managed in the interest of investors.
Net Asset Value (NAV) per unit refers to the total assets managed by the fund at their value divided by the outstanding units of the fund. The NAV of a scheme depenps on the market value of its investments and hence it will fluctuate with the fluctuating share prices of its investments. An increase in NAV means capital appreciation for it’s investors. Mutual funds (M.F) are managed by professionals who have requisite experience and qualifications in the area of stock markets. Thus for a new entrant in the stock market mutual funds act as a safe vehicle for investments.
M.F invest in a number of scripts and the aim is to construct a diversified portfolio. This means that the impact of risks associated with individual securities is minimized and hence investors can enjoy the benefit of diversification even at a low amount of investment. Since the pooled funds are invested in different sectors and stocks there is a diversification effect reducing the overall risk to the portfolio. M.F generally trade in large number of securities at the same time giving them the advantage of economies of scale resulting in savings in the form of lesser brokerage per unit of purchase, etc.
M.F are categoried according investment objectives. Growth funds invest majority of their pooled amount with the objective of long term capital appreciation. Their major investments are in equity and equity related instruments which gives high return. Income funds provide periodic return in the form of dividend. These funds invest in securities which provide regular return and these returns are distributed to investors in the form of dividends. These funds primarily invest in Gilt securities, bonds and debentures,etc. which are regarded as safe investments. Thus not only do these funds provide regular return but are also less risky. Balanced funds are a midway between growth funds and income funds. They balance their investments in such a way that investors not get periodic return but their capital also tends to appreciate.
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