Mutual Fund – Meaning, Types & problems of Mutual Funds in India

MUTUAL FUND

Mutual funds refers to a professionally managed investment scheme that brings together a group of people and invests their money in stocks,bonds and other securities. Mutual funds are operated by professional money manager,who allocate the funds investment and attempt to produce capital gains and or income for the funds investors.

These funds give small or individual investors access to professionally managed portfolios of equities, bonds and other securities. All the mutual funds are registered with SEBI. They function within the provisions of strict regulation create to protect the interests of the investor.

In other words, A mutual fund is an investment vehicle made up of a pool of money collected from many investors for the purpose of investing in securities. Such as stocks, bonds, money market instruments and other assets.

Mutual funds are operated by professional money managers who allocate the funds investment and attempt to produce capital gain or income for the fund investor. A mutual funds portfolio is structured and maintain to match the investment objectives stated in its prospectus.

In india the mutual fund was started in 1964 when unit trust of India (UTI) was establish in the similar line of operation of the UK investment companies. The terms mutual fund has not been explained in British literature but it is considered as synonym of investment trust of USA.

One of the greatest advantages of investing through a mutual fund is that it gives small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult to create with a small amount of capital.

It is definitely not a one size fits all formula with mutual funds. Existence of different types of mutual funds investments allows investors to create a well diversified investment portfolio. One need not have a lot of money to begin in mutual Funds. These promote disciplined investing and give investors several options to make investing a regular habit. Mutual Funds are transparent. There are no hidden charges in Mutual Fund investments.

All the required information about the fund’s holdings,performances and assets are available to all investors.These funds offer liquidity. Some Mutual Funds allow investors to withdraw money from their investment in the fund. Regular performance records of all the Mutual Funds are maintained by Mutual Fund houses. These records are carefully analysed and audited . This ensures a degree of trust between the mutual Fund an the investors.

However, Mutual Funds have varying degrees of market risk and the value of Mutual Fund will often fluctuate. Due to this fluctuation in the mutual Funds value , investors often find that they get less than they expected from their investment. On the contrary,variety,accessibility, simplicity, affordability and professional management make mutual fund investment an attractive option for beginners and advanced investors as well.

KEY POINTS ABOUT MUTUAL FUNDS

1.Mutual Funds are transparent in nature.

2.There are no hidden charges in Mutual Funds investment.

3.All the required information about the fund’s holding is available to customers. 

4.Mutual Funds offer liquidity.Some Mutual Funds allow investors to withdraw money from their investment.

5.Mutual Funds are risky and vary over the market and fluctuation.Before investing, kindly read all the documents related to investment.

6.Mutual Fund based on the market risk and fluctuating periods.

7.All the Mutual funds are registered with the SEBI (Stock Exchange Board of India) Economic scale and operational efficiency.

8.Easy to access and track digitally.

9.It contains low type of trading costs.

Types Of Mutual Fund

There are are a number of mutual funds to suit the needs and performances of investors. The choice of the fund is link to the demands of the investor.The objective of earning helps in deciding the type of funds where investment is made to achieve the different objectives of the investors.The various types of mutual funds can be classified under this catagories.

According to Ownership

According to ownership mutual fund in india may be classified as:

Public sector mutual fund

Unit trust of India or (UTI) has been functioning in the area of mutual fund business in india.1963-64.However it was only after 23 years in 1987 second fund was establish by SBI. Thus UTI is monopoly in mutual fund business was break by the central government by opening mutual fund for the requirment of common investors.

Private sector mutual fund

Due to the success and growth of mutual fund in the indian capital market the government of india allowed to private sector in mutual fund industry on Feb 14 1992.A number of private sector companies have approsed SEBI for permission to setup private mutual funds.

According to Scheme Of Operation

According to the scheme of operation the mutual fund could be devided in to three catagories.

Open-ended scheme

In open ended scheme mutual fund offers units for sell without specifying any duration for redemption (Repayment of Principal account).These schemes do not have a fix maturity and entry to the fund is always open to investors who can invest at any time. The unit scheme of UTI,Dhan raksha and Dhan bridhi of LIC,Mutual Fund are some example of open ended scheme.

Close-ended scheme

A close ended scheme means any scheme of mutual fund in which the period of maturity is specified. The close ended scheme is fixed and an investor can subscribe directly to the scheme only at the intial time of issue. After the intial time is close the person can buy or sell the units of the scheme from the secondary market. Dhanashri dhansamridhi scheme of LIC mutual fund, Canshare scheme of Canada Bank, Swarnajyoti scheme of India Bank are some of the example of close ended scheme.

