What is a Mutual Fund?
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 appreciations realized are shared by its unit holders in proportion to the number of units owned by them.
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.
A debt fund may invest in short-term or long-term bonds, securitized products, money market instruments or floating rate debt. The main investing objectives of a debt fund will usually be preservation of capital and generation of income. Performance against a benchmark is considered to be a secondary consideration to absolute return when investing in a debt fund.
The following are the categories of Debt Mutual Funds distributed by us:
- Gilt funds invest predominantly in treasury bills and government securities.
- Income funds invest in corporations and governments bonds and other interest earning securities. In return, the corporations and government pay interest to the fund.
These funds are interest-rate sensitive, meaning that if interest rates falls, the value of income fund share may rise, and if interest rates rise, the value of debt fund share may fall.
- Liquid schemes or money market schemes are a variant of debt schemes that invest only in debt securities where the moneys will be repaid within 91 days. These are widely recognized to be the lowest in risk among all kinds of mutual fund schemes.
- Short-Term funds are a type of fund that invests in short-term investments of high quality and low risk. The goal of this type of fund is to protect capital with low-risk investments while achieving a return that beats a relevant benchmark
- Ultra Short-Term funds that invest in money market instruments. Ultra Short Term funds have no entry and exit loads in most cases.
- Monthly Income Plan (MIP) seeks to declare a dividend every month. It therefore invests largely in debt securities. However they make investment in equity shares to improve the scheme's yield. There are two categories of MIP:
- MIP - Aggressive
- MIP - Conservative
What are the advantages of investing in a Mutual Fund?
- Professional Management
Mutual funds offer investors the opportunity to earn an income or build their wealth through professional management of their investible funds
Units of a scheme give investors exposure to a range of securities held in the investment portfolio of the scheme. Thus, even a small investment in a mutual fund scheme can give investors a diversified investment portfolio.
- Economies of scale
The pooling of large sums of money from so many investors makes it possible for the mutual fund to engage professional managers to manage the investment. Individual investors with small amounts to invest cannot, by themselves, afford to engage such professional management.
Investors in a mutual fund scheme can recover the value of the moneys invested, from the mutual fund itself. Depending on the structure of the mutual fund scheme, this would be possible either at any time, or during specific intervals, or only on closure of the scheme.
- Tax benefits
Specific schemes of mutual funds (Equity Linked Savings Schemes) give investors the benefit of deduction of the amount invested, from their income that is liable to tax. This reduces their taxable income, and therefore the tax liability. Further, the dividend that the investor receives from the scheme is tax-free in his hands.
- Regulatory Comfort
The regulator, Securities & Exchange Board of India (SEBI), has mandated strict checks and balances in the structure of mutual funds and their activities. These are detailed in the subsequent units. Mutual fund investors benefit from such protection.
Frequently Used Terms:
Net Asset Value (NAV)
Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.
Sale Price is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load.
Repurchase Price is the price at which units under open-ended schemes are repurchased by the Mutual Fund. Such prices are NAV related.
Redemption Price is the price at which close-ended schemes redeem their units on maturity. Such prices are NAV related.
Sales Load is a charge collected by a scheme when it sells the units. Also called, 'Front-end' load. Schemes that do not charge a load are called 'No Load' schemes.
Repurchase or 'Back-end' Load is a charge collected by a scheme when it buys back the units from the unit holders.
Disclaimer: DBS Bank Ltd. only distributes/refers certain third-party products and services and the same is on a non risk participation basis. The agreement for these products would be solely between the customer and the product provider. The customer shall not hold the Bank responsible for any gains/loss arising from the investments into these products.