A mutual fund is a pool of money, collected from investors, and is invested according to certain investment options. A mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. A mutual fund is created when investors put their money together. It is therefore a pool of the investor's funds. The money thus collected is then invested in capital market instruments such as shares ,debentures and other securities. The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them.
The most important characteristics of a fund is that the contributors and the beneficiaries of the fund are the same class of people, namely the investors. The term mutual fund means the investors contribute to the pool , and also benefit from the pool . There are no other claimants to the funds. The pool of funds held mutually by investors is the mutual fund .
A mutual funds business is to invest the funds thus collected according to the wishes of the investors who created the pool. Usually , the investors appoint professional investment managers, to manage their funds. The same objective is achieved when professional investment managers create a product and offer it for investment to the investor. This product represents a share in the pool ,and pre states investment objectives. Thus a mutual fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified , professionally managed basket of securities at a relatively low cost.
Investors in the mutual fund industry today have a choice of 39 mutual funds, offering nearly 500 products. Though the categories of product offered can be classified under about a dozen generic heads, competition in the industry has led to innovative alterations to standard products. The most important benefit of product choice is that it enables investors to choose options that suit their return requirements and risk appetite. Investors can combine the options to arrive at their own mutual fund portfolios that fit with their financial planning objectives.
[...] High financial goals risk appetite Transition stage Near term needs for Liquid and medium term funds as per specified investment . needs draw closer Preference for income and debt products. Reaping stage Higher liquidity Liquid and medium term requirements investment for income low risk appetite Inter generation Long term investment Low liquidity needs , transfer of inheritance Ability to take risks and invest for the long term Sudden wealth surge Medium to long term Wealth preservation . Preference for low risk products. [...]
[...] Investors can easily transfer their holdings from one scheme to the other, get updated market information But roses have thorns as well While the benefits of investing through mutual funds far outweigh the disadvantages, an investor and his advisor will do well to be aware of a few shortcomings of using the mutual funds as investment vehicles. No Control over Costs: An investor in a mutual fund has no control over the overall cost of investing. He pays investment management fees as long as he remains with the fund, albeit in return for the professional management and research. [...]
[...] However, income distributed to unit-holders by a closed-end or debt fund is liable to a dividend distribution tax of 10% plus a surcharge of 2%,i.e., a tax of this tax is also applicable to distributions made by open-end equity funds ( i.e., funds with more than 50% of their portfolio in equity) on or after April The impact on the Fund and the Investor It should be noted that although this tax is payable by the fund on its distributions and out of its income, the investors pays indirectly since the fund's NAV, and therefore the value of his investment will come down by the amount of tax paid by the fund. [...]
[...] Funds are generally distinguished from each other by their investment objectives and types of securities they invest in. The major types of funds available Money Market Funds Often considered to be at the lowest ring in the order of risk level. Money Market Funds invest insecurities of short term nature which generally means securities of less than one year maturity. The typical short term interest bearing instruments these funds invest in Treasury Bills issued by governments, Certificate of Deposits issued by banks and Commercial Paper issued by companies. [...]
[...] Portfolio classification projects the combination of investment instruments and investment avenues available to mutual funds to manage their funds. Any portfolio scheme can be either open ended or close ended. Operational Classification Open ended schemes : As the name implies the size of the scheme (fund) is open i.e. not specified or pre determined. Entry to the fund is always open to the investor who can subscribe at any time. Such fund stands ready to buy or sell its securities at any time. [...]
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