Mutual funds are a type of certified managed combined investment schemes that gathers money from many investors to buy securities. There is no such accurate definition of mutual funds, however the term is most commonly used for collective investment schemes that are regulated and available to the general public and open-ended in nature. Hedge funds are not considered as any type of mutual funds.
Mutual funds are identified by their principal investments. They are the 4th largest category of funds that are also known as money market funds, bond or fixed income funds, stock or equity funds and hybrid funds. Funds are also categorized as index based or actively managed.
In a mutual fund, investors pay the funds expenditure. There is some element of doubt in these expenses. A single mutual fund may give investors a choice of various combinations of these expenses by offering various different types of share combinations.
The fund manager is also known as the fund sponsor or fund management company. The buying and selling of the funds investments in accordance with the funds investment is the objective. A fund manager has to be a registered investment advisor. The same fund manager manages the funds and has the same brand name which is also known as a fund family or fund complex.
As long as mutual comply with requirements that are established in the internal revenue code, they will not be taxed on their income. Clearly, they must expand their investments, limit the ownership of voting securities, disperse most of their income to their investors annually and earn most of their income by investing in securities and currencies.
Mutual funds can pass taxable income to their investors every year. The type of income that they earn remains unchanged as it gets transferred to the shareholders. For e.g., mutual fund distributors of dividend income are described as dividend income by the investor. There is an exception: net losses that are incurred by a mutual fund are not distributed or passed through fund investors.
Mutual funds invest in various kinds of securities. The various types of securities that a particular fund may invest in are mentioned in the funds prospectus, which explain the funds investments objective, its approach and the permitted investments. The objective of the investment describes the kind of income that the fund is looking for. For e.g., a "capital appreciation" fund generally looks to earn most of its returns from the increase in prices of the securities it holds rather than from a dividend or the interest income. The approach of the investment describes the criteria that the fund manager may have used to select the investments for the fund.
The investment portfolio of a mutual funds investment is continuously monitored by the funds portfolio manager or managers who are either employed by the funds manager or the sponsor.
Classifications of Mutual Funds:
Based on Tenure:
1) Open Ended Schemes: They can be bought or sold at any time at the prevailing NAV and do not have any fixed tenure.
2) Close Ended Schemes: They have a fixed tenure with a fixed corpus available during a specified period of time with a defined maturity date.
Based on Asset Class:
1) Equity Funds: They are invested in stocks.
The Equity Funds are sub-classified depending upon their investment objective, as follows:
- Diversified Equity Funds
- Sector Specific Funds
- Large Cap Funds
- Mid Cap Funds
- Small Cap Funds
- Multi Cap Funds
Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.
2) Debt Funds: A debt fund may invest in short-term or long-term bonds, securitized products, money market instruments or floating rate debt.
3) Hybrid Funds: They are invested partially in stocks and partially in money market
4) Real Funds: They are invested in commodities
Based on Investment Philosophy:
1) Diversified Equity Funds: The funds are diversified across sectors to reduce the overall portfolio risk.
2) Sector Funds: They are invested in a particular sector, like Manufacturing
3) Index Funds: track the components of a market index, such as the Standard & Poors 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.
4) Exchange Traded Funds: Exchange Traded Funds (ETFs) are open ended mutual funds that are passively managed and most of them seek to mirror the return of an index, a commodity or a basket of assets.
5. Fixed Maturity Plans: They invest in fixed income instruments, like bonds, government securities, money market instruments having a fixed maturity date. It could be 15 days, 30, 90, 141, 180 or even 365 days.
Mutual Funds are great methods to save tax and plan retirement. One can start SIPs early in tax saving funds so that when financial year ends you are in no hurry and at the same time your tax savings are properly planned. Similarly, investing through SIPs in mutual funds is a perfect planning to retire rich. Start early and even a monthly investment of Rs 2000 - 5000/- can make you crorepati when you retire - Start your retirement planning now!