What is Mutual Fund?

A mutual fund pools the money of people with similar investment goals. The money in turn is invested in various securities depending on the objectives of the mutual fund scheme, and the profits/loss are shared among investors in proportion to their investments.

Mutual fund schemes are usually open end (perpetually open for investments and redemptions) or closed end (with a fixed term).A mutual fund scheme issues units that are normally priced at Rs.10 during the initial offer. Thus the number of units you own as against the total number of units issued by the mutual fund scheme determines your share in the profits or loss of a scheme.

In the case of open-end schemes, units can be purchased from or sold back to the fund at a Net Asset Value (NAV) based price on all working days.

What are the types of mutual funds?

Mutual funds can be classified based on their objectives as:

Equity Funds:

Equity funds seek to provide maximum growth of capital with secondary emphasis on dividend or interest income. They invest in common stocks with a high potential for rapid growth and capital appreciation. An equity fund gives an exposure to the stock market. The fund would have long-term growth potential but provide low current income. They are not suitable for investors who are risk averse and are focused on maximizing current income or conserving principal.

The overriding objective of the Asset Management Companies (AMC) in managing its investments is to produce a consistently above average long-term performance.

The AMC believes in a bottom-up approach to stock picking. This means that the focus is on the fundamental quality of companies as opposed to a focus on favoured sectors and market movements.

The AMC will follow a structured investment process in order to identify the best stocks for inclusion in the portfolio. This would involve consistently examining all stocks under an internally developed research framework. A stock would be considered or inclusion in the portfolio when the valuation does not adequately capture its underlying fundamental value in the AMC's opinion based on the above factors.

The AMC's portfolio management style is conducive to a low portfolio turnover rate. However, the AMC will take advantage of the opportunities that present themselves from time to time because of inefficiencies of the securities markets. The AMC will endevour to balance the increased cost on account of higher portfolio turnover with the benefits derived therefrom.

Balanced Funds:

Balanced funds are more evenly invested in equities and income securities. Balanced and equity-income funds are suitable for conservative investors who want high current yield with some growth. If you seek to generate long-term capital appreciation and current income, an investment in the balanced fund would be ideal. It gives you an exposure to the stock market without the entire risk of the stock market. The AMC proposes to invest in a mix of equities and fixed income securities with the aim of generating capital appreciation, while at the same time minimizing the volatility inherent in pure equity schemes. With this aim, the AMC would allocate the assets between equity and fixed income instruments within the limits laid down for each scheme.

Debt Funds:

The goal of fixed income funds is to provide high current income consistent with the preservation of capital. Growth of capital is of secondary importance. These funds invest in corporate bonds or government securities that have a fixed rate of return. The funds are suitable for investors who want to maximize current income and who do not wish to assume a high degree of capital risk in order to do so. Since bond prices fluctuate with changing interest rates, there is some principal risk involved despite the fund's conservative nature.

The AMC aims to identify securities, which offer superior levels of yield at lower levels of risks. With the aim of controlling risks, rigorous in-depth credit evaluation of the securities proposed to be invested in will be carried out by the investment team of the AMC. The credit evaluation includes a study of the operating environment of the company, the past track record as well as the future prospects of the issuer, the short as well as longer-term financial health of the issuer. Rated debt instruments in which the Scheme invests will be of investment grade as rated by a credit rating agency. In case a debt instrument is not rated, specific approval of the Board of the AMC will be obtained for such an investment. In addition, the investment team of the AMC studies the macro economic conditions, including the politico-economic environment and factors affecting liquidity and interest rates. The AMC would use this analysis to attempt to predict the likely direction of interest rates and position the portfolio appropriately to take advantage of the same.