What is Mutual Fund?
Step 2:- Fund use that money to buy a basket filled with different type of Securities, in accordance with the investment objectives as disclosed in the offered documents.
Step 3:- Securities generate returns, here return refers to the fund's overall gain including any interest, dividend, and capital appreciation over a period of time.
Step 4:- Funds pass on these Income and gains to investors in the form of a distribution on pro-rata basis.
➧ The investment in mutual fund is managed by a Fund Manager, based on the direction by Fund House or Asset Management Company (AMC). it is an AMC who hires a fund manager to manage the fund, and pays him or her a management fee.
➧ The total values of the assets that a fund buys is called the Assets under Management.
➧ When you buy mutual fund, you exactly purchase units of those funds. A unit in mutual fund is also referred as a Share of mutual fund, and the value of mutual fund shares changes every time in accordance with the performance of the fund. The value of each unit/Share of mutual fund is called Net Asset Value (NAV).
What are the different types of mutual funds?
Ans:- Mutual Funds are classified into different categories based on certain characteristics such as asset class, structure, investment objectives, and risk.
♦ Based on Asset Class
♦Equity Mutual Fund:-
➧ Equity Mutual Fund normally invest major part in equity shares of companies, at least 65% of its corpus.
➧ Equity funds are known to generate better returns because, it is directly linked with the market's performance. if market is on a bull run than the fund will generate value however, a poor performance in the market could negatively impact your investment.
➧ Equity share mutual fund can be classified As:-
- Large Cap Fund:- Large cap funds are those equity fund that invest in equity shares of companies having large market Capital also known as Blue-Chip Companies (like:- Apple, Google, Amazon, Hindustan Unilever, etc.)
- Mid Cap Fund:- Mid cap funds are those equity funds that invest mainly in equity shares of companies with medium market capitalization (like:- Apollo Tyres, Exide Industry, JK Laxmi Cement, Ashok Leyland, etc.).
- Small Cap Funds:- Small cap funds are those equity funds that invest in equity shares of companies having Small market capital. in India any company having market cap Bellow 5000cr comes under small cap companies. (like:- Bajaj consumer care, JK Paper, Thyrocare, etc.).
➧ Equity share mutual fund further also classified As:-
- IT Fund:- it mainly invest in the shares of IT companies (like:-TCS, Infosys, HCL, Wipro etc.).
- Banking Fund :- it mainly invests in the shares of Banking companies (like:- SBI, HDFC Bank, ICICI Bank, Kotak Bank, etc.).
- Pharma Fund, etc.
♦ Bond Mutual fund:-
These Fund generally invest in Debt Instruments (like:- Long terms Bonds, Certificate of deposits, Govt. treasury, other money market instruments.
♦ Hybrid Mutual Fund:-
it is a mixture of Equity and Bond Securities. These fund usually invest in both equity shares and money market.
♦ Based on Structure
♦ Open Ended Mutual Fund:-
it will accept new investment money and issue additional shares at a value equal to the net asset value of the fund at the time of investment.
Example:- Suppose that an investment firm wishes to start a mutual fund with
a target amount of $10 million. It is able to reach this goal through investments
from five individuals and two institutions.
The investment of each is as follows:
The investment firm will appoint a portfolio manager to be responsible for
the investment of the $10 million. assume that at a later date the net asset value of the fund increases to $12.0 million and the new net asset value per share is $120. A new investor, F, wishes to
invest $0.96 million in the fund. If the total value of the assets in the fund is now $12 million or $120 per share, in order to accommodate the new investment the
fund would create 8,000 ($0.96 million/$120) new shares. After this investment,
the net asset value of the fund would be $12.96 million and there would be a total
of 108,000 shares.
Funds can also be withdrawn at the net asset value per share. Suppose on the same
day Investor E wishes to withdraw all her shares in the mutual fund. To accommodate this withdrawal, the fund will have to liquidate $0.6 million in assets to retire
5,000 shares at a net asset value of $120 per share ($0.6 million/$120). The
combination of the inflow and outflow on the same day would be as follows:
The net of the inflows and outflows on that day would be $360,000 of new funds to be invested and 3,000 new shares created.
However, the number of shares held and the value of the shares of all remaining investors, except Investor, would remain the same.
♦ Close Ended Mutual Fund:-
It is a fund in which no new investment money is accepted. New investors invest by buying existing shares, and investors in the fund liquidate by selling their shares to other investors.
Hence, the number of outstanding shares does not change.
How to invest in mutual fund?
Step 1:- Go to the website of the brokerage of your choice (like:- Zerodha, Angel broking, kotak securities etc.).
Step 3:- Set up an initial deposit.
Step 5:- Start investing by Lump-sum money or by doing SIP.
➨ All Mutual fund normally come out with an advertisement in news papers publishing the date of launch of the new schemes.
Almost all mutual fund have their own websites. [In India All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) http://www.amfiindia.com and thus the investors can access NAVs of all mutual funds at one place.
➨ You can choose Mutual Funds, as per your own Risk Appetite, Investment Horizon, or your Investment objectives. And there are lots of Mutual Funds to choose from, and you can pick-up the one that fits your criteria of investment perfectly.
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