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Mutual Funds

What is a Mutual Fund?

A Mutual Fund pools the money received from individuals and Companies. The collected money is then invested in equity shares, Government securities, Bonds, call money markets etc. The profits are distributed to unit holders of the Mutual Fund schemes. This is an indirect form of Investment in different assets such as Equities, and Debt Instruments.

How are Mutual Funds regulated in India?

Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds in India. All the mutual funds have to get registered with SEBI with the exception of UTI, since it is a corporation formed under a separate Act of Parliament.

Are Mutual funds considered as risk-free investments?

No. Mutual fund investments are not risk free as investing in mutual funds contains the same risk as investing in the underlying stocks / bonds. However due to diversification and professional fund management the risk is mitigated to a great extent.

What are the advantages of investing in a Mutual Fund?

Retail investors do not have the time, knowledge and expertise to analyze and invest in Equity shares and Bonds. Mutual Funds is the best investment alternative due to the following reasons:

  • Mutual Funds provide diversification by investing in a variety of assets.
  • Mutual Funds can be invested for small amounts through units of the scheme and is best suited for all types of Retail Investors due to its flexibility.
  • Mutual Funds are managed by qualified professional fund managers supported by Research Analysts who perform a detailed analysis of the companies they invest in.
  • Liquidity is very high and Mutual Fund units can be sold and purchased with little effort

What are open-ended and closed-ended schemes in Mutual Funds?

Open-ended schemes mutual fund have no limit to size of the corpus. Investors are allowed to enter and exit open-ended mutual funds at any point of time. The sale and purchase is done based on the prevailing net asset value (NAV) of the scheme.

In case of closed-ended funds, the total size of the corpus is limited by the size of the initial offer. As per SEBI, all closed-ended funds have to be listed on the stock exchange. Hence, in cases of close-ended funds, the secondary market provides an exit route.

What are the different categories of funds in India?

Some of the categories of Mutual Funds in India are Income fund, Debt Funds, Balanced funds, Growth funds, Sector funds. International Funds etc.

What are the options available to an Investor while investing in any mutual fund scheme?

Broadly there are three categories. A dividend plan has the facility of regular dividend payments to the investors. A reinvestment plan is a plan where dividend amount is reinvested in the scheme. A growth plan is one where no dividends are declared and the investor only gains through capital appreciation in the NAV of the fund.

What is a Systematic Investment Plan (SIP) and how does it work?

In the case of a systematic investment plan or SIP, an investor contributes a fixed amount every month, the units to be invested are calculated based on the NAV prevailing on the date of Investment and added to the individual account.

What are the advantages of investing through a Systematic Investment Plan (SIP)?

In case of salaried individuals SIP provides an opportunity to invest small amounts monthly instead of a lump sum amount which may be difficult for an individual. Also an SIP has the distinct advantage of rupee cost averaging. This means you are able to acquire more units in a falling market and vice versa.