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Mutual Funds
What are Mutual Funds:
A mutual fund is a professionally-managed investment scheme, usually run by an asset management company that brings together a group of people and invests their money in stocks, bonds and other securities.
As an investor, you can buy mutual fund ‘units’, which basically represent your share of holdings in a particular scheme. These units can be purchased or redeemed as needed at the fund’s current net asset value (NAV). These NAVs keep fluctuating, according to the fund’s holdings. So, each investor participates proportionally in the gain or loss of the fund.
Structure of Mutual Funds:
The structure of mutual funds in India is very unique and robust. All the constituent entities involved function based on rules and regulations laid down by the Securities and Exchange Board of India (SEBI). In the year 1992, SEBI was formed with the objective to protect the interest of the investors and to regulate and promote the development of the securities market. With respect to mutual funds, SEBI controls and manages the functioning of mutual funds.
There are various stakeholders involved in a mutual fund but the core structure is three-tiered:
- Sponser
- Trustee
- Asset Management Company
Benefits of Investing in Mutual Funds
1. Diversification – One of the main advantages of investing in mutual funds is the kind of diversification it gives to the investor’s portfolio at a low cost. By investing in only one fund, an investor can get an exposure to at least 30-40 stocks with an investment amount of as low as INR 500.
2. Professional Management – For every investor, especially retail investors who do not have much knowledge about the capital market, mutual funds can be a boon. Every scheme has an expert who manages the allocation of funds to financial instruments. Mutual fund companies hire experts that have vast experience and spend dedicated time in the capital market to manage the money of the investors.
3. Transparency – Mutual funds are the only instrument which disclose all the details on a regular basis. Portfolio disclosure enables investors to understand exactly what proportion of fund money is investment in which particular instruments. Also, the portfolios are updated on a monthly basis. This makes investing in mutual funds reliable and transparent.
Options for Investment in Mutual Fund
There are primarily 3 options in which one can invest in a scheme of a mutual fund:
1. Growth: In this, all the profits made by the scheme are reinvested in the scheme.
2. Income Distribution and Capital Withdrawal (IDCW): By selecting this option, one can get income at the discretion of the scheme.
3. Income Distribution & Capital Withdrawal – Reinvestment (IDCW-R): In this option, the declared income by the scheme is reinvested in the same scheme instead of being disbursed to the investor.