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Mutual Funds

What is a Mutual Fund?

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. It is essentially a diversified portfolio of financial instruments - these could be equities, debentures/bonds or money market instruments. The corpus of the fund is then deployed in investment alternatives that help to meet predefined investment objectives. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is a suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

You could make money from a Mutual Fund in three ways:

  • Income is earned from dividends declared by Mutual Fund schemes from time to time

  • If the fund sells securities that have increased in price, the fund has a capital gain. This is reflected in the price of each unit. When investors sell these units at prices higher than their purchase price, they stand to make a gain

  • If fund holdings increase in price but are not sold by the fund manager, the fund's unit price increases. You can then sell your Mutual Fund units for a profit. This is tantamount to a valuation gain

What are the different types of Mutual Funds?

Mutual Fund schemes may be classified on the basis of their structure and their investment objective.

  • By structure


    Open-ended Funds

    An Open-ended Fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices.


    Close-ended Funds

    A Close-ended Fund has a stipulated maturity period, which generally ranges from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the new fund offer and thereafter they can buy or sell the units of the scheme on the Stock Exchanges, if they are listed. The market price at the stock exchange could vary from the scheme's NAV on account of demand and supply situation, unit holders' expectations and other market factors.

  • By investment objective


    Growth Funds

    The aim of Growth Funds is to provide capital appreciation over the medium to long term. Such schemes normally invest a majority of their corpus in equities. Growth schemes are ideal for investors who have a long-term outlook and are seeking growth over a period of time.


    Income Funds

    The aim of Income Funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities.

    Income Funds are ideal for capital stability and regular income. Capital appreciation in such funds may be limited, though risks are typically lower than that in a growth fund.


    Balanced Funds

    The aim of Balanced Funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. This proportion affects the risks and the returns associated with the balanced fund - in case equities are allocated a higher proportion, investors would be exposed to risks similar to that of the equity market.

    Balanced funds with equal allocation to equities and fixed income securities are ideal for investors looking for a combination of income and moderate growth.


    Money market Funds

    The aim of Money Market Funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit, Commercial Paper and Inter-Bank Call Money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market.

    These are ideal for corporate and individual investors as a means to park their surplus funds for short periods.

  • Other equity related schemes


    Tax saving schemes

    These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws, as the Government offers tax incentives for investment in specified avenues.

    Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction under Section 88 of the Indian Income Tax Act, 1961.

    Index schemes

    Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE S&P CNX 50.

    Sectoral schemes

    Sectoral Funds are those which invest exclusively in specified sector(s) such as FMCG, Information Technology, Pharmaceuticals, etc. These schemes carry higher risk as compared to general equity schemes as the portfolio is less diversified, ie restricted to specific sector(s) / industry (ies).