MS 44 IGNOU MBA Solved Assignment -Discuss the concept of mutual funds and describe various types of schemes issued by mutual funds.

Discuss the concept of mutual funds and describe various types of schemes issued by mutual funds.

CONCEPT OF MUTUAL FUNDS :

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

       Every Mutual Fund is managed by a fund manager, who using his investment
         Any change in the value of the investments made into capital market instruments
in which these funds invest are called �sovereign� securities and they are assigned the
highest credit rating. These securities, usually, doesn�t carry any credit risk. However,
they carry interest rate risk due to fluctuations of their trading prices based on current
interest rate environment in the economy and a plethora of fundamental economic
conditions. The ideal investment horizon depends on the type of gilt security scheme chosen
� medium term or long term. Usually, an investment horizon of more than 1 year is
recommended.
Bond funds: These schemes invest in securities issued by central government, state
government, public sector companies and private sector companies. The objective of these
schemes is to provide a consistent high return from a portfolio of bonds comprised of the
securities described above. The ideal investment horizon is about 1 year to 2 years.
Fixed Maturity Plans: These schemes have a fixed maturity date wherein the scheme gets
matured. These schemes are closed ended in nature. They are open for a fixed duration, at
first, during which investors can subscribe for units of the scheme. After the fixed duration
gets over, the schemes close for further subscriptions. Units are allotted only to the persons
who have invested during the initial opening period. The plans have fixed maturities like 3
months, 6 months, 1 year, etc. After such a fixed period or on maturity date, units of the
investors are bought back by the mutual fund at the NAV applicable on that day. The
objective of these schemes is to provide a fixed income for a fixed period to the unit holders
from a portfolio of various types of debt instruments.
 
 Open-ended schemes
Close-ended schemes
Growth schemes
Balanced schemes
Income schemes
Money market schemes
Tax saving schemes
Index schemes
Sector-specific schemes
Exchange-traded funds
Capital protection funds
Types of Mutual Funds Scheme in India

• By Structure

• Open - Ended Schemes

• Close - Ended Schemes

• Interval Schemes

• By Investment Objective

• Growth Schemes

• Income Schemes

• Balanced Schemes

• Money Market Schemes

• Other Schemes

• Tax Saving Schemes

• Special Schemes

• Index Schemes

Sector Specfic Schemes

             When you invest in a mutual fund, your earnings are derived from two potential

sources: any appreciation in the value of your fund shares and any fund distributions. Your

total return is a combination of these two elements.

         Once you have determined your fund's total return, you can compare your returns to

the market and to mutual funds with similar investment objectives.

Mutual fund is a trust that pools money from a group of investors (sharing common

financial goals) and invest the money thus collected into asset classes that match the stated

investment objectives of the scheme. Since the stated investment objectives of a mutual

fund scheme generally forms the basis for an investor's decision to contribute money to the

pool, a mutual fund can not deviate from its stated objectives at any point of time.

management skills and necessary research works ensures much better return than what an

investor can manage on his own. The capital appreciation and other incomes earned from

these investments are passed on to the investors (also known as unit holders) in proportion

of the number of units they own.When an investor subscribes for the units of a mutual fund, he becomes part owner

of the assets of the fund in the same proportion as his contribution amount put up with the

corpus (the total amount of the fund). Mutual Fund investor is also known as a mutual fund

shareholder or a unit holder.

(such as shares, debentures etc) is reflected in the Net Asset Value (NAV) of the scheme.

NAV is defined as the market value of the Mutual Fund scheme's assets net of its liabilities.

NAV of a scheme is calculated by dividing the market value of scheme's assets by the total

number of units issued to the investors

The following are broadly the schemes offered by mutual fund companies.

Income Category

       This category of schemes invests only into debt instruments issued by government, public or private companies.

Liquid Funds: These schemes invest in short term income instruments such as certificate

of deposits, treasury bills and short-term bonds. The objective of these schemes is to

provide current income with high liquidity. The ideal investment horizon is 1 day to 1

month.

Short-Term Income Funds: These schemes invest in short-term money market

instruments and corporate bonds. The objective of these schemes is to provide a higher

current income than liquid funds but without compromising the liquidity. The ideal

investment horizon is 1 month to 3 months.

Medium-Term Income Funds: These schemes invest in medium-term treasury bills and

corporate bonds. The objective of these schemes is to provide a higher current income

than short-term income funds with reasonable liquidity. The ideal investment horizon is 3

months to 6 months.

Long-Term Income Funds: These schemes invest in medium to long term treasury bills,

dated government securities and corporate bonds. The objective of these schemes is to

provide consistent returns higher than medium term income funds with reasonable

liquidity. The ideal investment horizon is more than 6 months to 2 years.

Floating Rate Funds: These schemes invest in short-term to long-term instruments

comprising of government securities and corporate bonds. The objectives of these

schemes to provide consistent returns by investing in floating rate instruments, which are

indexed to interest rate or consumer price indexes. These schemes also provide

reasonable liquidity to the investors. The ideal investment horizon depends on the type of

floating rate scheme chosen � short term floating rate scheme, medium term floating

rate scheme, floating rate income scheme, etc.

GILT Funds: These schemes invest in securities issued by the government. The securities

These funds do not have a fixed maturity and one can invest in such funds on any working day, during business hours. Investors can buy or sell units of open-ended schemes directly from the fund house at NAV related prices.

Such funds have a fixed maturity period and are open for subscription only for a specified period. After the expiry of this period, investors can buy or sell the units on the stock exchanges where such funds are listed. Some funds also have the option of periodic repurchase, whereby investors can sell back their units to the fund at NAV related prices.

Interval schemes

Interval schemes are a combination of both open and close-ended schemes. Investors can purchase or redeem their shares from the fund house at pre-determined intervals at NAV related prices

Such funds are aimed at capital appreciation over the medium to long term. Usually, such funds invest a major portion of the portfolio in equities.

Such funds have a balanced portfolio and invest in equity and preference shares in addition to fixed income securities. The aim of such funds is to provide both income and capital appreciation over a long-term.

These schemes invest primarily in fixed income instruments issued by the government, banks, financial institutions and private companies. The main objective of income schemes is preservation of capital and to provide fixed income over the medium to long term.

Money market schemes invest in short-term debt instruments, which earn interest and have high liquidity. Though these are considered to be the safest investment option, such funds are subject to fluctuations in the rates of interest.

Such schemes are aimed at offering tax rebates to investors under specific provisions of the Income Tax Act, 1961. For instance, investors of Equity Linked Savings Schemes (ELSS) and Pension Schemes are applicable for deduction u/s 88 of the Income Tax Act, 1961.

Such funds strive to mirror the performance of specific market indices, such as the BSE SENSEX, CNX Nifty, etc which are called the base index. Investments in such funds are made in the same stocks as the base index and in similar proportion.

Such funds invest in a specific industry or sector. The investments could be in a particular industry (Banking, Pharmaceuticals, Infrastructure, etc) or a group of industries, or various segments (like ‘A’ Group shares). 

Such funds are listed and traded on the stock exchange in a similar manner as stocks. Such funds invest in a basket of stocks and aim at replicating an index (S&P CNX Nifty, BSE Sensex) or a particular industry (banking, information technology) or commodity (gold, crude oil, petroleum).

These funds are designed to safeguard the capital invested therein, by investing in suitable securities.

      Wide variety of Mutual Fund Schemes exist to cater to the needs such as financial

position, risk tolerance and return expectations etc. The table below gives an overview into

the existing types of schemes in the Industry.