NISM Course Training in Hyderabad : Understanding of Mutual Funds
Stock Market : NISM NCFM Course in Hyderabad
Understanding of Mutual Funds:
Mutual fund is a vehicle to mobilize moneys from investors, to invest in different markets and securities, in line with the investment objectives agreed upon, between the mutual fund and the investors. In other words, through investment in a mutual fund, a small investor can avail of professional fund management services offered by an asset management company.
Why Mutual Fund Schemes?
Mutual funds seek to mobilize money from all possible investors. Various investors have different investment preferences. In order to accommodate these preferences, mutual funds mobilize different pools of money. Each such pool of money is called a mutual fund scheme. Every scheme has a pre-announced investment objective. When investors invest in a mutual fund scheme, they are effectively buying into its investment objective.
Types of Funds
Open-Ended Funds, Close-Ended Funds and Interval Funds
Open-ended funds are open for investors to enter or exit at any time, even after the NFO.
Close-ended funds have a fixed maturity. Investors can buy units of a close-ended scheme, from the fund, only during its NFO.
Interval funds combine features of both open-ended and close-ended schemes. They are largely close-ended, but become open-ended at pre-specified intervals. For instance, an interval scheme might become open-ended between January 1 to 15, and July 1 to 15, each year.
Actively Managed Funds and Passive Funds
Actively managed funds are funds where the fund manager has the flexibility to choose the investment portfolio, within the broad parameters of the investment objective of the scheme.
Passive funds invest on the basis of a specified index, whose performance it seeks to track.
Debt, Equity and Hybrid Funds
A scheme might have an investment objective to invest largely in equity shares and equity-related investments like convertible debentures. The investment objective of such funds is to seek capital appreciation through investment in this growth asset. Such schemes are called equity schemes.
Schemes with an investment objective that limits them to investments in debt securities like Treasury Bills, Government Securities, Bonds and Debentures are called debt funds.
Hybrid funds have an investment charter that provides for investment in both debt and equity. Of late, there have been funds that also invest in Gold along with either debt or equity or both.
Types of Debt Funds
Gilt funds invest in only treasury bills and government securities, which do not have a credit risk (i.e. the risk that the issuer of the security defaults).
Diversified debt funds on the other hand, invest in a mix of government and non-government debt securities such as corporate bonds, debentures and commercial paper. These schemes are also known as Income Funds.
Junk bond schemes or high yield bond schemes invest in companies that are of poor credit quality. Such schemes operate on the premise that the attractive returns offered by the investee companies makes up for the losses arising out of a few companies defaulting.
Fixed maturity plans are a kind of debt fund where the investment portfolio is closely aligned to the maturity of the scheme.
Floating rate funds invest largely in floating rate debt securities
Liquid schemes or money market schemes are a variant of debt schemes that invest only in short term debt securities.
Types of Equity Funds
Diversified equity fund is a category of funds that invest in a diverse mix of securities that cut across sectors.
Sector funds however invest in only a specific sector. For example, a banking sector fund will invest in only shares of banking companies. Gold sector fund will invest in only shares of gold-related companies.
Thematic funds invest in line with an investment theme. For example, an infrastructure thematic fund might invest in shares of companies that are into infrastructure construction, infrastructure toll-collection, cement, steel, telecom, power etc. The investment is thus more broad-based than a sector fund; but narrower than a diversified equity fund.
Equity Linked Savings Schemes (ELSS), as seen earlier, offer tax benefits to investors. However, the investment is subject to lock-in for a period of 3 years.
Equity Income / Dividend Yield Schemes invest in securities whose shares fluctuate less, and the dividend represents a larger proportion of the returns on those shares. The NAV of such equity schemes are expected to fluctuate lesser than other categories of equity schemes.
Arbitrage Funds take contrary positions in different markets / securities, such that the risk is neutralized, but a return is earned. For instance, by buying a share in BSE, and simultaneously selling the same share in the NSE at a higher price. Most arbitrage funds take contrary positions between the equity market and the futures and options market. (‘Futures’ and ‘Options’ are commonly referred to as derivatives. These are designed to help investors to take positions or protect their risk in some other security, such as an equity share. They are traded in exchanges like the NSE and the BSE. Although these schemes invest in equity markets, the expected returns are in line with liquid funds
These funds invest in Gold and Gold-related securities. Gold Exchange Traded Fund, Gold Sector Fund
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