Mutual Funds

 Mutual Fund: A Mutual Fund organization is a pure intermediary

which performs a basic function of buying and selling securities on
behalf of its unit-holders, which the later also can perform but not as
easily, conveniently, economically, and profitably.

 The investors in the Mutual Fund are given the share in its total funds
which is proportionate to their investments, and which is evidenced
by the unit certificates.

 One of the major features of the operations of this kind of

organization is that the financial claim(s) it issues is formally almost
identical with the major asset(s) it holds.

 Unlike other financial institutions, whose liabilities and assets differ

sharply in their nature, unit trust issue claims (units) which have, like
it assets (equity stock), claim on a proportionate part of the portfolio.

 However, unlike shareholders of a company, the shareholders of

Mutual Funds do not have any voting rights.
 Mutual Funds special objective or advantage is to provide investors of
small and moderate means of opportunity, that is enjoyed by large, rich
investors, like realizing high and secure rate of return on their savings.

 This is sought to be ensured by diminishing the risk of investing in

stocks by spreading or diversifying investments over a large number of
different kinds of stocks.

 In general, mutual funds do not guarantee the returns to the investors.

In the case of a guaranteed return scheme, the particulars of the
guarantor and the modality in which the guarantee shall be met must be
disclosed in the offer document by the mutual fund.

 Investments in Mutual Funds are not guaranteed by the Government of

India, the RBI, the SEBI or any other government body.

 As per the regulations of SEBI, the mutual funds are required to send
the dividend warrants within 30 days of declaration of the dividend.
And, the proceeds form repurchase or redemption must be dispatched
within 10 working days from the date on which the request is made by
the unit holder.
 Advantages and Disadvantages of Mutual Fund Investments:
Many investors cannot directly invest in instruments such as CDs, CPs,
and TBs because the minimum required investment in them is quite
large.

 They also find it almost impossible to achieve diversification through

direct investment on their own because they have either limited funds to
invest, or it is too expensive to do so in terms of brokerage costs,
knowledge and time.

 Mutual Funds confer instantaneous and substantial diversification of the

available fund which is the most necessary thing to reduce risk.

 Mutual Funds also provide investors continuous supervision and

analysis, investment consultancy, judicious investment decision and
expert, experienced, professional management of portfolio at affordable
costs.

 Though the investors have to pay sales, management, administrative fees

and transaction costs still the cost of investment through Mutual Funds
tends to be much lower than that of direct investment of their own.
 Mutual Funds provide a number of benefits in comparison to other
forms and avenue of investments. This is particularly true, where
investors have limited resources in terms of capital and skills to carry
out detailed research and market monitoring.

 The major advantages of Mutual Fund investments are as

follows:-

i. Mutual funds are managed by a body of professional managers who

are highly experienced and have the requisite skills to manage fund
efficiently.

 Usually, Mutual Funds are backed by a research team which

constantly observe the market, carry out intensive analysis and
suggest the fund manager for efficient portfolio management.

 Hence the performance of Mutual Fund Schemes depend on the

quality of Fund Managers employed.
ii. Mutual Funds do not invest their total fund in a specific company,
rather, they allocate their funds across industries and sectors. This
reduces the idiosyncratic component of individual company’s risk.

 The investors hold a diversified portfolio even with a small amount of

investment that would otherwise required a big amount of capital.

iii. It reduces administrative jargons, save time and makes investing

easy. Also, it helps to avoid many problems such as bad deliveries,
delayed payments and unnecessary follow up with brokers and
companies.

iv. It has been observed that over a medium to long term, mutual funds
have the potential to provide a high return as they invest in a
diversified basket of selected securities.

v. Investors bear a low cost by investing in Mutual Funds as brokerage,

custodial and other fees are relatively less as compared to directly
investing in the capital markets.
vi. One of the important concerns of investors is liquidity of funds. The
mutual fund schemes are found to be more liquid than other
investment alternatives as there is always a market for its units. The
investor can sell his units at the currently prevailing NAV (Net Asset
Value) and realize their money.

vii. The Mutual Fund companies regularly disclose to investors their

related value of investment and in which companies the investments
have been made, the proportion of investment in each class of assets
and the fund manager’s investment strategy and outlook.

viii. Through features such as Systematic Investment Plans (SIPs),

Systematic Withdrawal Plans (SWPs), Systematic Transfer Plans
(STPs) and dividend reinvestment plans, one can systematically invest
or withdraw funds according to his requirements and expediency.

ix. Many Mutual Funds not only cater to the need of the investors but
also allow them to switch from one fund to another according to the
investor’s choice.
x. Above all, Mutual Funds are highly regulated as it is mandatory for
them to get registered with SEBI and also they function within the
provisions of strict regulations designed to protect the interests of
investors.

 Though Mutual Funds extend a lot of benefits to the investors,

still it suffers from the following limitations:-

i. Through diversification Mutual Funds definitely reduce risk, but it

does not insure against any losses of funds that may occur during
turmoil.

ii. On the one hand, diversification reduces risk; but on the other hand,
diversification has a disadvantage of dilution. This implies that
investment in a single security may double its value over a certain
period whereas in a mutual fund investment, the security counts
only a small part.
iii. Despite the liquidity of mutual funds, most mutual funds (particularly,
open-ended funds) cannot be bought or sold in the middle of the
trading day. One can only buy and sell them at the end of the day once
current value of holdings is calculated.

iv. Mutual Funds usually maintain large cash reserves as protection against
a large number of simultaneous withdrawals. Although this provides
investors with liquidity, it means that some of the fund’s money is
invested in cash instead of assets, which tends to lower the investor’s
potential return.

 Mutual Funds and Economic Growth: Mutual Funds help ensure

capital market stability by providing Structure, Clarity and
Transparency.

 They stimulate economic growth with important benefits in local

economies, such as employment and are ‘the biggest source of capital
for companies giving small and medium-sized businesses
unprecedented access to capital markets.’
 The role of Mutual Funds is not just to provide average people with a
vehicle to invest – but a vehicle to invest wisely. And help and
empower them by giving them opportunities like save for retirement,
buy a house, financing children's education etc.

 If one is not keeping up with inflation, he is falling behind and the

key is wise investment and wise investing understands that meeting
personal goals is still more important than beating the market and
when it comes to meeting long-term goals, time in the market beats
timing the market.