Basics of Mutual Funds

Basics of Mutual Funds


Introduction to Mutual Fund

Mutual fund is a pool of investment vehicles. Mutual funds are actively managed by an asset management company. An asset management company brings together a group of people and invests their money in stocks, bond, money market instruments and other Securities.

Mutual Funds are generally operated by Professional Fund Managers or Money Managers. They invest the fund’s capital in order to produce capital gains and income for the investors.

Mutual Fund is a way of invest for such investors who want to invest in stock market, bonds and other financial market instruments but have lack of time or knowledge to make complex investment decisions.

In the industry the words “Fund” and “Scheme” are used inter – changeably. Various categories of schemes are called “funds”.

What are the different kinds of Mutual Fund Scheme?

  1. Mutual Fund Schemes based on Structure:

  • Open Ended – these schemes do not have a fixed maturity. Open ended mutual fund ensures liquidity by announcing sale and repurchase price for the unit of an open-ended fund.
  • Closed Ended – These schemes have fixed maturity. There is a lock-in period for the investor. Sometimes, closed-end schemes provide a re-purchase option to the investors; it can be for a specified period or after the specified period. 
  1. Mutual Fund Schemes based on investment objective:

  • Equity Schemes – Equity Schemes primarily invest in shares. Investment could be in growth stocks, or value stocks. The various kinds of equity schemes are as following.
  • Mid Cap – Mid Cap funds invest in companies from different sectors, but they put some restriction in terms of the market capitalization of a company. Generally they invest largely in a BSE Mid Cap Stock.
  • ELSS – ELSS is an open-ended equity growth scheme.

How does a mutual fund operate?

A mutual fund company collects money from several investors, and invests this money in various options like stocks, bonds etc. this fund is managed by professionals who understand the market well.

The investment makes by investor is translated into a certain number of ‘Units’ in the scheme. Hence, an investor in a scheme issues units of the scheme. The asset management company is responsible for managing the investments for various schemes operated by mutual fund.

Every unit has its face value; the face value is very much relevant from an accounting perspective. The number of units issued by a scheme multiplied by its face value is the capital of the scheme.

The scheme earns interest income or dividend income on the investments. When it purchases and sells investments investors incur capital gains or losses, it is called realized capital gain or realized capital loss.

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