Mutual fund is convenient, easy and simple investment instrument with lower risk in comparison to the stock market with high expected returns. A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as stocks, debentures and other securities. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most 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.
Advantages of Mutual Funds
The advantages of investing in a Mutual Fund are as below:
- Professional Management
- Convenient Administration
- Return Potential
- Low Costs
- Choice of schemes
- Tax benefits
- Well regulated
Types of Mutual Fund Schemes
Wide varieties of Mutual Fund Schemes exist to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry.
Difference between an Open Ended and Close Ended Scheme
Open ended funds can issue and redeem units any time during the life of the scheme while close ended funds cannot issue new units except in case of bonus or rights issue. Hence, unit capital of open ended funds can fluctuate on daily basis while that is not the case for close ended schemes. Other way of explaining the difference is that new investors can join the scheme by directly applying to the mutual fund at applicable net asset value related prices in case of open ended schemes while that is not the case in case of close ended schemes. New investors can buy the units from secondary market only.
Difference between Mutual Funds and Portfolio Management Schemes
In case of mutual funds, the investments of different investors are pooled to form a common investible corpus and gain/loss to all investors during a given period are same for all investors while in case of portfolio management scheme, the investments of a particular investor remains identifiable to him. Here the gain or loss of all the investors will be different from each other.
Frequently Used Terms
Net Asset Value (NAV): Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.
Sale Price: It is the price you pay when you invest in a scheme, also called Offer Price. It may include a sales load.
Repurchase Price: It is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price.
Redemption Price: It is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related.
Sales Load: It is a charge collected by a scheme when it sells the units, also called, ‘Front-end’ load. Schemes that do not charge a load are called ‘No Load’ schemes.
Repurchase or ‘Back-end’ Load: It is a charge collected by a scheme when it buys back the units from the unit holders.