A Mutual Fund (MF) is a collective investment vehicle that pools money from multiple investors and invests it in a portfolio of securities such as shares, bonds and money-market instruments.

The pooled funds are managed by professional fund managers, who make investment decisions on behalf of the investors.Investors are allotted units of the mutual fund in proportion to their investment.

Regulation of Mutual Funds

Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Mutual Funds) Regulations, 1996.

How do Mutual Funds Work?

Pooling of Funds: Money collected from a large number of investors is pooled into a common fund.
Professional Management: A fund manager invests the pooled money in securities according to the scheme’s investment objective.
Diversified Portfolio: The fund may invest across different securities, companies, sectors or asset classes.
Units: Investors receive units representing their proportionate ownership in the scheme.
Returns: Gains or losses from the underlying portfolio are reflected in the value of the investor’s units.

Net Asset Value (NAV)

Net Asset Value (NAV) is the value or price of one unit of a mutual fund.
It represents the price at which investors buy (subscribe) or sell (redeem) units of a mutual fund scheme.
It is calculated by subtracting the fund’s liabilities from the total value of its assets and dividing the result by the total number of units held by investors.
- NAV = (Total Value of Assets − Liabilities) ÷ Total Number of Units
- Example: If a mutual fund has net assets worth ₹100 crore and 10 crore units, its NAV = ₹10 per unit.

Features and Advantages of Mutual Funds

Diversification: Investment across multiple securities reduces concentration risk associated with investing in a single security.
Professional Management: Investment decisions are taken by professional fund managers.
Affordability: Investors can participate with relatively small amounts, including through SIPs.
Liquidity: Open-ended schemes generally allow investors to purchase or redeem units on business days.
Transparency: Mutual funds are subject to periodic disclosure requirements relating to portfolios, performance and other information.
Wide Choice: Different schemes cater to different investment objectives, time horizons and risk appetites.
Regulated Investment: Mutual funds operate within the regulatory framework prescribed by SEBI.

Types of Mutual Funds

Mutual funds can be classified on different bases.

Based on Asset Class

Equity Funds
- Primarily invest in shares/equity of companies and generally seek long-term capital appreciation.
Debt Funds
- Primarily invest in fixed-income/debt securities, such as government and corporate bonds.
Hybrid Funds
- Invest in a combination of equity and debt securities, seeking a balance between growth and stability.
Money Market Funds
- Invest primarily in short-term money-market instruments such as Treasury Bills, Commercial Papers and Certificates of Deposit.

Based on Structure

Open-Ended Funds
- Investors can generally purchase and redeem units anytime at the applicable NAV.
Close-Ended Funds
- These have a fixed maturity and can only be subscribed to during the New Fund Offer (NFO) period.
- These have a fixed maturity period and can generally be subscribed to only during the New Fund Offer (NFO). Once invested, investors have to stay until maturity unless units are traded on the stock exchange..
Interval Funds: These combine features of open-ended and close-ended schemes by permitting transactions during specified intervals.

Based on Investment Objective

Growth Funds: Primarily seek capital appreciation.
Income Funds: Primarily seek regular income through income-generating securities.
Liquid Funds: Invest in short-term, highly liquid debt and money-market instruments.They allow easy withdrawal with low risk.
Tax-Saving Funds (ELSS): These equity-linked savings schemes offer tax deductions under Section 80C of the Income Tax Act.
Pension Funds: These are designed for long-term retirement planning. The allocation shifts gradually towards conservative assets as you approach retirement, ensuring better safety with age.

Based on portfolio management

Actively Managed Funds
- A fund manager actively selects securities with the objective of achieving the scheme’s investment objective.They’re dynamic, responsive to trends, and rely heavily on the manager’s expertise.
Passively Managed Funds
- These funds seek to replicate or track a specified market index, such as the Nifty 50 or Sensex, rather than actively selecting securities to outperform it.

Active Fund → Fund manager selects investments

Passive/Index Fund → Tracks an index

Modes of Investing in Mutual Funds

Lump Sum Investment
- The investor invests a larger amount at one time in a mutual fund scheme.
Systematic Investment Plan (SIP)
- SIP allows an investor to invest a fixed amount periodically, such as monthly, in a mutual fund scheme.

Taxation of Mutual Fund Investments

Returns from mutual funds are subject to taxation, and the tax treatment depends mainly on the type of mutual fund, nature of return and holding period.
Capital Gains: A capital gain arises when mutual fund units are sold or redeemed at a price higher than their purchase price. Capital gains are taxed only when the investor sells or redeems the mutual fund units, and not merely because their NAV has increased.
Dividends: Mutual funds may distribute income to investors in the form of dividends. Unlike capital gains, dividend income is taxable in the hands of the investor when it is received.

Important Mutual Fund Terminologies

Assets Under Management (AUM): Total market value of the assets being managed by a mutual fund or scheme.
Portfolio: Collection of securities and other assets held by a mutual fund scheme.
Benchmark: An index or standard against which a fund’s performance may be compared.
Expense Ratio: Expenses charged by the fund for managing and operating the scheme, expressed relative to its assets.
Exit Load: Charge that may be imposed when units are redeemed within a specified period.
Redemption: Process through which an investor sells/redeems mutual fund units and receives the applicable amount.
Lock-in Period: Specified period during which units cannot ordinarily be redeemed.
SIP: Facility for investing a predetermined amount periodically in a mutual fund scheme.
Holding Period: This is the duration between buying and selling the units. It determines whether your profit is classified as a short-term or long-term gain.

FAQs

1. What is a Mutual Fund?

A Mutual Fund is a collective investment vehicle that pools money from multiple investors and invests it in securities such as equities, bonds and money-market instruments.

2. Who regulates Mutual Funds in India?

Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Mutual Funds) Regulations, 1996.

3. What is NAV in a Mutual Fund?

Net Asset Value (NAV) represents the value of one unit of a mutual fund scheme.

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Mutual Funds

Mutual Funds

Regulation of Mutual Funds

How do Mutual Funds Work?

Net Asset Value (NAV)

Features and Advantages of Mutual Funds

Types of Mutual Funds

Modes of Investing in Mutual Funds

Taxation of Mutual Fund Investments

Important Mutual Fund Terminologies

FAQs

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