Mutual Fund
Mutual Funds are a vehicle which mobilize investor‟s savings, to invest in different markets and securities, in line with the investment objectives agreed upon, between the Mutual Fund and the investors. It is a pool of money managed by a professional Fund Manager wherein the investors with same objective come together.
It is construed as a trust that collects money from a number of investors sharing a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities. The income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting applicable expenses and levies, by calculating a scheme‟s Net Asset Value or NAV. In other words, the money pooled in by a large number of investors is what makes up a Mutual Fund.
Mutual Funds can design a scheme for any kind of investment objective. Thus, the Mutual Fund structure, through its various schemes, makes it possible to tap a large corpus of money from diverse and different kind of investors. Therefore, the Mutual Fund offers schemes. Usually across the industry, the words fund and scheme are used inter-changeably. Various categories of schemes are called “funds”. The money that is raised from investors, benefits governments, companies or other entities, directly or indirectly, to raise moneys to invest in different projects or pay for various expenses.
The Mutual Fund can keep a check on the operations of the investee company, and their corporate governance and ethical standards as it is a large investor.
Large number of people are associated with the Mutual Fund industry. These include employees working in the AMCs, registrars, banks, national distributors, etc. There are several thousand MFDs who are associated with this industry too. Collectively they boost the revenue collection and help the economy grow.
Mutual Fund Operations
Mutual Fund schemes announce their investment objective and seek investments from the public. Depending on how the scheme is structured, it may be open to accept money from investors, either during a limited period only or at any time.
The investment that an investor makes in a scheme is translated into a certain number of „Units‟ in the scheme. Thus, an investor in a scheme is issued units of the scheme. Under the law, every unit has a face value of Rs10. (However, older schemes in the market may have a different face value). The face value is relevant from an accounting perspective. The number of units multiplied by its face value (Rs10) is the capital of the scheme – it’s Unit Capital. The scheme earns interest income or dividend income on the investments it holds. Further, when it purchases and sells investments, it earns capital gains or incurs capital losses termed as Short Term Capital Gain/Loss and Long Term Capital Gain/Loss. They are realized capital gains or realized capital losses as the case may be. Investments owned by the scheme may be quoted in the market at a higher than the cost paid.
Investments is said to have been handled profitably, if the following profitability metric is positive:
(A) Interest income (B) + Dividend income (C) + Realized capital gains (D) + Valuation gains (E) – Realized capital losses (F) – Valuation losses (G) – Scheme expenses When the investment activity is profitable, the true worth of a unit goes up; when there are losses, the true worth of a unit goes down. The true worth of a unit of the scheme is otherwise called the Net Asset Value (NAV) of the scheme
When a scheme is first made available for investment, it is called a „New Fund Offer‟ (NFO). During the NFO, investors may have the chance of buying the units at their face value. Post-NFO, when they buy into a scheme, they need to pay a price that is linked to its NAV.
If the scheme has a positive profitability metric, its AUM goes up; a negative profitability metric will pull it down. Further, if the scheme is open to receiving money from investors even post-NFO, then such contributions from investors boost the AUM. Conversely, if the scheme pays any money to the investors, either as dividend or as consideration for buying back the units of investors, the AUM falls. The AUM thus captures the impact of the profitability metric and the flow of unitholder money to or from the scheme.
Types of Funds
Open-ended funds are open for investors to enter or exit at any time, even after the NFO. When existing investors buy additional units or new investors buy units of the open-ended scheme, it is called a sale transaction. It happens at a sale price, which is equal to the NAV. When investors choose to return any of their units to the scheme and get back their equivalent value, it is called a re-purchase transaction. This happens at a re-purchase price that is linked to the NAV.
Close-ended funds are open for subscription only during the NFO period and are launched for a limited time period.
Interval Funds are open for a limited time.
Mutual Fund Categorization
It would be highly insightful to know the latest categories and their further classification as per the regulations launched by SEBI. The schemes are broadly classified into the following categories-
- Equity Funds: The equity funds are divided into the following 11 sub-categories, namely large-cap, large & mid-cap, mid-cap, small-cap, multi-cap, flexi-cap, dividend yield, value, contra, focused, sectoral/thematic fund, and Equity Linked Saving Scheme.
- Debt Funds: The debt funds are divided into 16 sub-categories, namely overnight, liquid, ultra-short duration, low duration, money market (MMF), short duration (STF), medium duration indicating a moderate level of maturity, medium term to long duration, long duration, dynamic bond, corporate bond, credit risk, banking & PSU (Public Sector Unit), Gilt, Gilt fund with 10-year constant duration and floater fund.
- Hybrid Funds: The hybrid funds are divided into six sub-categories i.e. conservative hybrid fund, balanced hybrid fund, aggressive hybrid fund, balanced advantage fund, multi-asset allocation fund, arbitrage fund, and equity savings fund.
- Solution Oriented Funds: The solution-oriented funds are divided into the following 2 sub-categories i.e. retirement fund and children‟s fund. These funds will have a lock-in period of at least 5 years.
- Other Funds: The other funds have been further divided into the following 2 sub-categories i.e. index funds and fund of funds.
For citing this article use:
- Jafri, A. H. (2022). Impact of Global recession on India mutual funds.
