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Mutual Fund Operation Flow Chart
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Advantages of Mutual Funds
i) Portfolio Diversification
Mutual Funds spread the investment across different securities (stocks, bonds,
money market instruments, real estate, fixed deposits etc.) by investing in a
number of companies across a broad cross-section of industries and sectors
(auto, textile, information technology etc.). This kind of a diversification may add
to the stability of your returns and reduces the risk with far less money than you
can do on your own.
ii) Convenient and flexibility
Mutual fund management companies offer many investor services that a direct
market investor cannot get. Investors can easily transfer their holdings from one
scheme to the other ,get updated market information
Investor hold share or bonds they cannot directly ,easily and quickly
sell.Investment in mutual fund on the other hand,is more liquid. An investor can
liquidate the investment by selling the units to the fund if open ended, or selling
them.
v) Affordability
vi) Variety
.
Disadvantages of Mutual Funds
While the benefits of investing through mutual funds far outweigh the
disadvantages, an investor and his advisor will do well to be aware of few
shortcomings of using the mutual fund as an investment vehicle.
i) No Tailor-made-Portfolios
Investors who invest on their own can build their own portfolios of shares, bonds
and other securities.Investing through funds means, the investor delegates the
decision of investing through which securities to fund manager. The very high-
net-worth individuals or large corporates may find this as a constraint in
achieving their objectives. However this constraint can be overcome to some
extent by offering families of schemes to investor, within the same fund.
Investor pays the investment management fees as long as he remains within the
fund. Fees are usually payable as a percentage of the value of his investments,
whether the fund value is rising or declining. The investor also pays the fund
distribution cost, which he would not incur in direct investment.
iii) Managing a Portfolio of Funds
Availability of a large number of options from mutual funds can actually mean too
much choice for the investor. He may again need advice on how to select a fund
to achieve his objectives
TYPES OF MUTUAL FUND
BY STRUCTURE
BY INVESTMENT OBJECTIVE
• Growth Funds
• Income funds
• Balance Funds
• Money Market Funds
• Gilt Funds
• Index Funds
• Load Funds
• No Load Funds
OTHER SCHEMES
i) Open-ended Funds
An open-end fund is one that is available for subscription all through the year.
These do not have a fixed maturity. Investors can conveniently buy and sell units
at Net Asset Value (NAV) related prices. Hence, the unit capital of the schemes
keeps changing each day. Such schemes thus offer very high liquidity to
investors and are becoming increasingly popular in India.
A closed-end fund has a stipulated maturity period which generally ranging from
3 to 15 years. The fund is open for subscription only during a specified period.
Investors can invest in the scheme at the time of the initial public issue and
thereafter they can buy or sell the units of the scheme on the stock exchanges
where they are listed. In order to provide an exit route to the investors, some
close-ended funds give an option of selling back the units to the Mutual Fund
through periodic repurchase at NAV related prices. SEBI Regulations stipulate
that at least one of the two exit routes is provided to the investor.
Closed-ended schemes are usually more illiquid as compared to open-ended
schemes .
i) Growth Funds
The aim of growth funds is to provide capital appreciation over the medium to
long- term. Such schemes normally invest a majority of their corpus in equities. It
has been proven that returns from stocks, have outperformed most other kind of
investments held over the long term. Growth schemes are ideal for investors
having a long-term outlook seeking growth over a period of time. Growth funds
are less volatile.
Index Funds replicate the portfolio of a particular index such as the BSE sensitive
index, S&P NSE 50 index(Nifty).These schemes invest in the securities in the
same weight age comprising of an index. NAV’s of such schemes would rise or
fall in accordance with the rise or fall in the index, though not exactly by the same
percentage due to some factors known as “Tracking Error” in technical terms.
Necessary disclosure in this regard is made in the offer document of the mutual
fund scheme. There are also exchange traded index funds launched by the
mutual funds which are traded on the stock exchanges.
i) Load Funds
A Load Fund is one that charges a commission for entry or exit. That is, each
time you buy or sell units in the fund, a commission will be payable. Typically
entry and exit loads range from 1% to 2.5%. It could be worth paying the load, if
the fund has a good performance history.
A No-Load Fund is one that does not charge a commission for entry or exit. That
is, no commission is payable on purchase or sale of units in the fund. The
advantage of a no load fund is that the entire corpus is put to work.
Other Schemes
These schemes offer tax rebates to the investors under specific provisions of the
Indian Income Tax laws as the Government offers tax incentives for investment
in specified avenues. Investments made in Equity Linked Savings Schemes
(ELSS) and Pension Schemes are allowed as deduction u/s 88 of the Income
Tax Act, 1961.
Industry Specific Schemes invest only in the industries specified in the offer
document. The investment of these funds is limited to specific industries like
InfoTech, FMCG, and Pharmaceuticals etc.
As there are Entry Loads, there exist Exit Loads as well. As Entry Loads
increase the cost of buying, similarly Exit Loads reduce the amount received
by the investor. Not all schemes have an Exit Load, and not all schemes have
similar exit loads as well. Some schemes have Contingent Deferred Sales
Charge (CDSC). This is nothing but a modified form of Exit Load, wherein the
investor has to pay different Exit Loads depending upon his investment
period.
If the investor exits early, he will have to bear more Exit Load and if he
remains invested for a longer period of time, his Exit Load will reduce. Thus
the longer the investor remains invested, lesser is the Exit Load. After some
time the Exit Load reduces to nil; i.e. if the investor exits after a specified
time period, he will not have to bear any Exit Load.