A diversified portfolio of securities that is aimed to attract yields and appreciation of their value is called mutual funds. A mutual fund is an investment vehicle that investors use to increase the value of their savings. There are different managers for different fund. Their main task is to increase the return and to minimize the risk.
Mutual Funds and their Types
The profits that are earned in investment is distributed by the investors based on the unit held by them. As there is a huge number of investors, the risk is minimized. In India, the mutual funds are governed by the association of mutual funds. Also, this body, in turn, is managed by the securities and exchange board of India.
Types of Mutual Funds
Here, open end means a scheme where mutual funds offer units as a sale. In this scheme, the duration is not mentioned for redemption. Also, there is no fixed entry to the fund as well as no fixed maturity.
Thus, it depends on the investors and they can subscribe anytime for this scheme. Also, investors have an option to redeem their holdings anytime.
The name is close-ended because the period of maturity for this scheme is fixed. Also, the corpus in these funds is fixed. Thus, an investor can only subscribe to this scheme directly during the initial phase.
The main purpose of these funds is to provide maximum return or income to the investors. In these funds, the investment is done in the stocks that yield the highest returns. Also, capital appreciation in these funds or of little importance. Furthermore, these types of funds distribute the income that is earned by them in a cyclical manner.
Under the interval scheme, a mutual fund is kept open for a specific period of time. After this time period, it operates as a closed scheme. So, it is a combination of both closed and open-ended schemes.
Benefits of Mutual Funds
As mutual funds are managed professionally it reduces the risk factor. Also, they are invested in a huge number of companies. Thus, the risk factor is reduced more.
There are a large number of investors that has savings with them. Thus, these small savings are brought together and a mutual fund is created. So, this can be used to buy the share of many different companies. Also, because of this diversification, the investment ensures capital appreciation and regular return.
There are many schemes in a mutual fund that provide a tax advantage under the new income tax act. So, the liability of paying the tax of an investor is also reduced. This can be possible only when he/she invests in mutual funds.
Mutual funds are monitored and regulated by the SEBI. Thus, it provides better protection to its investors. Also, this makes sure that there is no legal obligation for the investors.
Questions on Mutual Funds
Q. Which is the first commercial bank in India to launch a mutual fund?
C. Canara Bank
D. Bank of India
Answer: A. SBI
Q. Which of the following organization is the regulator of mutual funds in India?
Answer: B. SEBI