| Human beings from their very inception want to | | | | Major types of mutual funds are: |
| earn and save something for unwanted situations. | | | | (1) Equity Schemes: investing primarily in equities |
| In earlier stage he puts his earnings under the soil | | | | with several plans such as growth plan, dividend |
| to keep it safe from being stolen. Later banking | | | | plan, and dividend reinvestment plan; |
| system was developed and subsequently | | | | (2) Bond Schemes: invest in government and |
| different kind of instruments for investment is | | | | corporate bonds of minimum and long duration, |
| being used. Nowadays, investments in share | | | | thus arising their income from interest. |
| market instruments are much preferred by big as | | | | (3) Balanced Schemes: invest in both equity and |
| well as small investors. Everyone wants to earn | | | | bonds based upon the specified policies and |
| extraordinary returns from share market booms. | | | | investment objectives; |
| And Mutual Funds are one of such ways through | | | | (4) Money Market Schemes: a relatively recent |
| investments in share markets are being carried | | | | phenomenon in India, such funds invest in very |
| out by small and marginal investors. A Mutual fund | | | | short term money market instruments at lesser |
| is an investment company that issues shares to | | | | risks. |
| the public. The money it receives from | | | | Once a mutual fund scheme has been floated, the |
| shareholders is pooled and invested in a wide | | | | buying and selling prices of its shares, known as |
| range of stocks, bonds, or other money market | | | | units, from day to day are related to the Net |
| instruments to meet specific investment | | | | Asset Value (NAV) of the units. A mutual fund is |
| objectives. The various instruments included in a | | | | required to calculate the NAV once a day based |
| fund's portfolio are handled by professional money | | | | on the closing market prices by valuing all assets |
| managers in line with the stated investment policy | | | | and liabilities at their current values. |
| of the fund. | | | | NAV per unit = (Market Value of Assets - |
| The essential purpose behind mutual fund is to | | | | Portfolio Liabilities)/No. of shares outstanding |
| secure two important benefits for small and retail | | | | SIP: an emerging trend |
| investors, viz. (i) minimization of risk through | | | | A systematic investment plan (SIP) commits the |
| diversification, and (ii) professional management of | | | | investor to invest a specified amount every |
| invested funds. Risk associated with investment | | | | month (or every quarter) in the units of a fund's |
| can be minimized by spreading the investment | | | | equity scheme. The number of units bought each |
| over a dozen, or even hundreds of companies, | | | | month for the investor under the plan will depend |
| which seems to be impossible for small investors. | | | | on the ruling price: fewer units are bought when |
| Thus, diversification of investment reduces risk. | | | | the price is high, and more units are bought when |
| Professional money management is required to | | | | price is low. This is a built-in advantage of SIPs. It |
| become successful in the game of investment. | | | | averages out investor's buying price over the |
| Most of small investors can not devote the time | | | | entire period of holding. The SIP resolves a |
| and resources required for managing their | | | | dilemma often facing investors due to ups and |
| investments. This is easily carried out by fund | | | | downs in the market price. The investors find it |
| managers, thus producing better results. | | | | difficult when to invest in equity scheme. |
| Mutual funds in India are structured as follows: | | | | The investors should not take it for granted that |
| Each mutual fund has a Board of Trustees, an | | | | SIP is always advantageous. The price level at the |
| Asset Management Company (AMC or the | | | | starting point is particularly important. The price |
| manager) and unit holders. In India, we also have | | | | level at the end of the period chosen is also |
| a promoters or sponsor who takes the initiative | | | | critical. The rigidity of most SIP schemes can be |
| of starting a mutual fund but has no active role | | | | both inconvenient and disadvantageous to the |
| after the fund has been launched. The sponsor | | | | investors. The investors should avoid a situation |
| remains only a shareholder of the AMC. As per | | | | forced redemption of accumulated units at unduly |
| the Securities and Exchange Board of India (SEBI) | | | | low price by building some flexibility in the choice |
| guidelines, the effective control of the AMC is not | | | | of redemption date. |
| with the sponsor but with the Board of Trustees. | | | | Hence, an investor should choose from among |
| SEBI guidelines provide the framework within | | | | the mutual funds those which have a record of |
| which mutual funds in India have to operate. | | | | consistently good performance and possess |
| Maximum limits have been prescribed for | | | | characteristics (e.g. industry composition of |
| management fees and other chargeable expense; | | | | investments) which will help to achieve good long |
| SEBI also regulates many other aspects of mutual | | | | term performance of investments. |
| funds' operations and policies. | | | | |