| UNDERSTANDING MUTUAL
FUNDS
The key considerations while investing in a mutual fund are
safety, liquidity and return. Safety is assured when investors
are able to get back their money. Liquidity enables investors
exit the fund any time. There are no assured returns from mutual
funds and they vary with the schemes under each fund. The schemes
are structured to suit the risk bearing capacity of unit holders
and the nature of deployment of funds by the various schemes.
The structure of mutual funds is governed by the Securities
and Exchange Board of India under the SEBI (Mutual Fund) Regulations
1996. These regulations make it mandatory for mutual funds to
have a three-tier structure - a sponsor, a trustee and an asset
management company (AMC). The sponsor is the promoter of the
mutual fund and appoints the trustees. The trustees are responsible
to the investors in the mutual fund and appoint the AMC for
managing the investment portfolio.
The AMC is the business face of the mutual fund, as if manages
all the affairs of the mutual fund. The mutual fund and the
AMC have to be registered with the SEBI.
SEBI regulations also provide for who can be a sponsor, trustee
and AMC and specify the format of agreements between these entities.
These agreements provide for the rights, duties and obligations
of these three entities.
Mutual funds are the preferred route for investors, particularly
small and retail investors, who do not have the knowledge or
time to directly trade in the equity and debt markets. The funds
are managed by qualified investment professionals and other
service providers who are paid for their services. Portfolio
diversification, professional management and reduced risk are
among the myriad advantages of mutual funds.
Mutual funds invest in multiple asset classesrenable continuous
evaluation and provide higher-fledbilify in investment plans.
After all, diversification is the key to achieving growth with
lower risk.
Investors in mutual funds have a wide choice from an assorted
variety of funds and schemes with several products on offer.
Competition in the industry has led to innovative changes in
standard products by fund houses. The product choice enables
investors choose options that suit their return requirements
and risk appetite. They can combine the options to arrive at
their own mutual fund portfolios that will fit their financial
planning objectives. The funds are invested in a portfolio of
marketable securities, reflecting the investment objective.
The value of the portfolio and investors’ holdings alter with
change in the market value of investments.
Mutual funds predominantly invest in equity shares and debt
instruments. Under equity funds, one can invest in diversified
equity schemes, primary market schemes, index-based funds and
secforal funds.
Debt funds invest predominantly in debt markets. Diversified
debt funds, income funds, gift funds, liquid and money market
funds, fixed term plans and floating rate funds are among the
categories of debt funds. While equity funds suit growth objectives,
debt funds fit income objectives.
Mutual fund houses also offer balanced funds and money market
funds. Balanced funds invest in equity and debt in specified
proportions while money market funds are preferred by institutional
investors which churn their investments depending on the need
and view.
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