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A Mutual Fund is a trust that pools together the savings of a number of investors who share a common financial goal. The fund manager invests
this pool of money in securities -- ranging from shares and debentures to money market instruments or in a mixture of equity and debt, depending
upon the objectives of the scheme.
• Professional expertise: Fund managers are professionals who track the market on an on-going basis. With their mix of professional
qualification and market knowledge, they are better placed than the average investor to understand the markets
• Diversification: Since a Mutual Fund scheme invests in number of stocks and/or debentures, the associated risks are greatly reduced.
• Relatively less expensive: When compared to direct investments in the capital market, Mutual Funds cost less. This is due to savings
in brokerage costs, demat costs, depository costs etc.
• Liquidity: Investments in Mutual Funds are completely liquid and can be redeemed at their Net Assets Value-related price on any
working day.
• Transparency: You will always have access to up-to-date information on the value of your investment in addition to the complete
portfolio of investments, the proportion allocated to different assets and the fund manager’s investment strategy.
• Flexibility: Through features such as Systematic Investment Plans, Systematic Withdrawal Plans and Dividend Investment Plans, you
can systematically invest or withdraw funds according to your needs and convenience.
• SEBI regulated market: All Mutual Funds are registered with SEBI and function within the provisions and regulations that protect the
interests of investors. AMFI is the supervisory body of the Mutual Funds industry.
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Types of Funds
There are a wide variety of Mutual Fund schemes that cater to your needs, whatever your age, financial position, risk tolerance and return
expectation. Whether as the foundation of your investment program or as a supplement, Mutual Fund schemes can help you meet your financial
goals. The different types of Mutual Funds are as follows:
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Once you are comfortable with the basics, the next step is to understand your investment choices, and draw up your investment plan relevant to
your requirements. Choosing your investment mix depends on factors such as your risk appetite, time horizon of your investment, your investment
objectives, age, etc.
• Very conservative
• Conservative
• Moderate
• Aggressive
• Very Aggressive
To ascertain your risk appetite, try out our Risk Thermometer.
What are my cash flow requirements?
For example, you may require:
• A lumpsum after a fixed period of time for some specific need in the future
• Or, you may have no need for cash, but you may want to create fixed assets for the future
• For Capital Appreciation go for equity sectoral funds, equity diversified funds or balanced funds.
• For Regular Income and Stability you should opt for income funds/MIPs
• For Short-Term Parking of Funds go for liquid funds, floating rate funds, short-term funds.
Investment Investment
Ideal Instruments
Objective horizon
Short-term
1- 6 months Liquid/Short-term plans
Investment
Capital Diversified Equity/ Balanced
Over 3 years
Appreciation Funds
Monthly Income Plans /
Regular Income Flexible
Income Funds
Equity-Linked Saving
Tax Saving 3 yrs lock-in
Schemes (ELSS)
Let's assume that Mr. Gupta has purchased Mutual Fund units worth Rs. 10,000 at an NAV of Rs. 10 per unit on February 1. The Entry Load on
the Mutual Fund was 2%. On September 15, he sold all the units at an NAV of Rs 20. The exit load was 0.5%.
Points to Remember
• Do not put all eggs in one basket: Diversification reduces the risk.
• Mutual Funds are subject to market risks and there is no assurance that the fund objective will be achieved.
Assets Management Company: A highly regulated organization that pools money from many people into portfolio structured to achieve certain
objectives. Typically an AMC manages several funds –open ended/ close ended across several categories- growth, income, balanced.
Balanced Fund: A hybrid portfolio of stocks and bonds.
Close Ended Fund: They neither issue nor redeem fresh units to investors. Some closed ended funds can be bought or sold over the stock
exchange if the fund is listed. Else, investor have to wait till redemption date to exit. Most listed close ended funds trade at discount to the NAV.
Open Ended Fund: A diversified and professionally managed scheme, it issues fresh units to incoming investors at NAV plus any applicable sales
charge, and it redeems shares at NAV from sellers, less any redemption fees.
Entry/ Exit Load: A charge paid when an investor buys/sells a fund. There could be a load at the time of entry or exit, but rarely at both times.
Expense Ratio : The annual expenses of the funds, including the management fee, administrative cost, divided by the fund under management.
Growth/Equity Fund: A fund holding stocks with good or improving profit prospects. The primary emphasis is on appreciation.
Liquidity: The ease with which an investment can be bought or sold. A person should be able to buy or sell a liquid asset quickly with virtually no
adverse price impact.
Net Assets Value : A price or value of one unit of a fund. It is calculated by summing the current market values of all securities held by the fund,
adding the cash and any accrued income, then subtracting liabilities and dividing the result by the number of units outstanding.
Interest Rate Risk: The risk borne by fixed-interest securities, and by borrowers with floating rate loans, when interest rates fluctuate. When
interest rates rise, the market value of fixed-interest securities declines and vice versa.
Credit Risk: Credit risk involves the loss arising due to a customer’s or counterparty’s inability or unwillingness to meet commitments in relation to
lending, trading, hedging, settlement and other financial transactions.
Capital Market Risk : Capital Market Risk is the risk arising due to changes in the Stock Market conditions.
Faqs
There are a wide variety of Mutual Fund schemes that cater to your needs, whatever your age, financial position, risk tolerance and return
expectation. Whether as the foundation of your investment program or as a supplement, Mutual Fund schemes can help you meet your financial
goals. The different types of Mutual Funds are as follows:
Index Funds
These funds invest in the stocks of companies, which comprise major indices such as the BSE Sensex or the S&P CNX Nifty in the same
weightage as the respective indice.
Balanced Funds
The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the
proportion indicated in their offer documents. They generally invest 40-60% in equity and debt instruments.
Fund of Funds
A Fund of Funds (FoF) is a mutual fund scheme that invests in other mutual fund schemes. Just as fund invests in stocks or bonds on your behalf,
a FoF invests in other mutual fund schemes.
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Assets Management Company: A highly regulated organization that pools money from many people into portfolio structured to achieve certain
objectives. Typically an AMC manages several funds –open ended/ close ended across several categories- growth, income, balanced.
Balanced Fund: A hybrid portfolio of stocks and bonds.
Close Ended Fund : They neither issue nor redeem fresh units to investors. Some closed ended funds can be bought or sold over the stock
exchange if the fund is listed. Else, investor have to wait till redemption date to exit. Most listed close ended funds trade at discount to the NAV.
Open Ended Fund : A diversified and professionally managed scheme, it issues fresh units to incoming investors at NAV plus any applicable sales
charge, and it redeems shares at NAV from sellers, less any redemption fees.
Entry/ Exit Load : A charge paid when an investor buys/sells a fund. There could be a load at the time of entry or exit, but rarely at both times.
Expense Ratio : The annual expenses of the funds, including the management fee, administrative cost, divided by the fund under management.
Growth/Equity Fund : A fund holding stocks with good or improving profit prospects. The primary emphasis is on appreciation.
Liquidity : The ease with which an investment can be bought or sold. A person should be able to buy or sell a liquid asset quickly with virtually no
adverse price impact.
Net Assets Value : A price or value of one unit of a fund. It is calculated by summing the current market values of all securities held by the fund,
adding the cash and any accrued income, then subtracting liabilities and dividing the result by the number of units outstanding.
Interest Rate Risk : The risk borne by fixed-interest securities, and by borrowers with floating rate loans, when interest rates fluctuate. When
interest rates rise, the market value of fixed-interest securities declines and vice versa.
Credit risk : Credit risk involves the loss arising due to a customer’s or counterparty’s inability or unwillingness to meet commitments in
relation to lending, trading, hedging, settlement and other financial transactions.