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MUTUAL FUNDS AND EQUITY MARKET

MUTUAL FUNDS AND EQUITY MARKET. MEANING OF MUTUAL FUNDS :-

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MUTUAL FUNDS AND EQUITY MARKET

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  1. MUTUAL FUNDS AND EQUITY MARKET MEANING OF MUTUAL FUNDS :-    A Mutual Fund is a financial intermediary that pools the savings of investors for collective investments in a diversified portfolio of securities. According to SEBI (Mutual Funds) Regulations, 1996, a mutual fund is “a fund established in the form of a trust to raise money through the sale' of units to the public or a section of the public under one or more schemes for investing in securities including money market instruments.“     Mutual funds raise money by selling shares / units of funds to the public. Mutual funds use this money to purchase various assets such as stocks, bonds and money market instruments. The mutual fund industry in India has been witnessing an annual growth rate of 9% for past five years and is expected to grow better

  2. ROLE OF MUTUAL FUNDS Mutual funds plays an important ROLE in promoting a healthy capital market. They provide active support to secondary market and increase liquidity of capital market and bring stability in financial market. Role of mutual fund can be explained with the help of following points :- • 1.Mobilises Savings :- • Mutual funds play an important role in mobilising savings of millions of investors across the country. In mutual funds, savings of small investors are mobilised, invested and returns are distributed in the same proportion to the unit holders. • 2.Instrument Of Investing Money :- • Now-a-days bank rates have become very low so, keeping large amount of money in bank does not give higher returns. People can invest in stock market. But a common investor is not well informed about the complexities involved in stock market movements. Here mutual funds play an important role in helping common public to get higher returns. • 3.Protection To Small Investors :- • A small investor is not safe in share market. In mutual industry there is no such risk. Mutual funds help to reduce the risk of investing in stocks by spreading or diversifying investments. Small investors enjoy the benefit of diversification.

  3. 4. Tax Benefit :- Investors in mutual funds enjoy tax benefits. Dividend received byinvestors is tax free. Tax exemption is allowed on income received on units of mutual funds and UTI. Investment in mutual funds enjoy wealth tax exemption within the overall limit of Rs. 5 lakhs.. No tax shall be charged on gifts of mutual fund unitsuptoRs. 30,000. • 5.    Diversification :- Investment in mutual funds enable investors to spread out and minimise the risks upto certain extent. Mutual fund invests in a diversified portfolio of securities. This diversification helps to reduce risk since all the stocks do not fall at same time. Thus investors are assured of average income which is not possible in other sources.

  4. 6. Multi - Purpose Service :- Mutual funds introduces variety of innovative schemes containing various benefits. Innovative schemes are designed to meet the needs of different types of investors in terms of investment, dividend distribution, liquidity etc. 7. Boost To Capital Market :- Mutual fund has become a capital market intermediary. It bridges the gap between retail investors and capital market. The rapid growth of mutual fund industry leads to increased vibrancy of capital market. 8) Arrival Of Foreign Capital :- Mutual funds attract foreign capital. Indian Mutual Fund Industries open offshore funds in various foreign countries and secure safe investment avenues abroad to domestic savings. These funds enable NRI’s and foreign investors to participate in Indian Capital Market. 9)  Savings For Retirement And Education :- Various schemes of funds with their tax benefits can help the households to save for the retirements and education of their children

  5. Advantages of Mutual Funds Mutual fund is a single and large professionally managed investment organisation which combines the funds of many individual investors having similar investment objectives. They form an important part of capital market. The importance of mutual funds arise due to its many benefits. Let us explain :- 1)        Professional Management :- Investors purchase units in mutual funds because they do not have time or expertise to manage their own portfolio. Mutual funds are managed by professional managers who have requisite knowledge and skill to make organisedinvestment strategy. Thus small investors invest in mutual funds to maximise their returns on investment. 2)        Economies Of Scale :- Mutual funds buy and sell large amount of securities at a time, this reduces, transaction cost. Investors gain on account of low transaction costs.

  6. 3)        Product Innovation :- From time to time new products are introduced by mutual fund industry to its investors. Schemes like children funds, commodity based funds, fixed maturity plans, exchange traded funds hybrid funds (fund for funds) etc. all have attracted huge investments. 4)        Safety And Liquidity :- Mutual funds are controlled and regulated by SEBI hence they are safe. Further, investors can easily encash their investments by selling their units to fund if it is an open-ended scheme or selling them on stock exchange if it is a close-ended scheme. 5)        Convenience And Flexibility a Mutual funds permit flexibility. If an investor is not satisfied with one mutual fund, he can switch over to another. There are least formalities to invest in mutual funds.

  7. 7)        Reduction In Risk :- Mutual funds help to reduce risk through diversification and professional management. All funds are not invested in same investment avenue. Holding a portfolio that is diversified across investment avenues is a wise way to manage risk. 8)        Transparency :- There is greater transparency in investment in mutual funds. They declare their portfolio of investment every month. The investors can know where their funds are invested. In case they are not happy with the portfolio, of fund they can withdraw their money at a short notice. 9)        Services To Investors :- Mutual funds offer systematic withdrawal plans which are convenient to retired people. The dividend and capital gains are reinvested automatically. Automatic reinvestment is a type of forced savings which brings cumulative benefits to investors

  8. TYPES OF MUTUAL FUNDS I. Geographical Classification 1)        Domestic Funds  2)        Offshore Funds  II. Classification By Structure 1)        Open - Ended Scheme 2)        Close - Ended Scheme 3)        Interval Schemes

  9. III.       Classification By Nature :- 1)        Equity Funds 2)        Debt Funds  IV. Classification By Investment Objectives 1)    Balanced Schemes  2)    Income Schemes  3) Growth Schemes  4)    Money Market Schemes

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