What are mutual funds?
Mutual Funds are collective investment schemes. As an individual if you buy shares
in the market, there is only so much shares that you can buy with your capital.
Also you will not be too sure if they are the right stocks to buy because you may
not have the expertise and the time to evaluate the merits and demerits of the stock.
Mutual Funds resolve both these problems. They collect small amounts of money from
millions of investors and deploy the funds in assets like equities, bonds, money
markets etc. Firstly, by distributing the money across a variety of stocks, your
overall risk is reduced. This is called diversification. Secondly, fund managers
have deep expertise in the market and are supported by quality analysts and traders
who help them in the job. Hence their decisions are a lot more informed. When you
invest in mutual funds, you get both these benefits.
Types of mutual funds:
Mutual funds come in a variety of categories. There are equity funds that are largely
invested in equity shares. There are debt funds that invest in bonds issued by the
government of India and by other institutions and corporates. For those who want
a combination of equity and debt, there are balanced funds which invest in a mix
of equities and debt. For short term investors, there are liquid funds which invest
in liquid assets like call money, treasury bills, commercial paper etc. These liquid
funds give much lower returns but are very safe and can be easily converted into
cash. You also have mutual funds that are designed to invest in specific sectors
or in specific themes. For example, Infrastructure Fund, Software Fund, Pharma Fund
and FMCG Fund are examples of sector funds. Similarly, Mid-Cap Funds, Consumer Demand
Fund, Commodity Fund are examples of thematic funds.
Structure of a Mutual Fund…
Mutual Funds are managed and administered by the Asset Management Company (AMC).
The AMC handles all the functional and operating procedures pertaining to the mutual
fund. The AMC typically has a CEO who is overall in charge and a Chief Investment
Officer (CIO) who is in-charge of all investment decisions. Normally, there are
specialized fund managers for debt and equity. Secondly, there is the Board of Trustees,
which oversees the functioning of the AMC and ensures that the AMC is operating
in line with the Trust Agreement. Mutual Funds being market intermediaries are regulated
by SEBI. Debt funds and money market funds also report into RBI.
Mutual Funds in India:
The first mutual fund in India (US-64) was launched by UTI in 1964. In the mid-1980s,
PSU banks were permitted to float AMCs. It was only after private players were permitted
to float AMCs in 1993 that the mutual funds business took off in India in a big
way. The total assets under management (AUM) of the mutual fund industry in India
is Rs.21.2 trillion of which nearly Rs.7.1 trillion is equity funds and the balance
is debt, liquid and other funds. HDFC Mutual Fund, ICICI Pru Mutual Fund, Reliance
Mutual fund, Birla Mutual Fund, SBI Mutual Fund and Franklin Templeton Mutual Fund
are among the largest mutual funds in India in terms of AUM. Mutual Funds offer
a very smart and scientific way of investing in markets by keeping risk at the minimum