Meaning of Mutual Funds
A Mutual fund is a trust that attracts savings which are then invested in capital markets. A Mutual fund is an investment vehicle for investors who pool their savings for investing in diversified portfolio securities with the aim of attractive yields and appreciation in their value.
According to SEBI, a mutual fund defined as a fund, established in the form of a trust to raise money through the sale units of the public under one or more schemes for investing in securities, including money and market instruments.
Advantages of Mutual Fund
- Mutual funds promote savings among the lower and middle-income groups of investors because mutual funds units are available with a single unit of ₹ 10 and multiplies of the same value
- Mutual funds reduce the risks as they diversify the investment into shares, debentures, bonds, etc.
- Mutual funds can be recapitalized at any time i.e. one can sell their mutual fund units at any time
- Investors get an attractive return because mutual funds are linked with the stock market
- Mutual funds are convenient and easy to invest
- Mutual funds are flexible which means it can be transferred from one scheme to another easily
- Mutual funds contribute to the economy
Types of Mutual fund
Following are the types of mutual funds:
- Public sector Mutual funds – State bank of India, Canara Bank, Punjab national bank, general insurance, corporation are some of the public sector mutual funds.
- Private sector Mutual funds – Kothari pioneer fund, twentieth-century fund, ICCI fund, Morgan Stanly fund, Taurus fund and CRB fund are examples of the private sector of mutual funds.
- Open-ended mutual funds – When the mutual fund units are sold and redeemed at any time on the basis of the price determined by the fund’s net asset value, it is called an open-ended mutual fund. There is no maturity period in these mutual funds and investors can sell the units back whenever they wish.
- Closed-ended Mutual funds – These types of mutual funds have a fixed maturity period from 2-15 years. The units of these funds can’t be redeemed.
- Growth generated Mutual funds – These types of mutual funds are reinvested in highly growth-oriented equity shares. It consists of securities that offer high returns and growth potential.
- Income generated mutual funds – When the investors need regular income for their investment then they can select income generated mutual funds. These funds offer a regular dividend to its investors.
- Balanced Mutual funds – The balanced mutual funds are characterized by investment in a combination of various securities as well as government bonds. It consists of both equity and debt instruments.
- Domestic Mutual funds – When the mutual funds mobilize savings from a particular country or region it is called domestic mutual funds.
- Global Mutual funds – When the mutual fund investment stocks are traded in the market throughout the world, it is called global mutual funds.
- Regional mutual funds – When the mutual funds consist of investment from a particular region of a country then it is called a regional mutual fund.
- Sector mutual funds- Sector mutual funds are specialized in a particular industry which consists of aggressive funds from a particular sector/industry.
Mutual funds in India
There are various mutual funds companies in India that invest in equity or stocks and manage the fund to achieve a range of goals.
Many equity mutual funds are structured to generate long term capital gains through growth or value investing strategies like Birla SL Frontline Equity fund, while others focus on generating income for its shareholders. Indian mutual funds may also invest in bonds and other securities with the goal of generating regular interest income. Funds can also take a balanced approach i.e. invest in both equity and debt instruments to create diverse portfolios that offer stability and also offer the potential for huge gains in the stock market.
Mutual funds in India are regulated by the securities and exchange board of India (SEBI). The SEBI regulations include a minimum of ₹ 500 million for open-ended debt funds and ₹ 200 million for closed-ended funds. Indian mutual funds are only allowed to borrow up to 20% of their value for a term not to exceed six months to meet short term requirements.
Mutual Fund Sponsor
The mutual fund sponsor can be either an individual, a group of individuals, or a corporate body. The Sponsor is responsible for registration with SEBI. Once approved, the sponsor must form a trust to hold the assets of the fund, appoint a board of trustees, and choose an asset management company.