What Are Mutual Funds?

What Are Mutual Funds?

Recently, SEBI announced a major change in mutual funds investment. Now multi-cap mutual funds have a compulsion to invest 25% each in mid, large, and small capitalization funds. But before we delve into that, let us understand what mutual funds are, their various aspects, and how to calculate their value.

Crux of the Matter

What Are Mutual Funds?
A mutual fund (MF) is an investment company, which brings together money from many people and invests in stocks, bonds, or other assets. Fund’s portfolio includes combined holdings of stocks, bonds, or other assets it owns. Generally, a professional Fund Manager manages the fund.

The entire amount of investment is distributed in units. Investors buy these units instead of buying stocks directly. Therefore, mutual fund investors are sometimes called unitholders. Mutual Funds based on flexibility of investing are categorized as:

  • Open-ended – Can invest and redeem anytime.
  • Closed-ended – Can invest only at the start and redeem when its tenure ends.
  • Interval – Can invest or redeem only at some predefined dates.

Active & Passive Management
Portfolio management is the process of managing underlying assets (equity, debt, gold, etc) through buying, selling, and holding. Mutual Funds can be Passively or Actively managed.

Passive fund management generally involves replicating a benchmark index, in which a
fund manager tries to match the returns of the set benchmark. For instance, a benchmark for a Mutual Fund can be NIFTY 50, in which the fund would try to match the returns of that index.

In active fund management, a fund manager actively looks after which assets to buy, sell, or hold based on quantitative, technical, and/or fundamental analysis.

The cost of the passive fund is less whereas the cost of active funds is more. Generally, Open-ended MFs are passively managed, whereas Closed-ended MFs are actively managed.

Types Based On Investment

  • Equity MF – Invest in equities, and are considered risky but with a potential of a higher return.
  • Debt MF – Invest in bonds of Governments, banks, and corporates and are considered safe but with a low potential for returns as bonds fetch a fixed amount of interest.
  • Hybrid MF – Invest in both equity and bonds, and are considered to have a moderate risk with moderate returns.
  • Other MFs – Invest in gold, real estate, commodities, etc. individually or have mixed assets. These funds are also considered to have a moderate risk with moderate returns prospects.

NAV states the per share/unit price of the mutual fund on a specific date or time.

Now that you have a basic understanding of Mutual Funds, you can read about SEBI’s major announcement for mutual funds: SEBI Announced New Norms For Mutual Funds

  • An index fund is a mutual fund designed to follow certain preset rules so that the fund can track a specified basket of underlying investments. The first theoretical model for an index fund was suggested in 1960.
  • Dollex 30 is the USD version of the SENSEX. It is designed to measure the performance of the 30 largest, most liquid and financially sound companies across key sectors of the Indian economy that are listed at BSE Ltd.
  • The first modern investment funds were established in the Dutch Republic. In response to the financial crisis of 1772–1773, Amsterdam-based businessman Abraham van Ketwich formed a trust named Eendragt Maakt Magt (“unity creates strength”).