Interval scheme

An interval scheme is a scheme of mutual fund which is kept open for a specific interval and after that it operates as a close scheme. It is combined the feature of both open and close ended scheme.

According to portfolio

Income Funds

These funds aim at providing maximum current return to the investors.The investments are made in stocks yielding higher return and capital appreciation of small importance.

Growth Fund

These fund aim at providing capital appreciation in the value of investment such funds investment in growth oriented securities have a potential for long run.

Stock/Equity Fund

These funds mainly invest in shares of the companies.The investment may vary from blue chip companies to newly established companies.They undertake the risk associated with the share of companies.A social type of equity fund is known as never beat market fund.

Bond Funds

These fund employ their resources in bonds.These investments ensure fixed and regular income.sometimes bonds are available in the market at lower than face value.

Taxation Fund

Mutual funds may be design to suit the tax pay to the contributors to such funds get some concession in income tax return.

Money Market Mutual Fund

Money market mutual fund means a scheme of mutual fund which has been set up with the objective of investing exclusively in money market instrument.

According to Location

Domestic Fund

These funds are the funds which mobilise saving of people within the country where the investments are made.

Offshore Fund

Offshore mutual funds are those funds which raise or mobilise funds in countries other than where investment are to be made.These attract foreign savings for investment in india.

Other type of mutual Fund

There can be other type of mutual funds are available such as loan funds and non loan funds based on the fees to be changed and spoke fund which are basically fund of fund etc.

Advantages Of Mutual Fund

A mutual fund is a special type of institution which acts as an intermediary of investment and mobilise the saving.

1.Liquidity

Mutual fund is the investment made in that schemes can be converted back in to cash easily without heavy expenditure on brokerage,delays etc.

2.Reduce Risk

As mutual fund invest in large number of companies and are managed by professionally the risk factor of the investor is reduced. A small Investor on the other hand may not be a position to minimise such risk.

3.Expert supervision and management

A small Investor can not be an expert at portfolio management when he invest in mutual fund he get the benefit of expert supervision and management which possible because of large resources.

4.Flexibility

Mutual fund provide flexibility in investment to regularised the investment plan,regular withdrawal plan, dividend, reinvestment plan etc.

6.Tax feature

There are certain schemes of mutual fund which provide tax advantage under the income tax act.

7.Diversification

Mutual fund diversified the small savings in to large investment.They can buy shares,when small savings pulled and entrusted to mutual fund then this can be used to buy the shares of many different companies.

Problems Of Mutual Fund In India

1.Liquidity crisis

Mutual Fund in india face liquidity problem.Investor are not able to withdraw or drawback from some of the scheme bad delivery has caused a lot of problem and liquidity crisis.

2.Lack of Innovation

Mutual funds in india have not been able to provide innovative scheme in terms of risk,liquidity, and choice of the investors.

3.Poor risk management

According to the survey about 50% of the mutual fund are not managing risk properly and another 50% do not have documented risk procedure.

4.Inadequate resources

In india their is a lack of resources to pull of the investment in the path of development.So the mutual fund can not provide sufficient fund for investment.

5.Inadequate Research

Most of the mutual fund in india are suffering because of inadequate research facilities most of the funds depends on external research and have no facilities for in house research.

6.Delays in services

Mutual funds in india also not been able to provide quick and ahequate service to the investors.

7.No provision for performance guarantee

Mutual funds in india have so far fail to provide performance guarantee to the investors in many cases that has been destroy erosion of capital.

Roll of Mutual Fund in Capital Market Development

1.Mutual fund have contributed significant link in brodening and depending of different segments of the money market and to some extend the government securities market.

2.The growth of the indian mutual fund industry is an indicator of the efficient financial market.

3.Mutual funds are essentially investment vechicles where people with similar investment objective.It funds an important part of the capital market.

4.Mutual funds providing the benefits of a expert fund mangement and diversified the resources to a large or small investors.

5.Mutual funds are plays an important role in the capital market development.

6.Mutual fund pull the resources of small investors,increasing the participation which help efficiently functioning the market.

7.Decission made on the basis

of deeper understanding of risk and return contribute to financial stability.

8.Mutual fund provide transferency in investment and startergy or outcomes.It raise the confidence of investors in capital market. 

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