What is a Mutual Fund?
- Mutual fund as the term suggests means Mutual ( large number of investor ) who have combined their money and form a fund. Mutual funds are basically a basket of different asset in which an investor's money is invested according to the financial planning of the investor it can be for small, mid, and also term as well.
What is the advantage of a mutual fund
- Out of all the other securities and asset class mentioned in the blog mutual fund is very different from them as a mutual fund is very flexible which generates returns not only from fixed incomes but also market appreciation. There is a famous saying "Don't lay all your eggs in one basket" a mutual funds does that work for you. A mutual fund a basket that comprises of different assets like Bonds, equity, Gold, and others like government securities . For any financial investment decision diversification is the key. Also the liquidity of a Mutual Funds is very high when comparing it to others investment options.
Structure of a Mutual Fund
- Mutual funds have a 3 tier structure of sponsor, trustee and asset management companies known as AMCs. A sponsor is a promoter of the fund there can be more than 1 sponsor and it also can be a bank, corporate and NBFC ( non banking financial company like L&T). A trustee are responsible to protect the money of investors and it also require a prior approval of SEBI has to be taken before a person is appointed as a trustee. AMC is appointed by trustee or Sponsor it manages day to day actives of the scheme further AMC appoints R&T agents who are responsible for processing of purchases and repurchase of the fund. AMC also appoints the bank the money goes into that account or scheme. AMC also appoints AMC auditor who are responsible to audit the AMC account. Then comes the distributors who are responsible to sell the Mutual funds to the investors plus investors receives tax benefits for holding till a particular tenure for equity funds it's more than a year and for debt it is more than 3 years
Types of Mutual funds
- Before AMCs did not follow any standard method to divide the scheme of mutual funds and had different scheme with same features. This caused a lot of confusions among the investors so SEBI came up with a regulation on the characterisation of a mutuals funds in 2007 there are 5 broad characteristics
- Equity scheme ( 10 sub category )
- Debt ( 16 sub category)
- Hybrid ( 6 sub category)
- solutions oriented ( 2 sub category)
- Other scheme ( 2 sub category)
In this blog we will only discuss basics of Equity, debt and hybrid scheme
Equity funds
- Equity schemes are the ones in which invest in a portfolio of equity or equity related instruments which are stocks usually investment in equity has more risk than in other schemes since the money is invested in a company and the investor becomes a part owner of the company but a high risk can also generate high returns there is a trade off.
Debt funds
- In debt funds the investor lends the money at a fixed rate and for a particular time. The money can be invested in Bonds, PPF and FDs. The investor gets the return in terms of fixed income securities which depends on bases of tenure ( long term, short term) and bases of issuers ( banks, government and corporate) this debt instrument is less risky than equity but also generates less returns on average.
Hybrid funds
- Is a type of mutual fund which invest in more than one asset class usually a combination of equity and debt. In this the risk and return are balanced since it comprises of both high volatile and low volatile funds so hybrid funds aims to offer long term capital appreciation through equity and short term stability through fixed income from debt.
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