What is a Mutual Fund?
Mutual Fund is a financial intermediary which collects money from many investors who have a common financial goal and invest it in bonds and stocks etc. Thus it is a very suitable investment for common man as it is cost effective and easy.
How does it work?
The portfolio / fund manager collects the interest after trading the fund's securities and realizing capital gains or losses. The investment proceeds are then given to the individual investors. Total value of the fund divided by the number of shares currently issued and outstanding gives net asset value per share (NAV). It is calculated on daily basis.
Future of Mutual Fund Investment in India:
Mutual Funds have a very bright future in India. As compared to the annual growth rate of 9% in last 5 years, composite rate of growth is expected 13.4% in the next 5 years.
- Big Scope of expansion as there are 29 mutual funds in India
- Most of the mutual funds are concentrating on A class cities. "B" and "C" class cities are also growing rapidly in India.
- The saving rate in India is 23% which is highest in India
- Many foreign AMC's want to enter India with over US$1trillion assets under management worldwide
- Mutual Funds can target the rural area in India with simple plans
- Security and Exchange Board of India allow Mutual Funds to launch commodity mutual funds
Advantages of Investment in Mutual Funds
Investor is benefited by investing in Mutual Funds because
- Diversification: - Diversified portfolio is balanced in varying economic conditions. When there is rise in interest rate, some securities decrease and some increase in value. Gradually the value of overall portfolio increases over time even if some securities lose value
- Professional Management - Top managers are paid by Mutual funds to manage their investments. They decide what securities the fund will buy and sell
- Liquidity - Money can be taken out of mutual fund anytime easily
- Convenient - Mutual fund shares can be bought by email, phone or over internet.
- Regulatory Oversight - Investors are protected from fraud as mutual funds are subject to government regulations
- Low Cost - Expenses of Mutual Fund is 1.5% of the investment.
- Tax Benefits - Investors gets tax benefits over the money invested in Mutual Fund
- Transparent and Flexible
- Choice of Schemes - Investor can choose between many schemes
- Well regulated
Disadvantages of Mutual Fund Investment:
- No Guarantee - When the entire stock market goes down, the Mutual Fund shares will also go down even if the portfolio is balanced though the risk is low
- Administrative fees or sales commissions is charged by all the funds to compensate brokers and financial planners
- Tax have to be paid on the income the investors make even if you reinvest the profit
- Management Risk is always there as the funds manager takes the decision for you regarding funds portfolio
Mutual Fund Structure
- A Sponsor establishes the Mutual Fund and contributes at least 40% of net worth of Investment and fulfills criteria set by SEBI. He is not responsible for any kind of loss from operation of Schemes. According to the Indian Trust Act, 1882, Mutual Fund is constituted as a trust by Sponsor.
- Trustee is a company which takes care of interest of unit holders while AMC takes care of interest of Investors as per SEBI Regulations, 1996.
- AMC is the Asset Management Company appointed by Trustee as the Investor Management and it should have a net worth of at least 10 crores. AMC has to take approval from SEBI. At least 50% of the directors of AMC have to be independent directors and should not be associated with Sponsors.
- AMC appoints Registrar and transfer agent who communicates with investors and update their records.