What is a Mutual Fund?

What is a Mutual Fund? 

A mutual fund is a financial tool formed by a pool of cash collected from several investors to invest in securities like stocks, bonds, securities industry instruments, and different assets. Mutual funds are run by skilled fund managers, who allot the fund's assets and decide to turn out capital gains or income for the fund's investors. A mutual fund's portfolio is structured and continues to match the investment objectives written in its prospectus. 
Mutual funds offer small or individual investors access to professionally managed portfolios of equities, bonds, and alternative securities. Every stockholder, therefore, participates equally in the gains or losses of the fund. Mutual funds invest in a very large range of securities, and performance is typically tracked because the modification within the total market cap of the fund—is derived from the aggregating performance of the underlying investments. 

Understanding Mutual Funds 

  • Suppose we planned a family tour? There are always some capable people who volunteer to try and do the look. They book the venue, organize accommodation, arrange the transport, and create the payments as they arise. Everyone else just contributes their share of the price. 
  • The process of planning a family tour may facilitate understanding the thought of mutual funds as an investment tool that collects cash from an outsized group of investors. 
  • Similarly, once arranged the tour, the contributions from your members of the family are pooled along. Here, your members of the family may represent the 'large group of investors'. The share that every person pays is their 'investment'. 
  • A professional fund manager or a fund management team decides on a way to use this pool of cash. They allot the investors’ cash across different asset classes. 
  • The mutual fund sector functions under the SEBI (Mutual Fund) laws of 1996, however, a change from time to time.

KEY POINTS 

  • An open-end fund could be a style of investment vehicle consisting of a portfolio of stocks, bonds, or alternative securities. 
  • Mutual funds provide tiny or individual investors access to distributed, professionally managed portfolios. 
  • Mutual funds are divided into many types of classes, representing the types of securities they invest in, their investment objectives, and therefore the style of returns they obtain. 
  • Mutual funds charge annual fees (called expense ratios) and, in some cases, commissions, which might have an effect on their overall returns. 
  • The overwhelming majority of cash in employer-sponsored retirement plans goes into mutual funds. 

How Mutual Funds Work 

  •  A mutual fund is both an investment and an actual company. This twin nature could appear strange, however, it's not different from however a share of TCS could be an illustration of TCS. Once an investor buys TCS stock, he's buying partial possession of the corporate and its assets. Similarly, a mutual fund investor is buying partial possession of the mutual fund company and its assets. 
  • Investors usually earn a return from a mutual fund in 3 ways: 
  • Income is earned from dividends on stocks and interest on bonds controlled within the fund's portfolio. A fund pays out nearly all the financial gain it receives over the year to fund owners within the kind of distribution. Funds typically offer investors an alternative either to receive a check for distributions or to reinvest the earnings and obtain additional shares. 
  • Suppose the fund sells securities that have raised in value, the fund includes a capital gain. Most funds also pass on these gains to investors in a very distribution. 
  • Suppose fund holdings increase in value but don't seem to be sold by the fund manager, the fund's shares increase in value. You'll then sell your mutual fund shares for a profit in the market. 
  • Mutual funds are subject to trade regulation that ensures answerableness and fairness to investors. 

 History of Mutual Funds in India: 

  • In India, mutual fund starts with forming of the Unit Trust of India (UTI) in 1963. Brought into being by an Act of Parliament, UTI was started and controlled by the reserve bank of India (RBI) till 1978. That year, the Industrial Development Bank of India (IDBI) replaced the tally as the UTI regulator and administrative authority. 
  • The first mutual fund scheme launched by UTI was Unit scheme 1964 (US 64). By the end of 1988, the overall market price of UTI investments amounted to Rs 6,700 crore. 

In June 1987, SBI launched the first non-UTI mutual fund. Between 1987 and 1992, five alternative public sector banks started mutual funds of their own: 

  1. Can bank in December 1987 
  2. Punjab national bank in August 1989 
  3.  Indian Bank in November 1989 
  4.  Bank of India in June 1990 
  5.  Bank of Baroda in Oct 1992
  • In 1989 the life insurance corporation of India (LIC) launched its mutual fund. The General Insurance Corporation of India (GIC) followed suit in December 1990. 
  • By 1993, the market price of investments within the mutual fund sector had ballooned to Rs 47,004 crore. 

Types of Mutual Funds 

Mutual funds can be classified into 5 sorts relying upon the assets they invest in. Let’s take a glance at the types before we tend to explore them intimately. They are classified into 

Equity funds

These mutual funds invest most of the fund cash in shares of various firms. 

Debt funds

Mutual funds that invest primarily in invariable securities like government bonds, company bonds, debentures, etc. are referred to as debt funds.

Hybrid funds

Hybrid funds invest in a mixture of equities and fixed-income securities. 

Solution-oriented schemes

These mutual funds are slightly completely different from the above three. These schemes are designed to satisfy a particular goal, like retirement planning or to fund children’s academic expenses. 

Other schemes

Excluding these, there are different kinds like index funds and funds of funds. Don’t worry concerning these simply nonetheless.  

Rise of private sector mutual funds 

  • The first personal sector mutual fund was launched in 1993. The fund house that set it up—Kothari Pioneer—has since incorporated with Franklin Templeton. 
  • In the same year, the first mutual fund regulations came into being. These regulated all mutual funds except those registered underneath UTIs. The 1993 SEBI (Mutual Fund) regulations were later replaced by additional comprehensive and revised investment trust laws in 1996. 
  • The entry of the non-public sector led to increasing in India’s mutual fund sector. That’s because: 
  •  New mutual fund houses were launched 
  •  Foreign mutual funds arrived on the scene 
  •  Mergers and acquisitions occurred 
  •  By the end of Jan 2003, India had thirty-three mutual funds with a total assets value of Rs 121,805 crore. Indian investors currently had additional fund homes to decide on from. 
Pros Cons
Liquidity High fees, commissions, and alternative expenses
Diversification Large money presence in portfolios
Minimal investment needs No Federal Deposit Insurance Corporation coverage
Professional management Difficulty in comparison funds
Variety of offerings Lack of transparency in holdings

Bottom Line on Mutual funds nowadays 

  Mutual funds stay extremely popular in India nowadays. That’s because: 

  •  The investment method is simple and fast 
  •  The returns are smart 
  •  Investors don’t want any market experience 
  •  Besides, there are such a large number of options! As a mutual fund investor, you'll be able to select from among forty-three asset management companies (AMCs) that offer more than 1,700 schemes! 
  •  There are more than 1,700 mutual fund schemes that you simply will invest in. 

In 2019–20, the business had assets under management (AUM) price of around Rs 27 lakh crore. 

Frequently Asked Questions

How many types of investments are in Mutual funds?

Mutual funds provide investors with the option to try each. The 2 ways in which one can invest in mutual funds are either through lumpsum investments or through Systematic Investment Plans (SIPs).