Mutual Fund Basics | What are Mutual funds and How to Invest in them | LKP

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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 level possible.

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