Mutual funds

MUTUAL FUNDS

INTRODUCTION

Mutual funds have been successfully working is U.S.A and some western countries. These funds have been useful in filling the gap between demand and supply of capital in the market. A mutual fund motivates small and big investors to entrust their savings to it so that these are professionally employed ensuring their savings to it so that these are professionally employed ensuring good return. A large number of investors have small savings with them. They can at the most buy shares of one or two companies. When small savings are pooled and entrusted to mutual funds then these can be used to buy the chips where regular returns and capital appreciation are ensured.

Mutual fund is an American concept. The terms like Investment Company, Money Fund, Investment Trust and Mutual Fund are used interchangeably and used to describe same thing in American literature. In British literature, mutual funds has not been explained but is considered as synonym of investment trust of U.S.A.

MEANING OF MUTUAL FUND

A mutual fund is an investment vehicle for investors who pool their savings for investing in diversified portfolio of securities with the aim of attractive yields and appreciation in their value. As per mutual fund book, published by investment company institute of the U.S., a mutual fund is a financial service organization that receives money from shareholders, invests it, earns returns on it, attempts to make it grow and agrees to pay the shareholder cash on demand for the current value of his investment. The investment managers of the funds manage these savings in such a way that the risk is minimized and steady return is ensured.

CONCEPT OF MUTUAL FUNDS

The concept of mutual fund is a new feather in the cap of Indian capital market but not to international capital markets. The formal origin of mutual funds can be traced to Belgium where society generate de Belgique was established in 1822 as an investment company to finance investments in national industries with high associated risks. In England, the foreign and colonial government trust was established in 1868 to spread risks for investors over a large number of securities. The concept of mutual funds spread to U.S.A. in the beginning of the 20th century and three investment companies were started in 1924. The post world war II period gave an impetus to mutual funds culture in U.S.A. when more and more people invested in mutual funds. Since then the concept of mutual funds has been growing all around the world.

In India, mutual fund was started in 1964 when unit trust of India was started in 1964 when unit investment of India was established in the similar line of operation in the U.K. based investment trust companies. The terms like Investment Company, money fund, investment trust and mutual fund are used interchangeably and used to describe same thing in American literature. The term mutual fund has not been explained in British literature but it is considered as synonym of investment trust of U.S.A.

TYPES OF MUTUAL FUNDS

There are a number of mutual funds to suit the needs and preferences of investors. The choice of the fund is linked to the demand of the investor. The objective of earning helps in deciding the type of funds where investment is made. To achieve the differing objectives of the investors, mutual funds adopt different strategies and accordingly offer different schemes of investment. The various mutual funds may be classified under five broad categories:

A. According to ownership
According to ownership mutual funds may be classified as (i) public sector mutual funds and (ii) private sector mutual funds.

B. According to the scheme of operation
The most important classification of mutual funds is on the basis of the scheme of their operations as all types of mutual funds fall under this classification. According to the scheme of operations, the mutual funds could be divided into three categories, open ended bunds, close ended funds and the interval funds.

C. According to portfolio

Mutual funds can also be classified according to portfolio or the objectives of the fund. Some of these funds are discussed as follows:
(i) Income funds
(ii) Growth funds
(iii) Balanced or conservative funds
(iv) Stock or Equity funds
(v) Bond funds
(vi) Specialized funds
(vii) Leverage funds
(viii) Taxation funds
(ix) Money market mutual funds

D. According to location
Mutual funds can also be classified on the basis of location from where they mobilize funds, as:
(i) Domestic funds
(ii) Off-shore funds

E. Others types of mutual funds

In addition to the above mentioned mutual funds, there can be some other types of mutual funds also, such as, loan funds and non-loan funds based upon the expenses or fees to be charged. Hub and spoke funds which are basically fund of funds.

ADVANTAGES OF MUTUAL FUNDS

A mutual fund is a special type of institution which acts as an investment intermediary and channelises the savings of large number of people to the corporate securities in such a way that investors get steady returns, capital appreciation and a low risk. Mutual funds are becoming very popular world wide because of the following important advantages:

(i) Diversification – A large number of investors have small savings with them. They can at the most buy shares of one or two companies. When small savings are pooled and entrusted to mutual funds then these can be used to buy shares of many different companies. Thus investors can participate in a large basket of shares of different companies. This diversification of investment ensures regular returns and capital appreciation at reduced risks as all the eggs or not put in one basket.

(ii) Expert supervision and management – A small investor cannot be an expert in portfolio management. When he invests in mutual funds, he gets the benefit of expert supervision and management which mutual funds can afford because of large resources at their disposal. The funds can be professionally employed through the mutual funds ensuring good returns. The mutual fund managers also have extensive research facilities at their disposal. They can analyze the performance and prospectus of various companies and take better decisions in making investments.
(iii) Liquidity – A peculiar advantage of a mutual fund is that investment made in its schemes can be converted back into cash promptly without heavy expenditure on brokerage, delays. According to the regulations of Stock Exchange Board of India (SEBI), a mutual fund in India is required to ensure liquidity. For open ended schemes, the investor can always approach the mutual fund to repurchase units at declared net assets value (NAV). In case of close ended schemes, units can easily be sold in the stock market.
(iv) Reduced Risk – As mutual funds invest in large number of companies and are managed professionally the risk factor of the investor is reduced. A small investor, on the other hand may not be in a position to minimize such risks.
(v) Tax Advantage – These are certain schemes of mutual funds which provide tax advantage under the income tax act. Thus the tax liability of investors is also reduced when he invests in these schemes of the mutual funds.
(vi) Low operating costs – Mutual funds have large investible funds at their disposal and thus can avail economies of large scale. This reduces their operating costs by way of brokerage, fees, commission. Thus a small investor also gets the benefit of large scale economies and low operating costs.
(vii) Flexibility – Mutual funds provide flexible investment plans to its subscribers such as regular investment plans, regular withdrawal plans and dividend reinvestment plans. Thus an investor can invest or withdraw funds according to his own requirements.
(viii) Higher Returns – Mutual funds are expected to provide higher returns to the investors as compared to direct investment because of professional management, economies of scale, reduced risk.
(ix) Investor protection – Mutual funds are regulated and monitored by the Securities and Exchange Board of India (SEBI). The SEBI (Mutual funds) regulations 1996 which have replaced the regulations of 1993, provide better protection to the investors, impart a greater degree of flexibility and facilitate competition.
From the above discussed advantages, we can conclude that investing in securities through mutual funds is a better choice than investing directly for the small investors. In addition, mutual funds are also relevant to the national interest and they have to play the role to fill the gap between supply and demand in the capital market.

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