Mutual Fund Basics - Part I

A mutual fund is a professionally managed investment scheme that pool money from many investors and invest in market securities. The companies which manage the funds are called AMC (Asset Management Company).

Profits and losses are shared by the investors by the proportion of their investment. AMC allocates units to the investors as per their investment. The value of unit varies daily basis based on the market.

Mutual fund invests in securities which are spread wide across the industries and sectors which create the diversification in investment. Diversification reduces the risk because all the stocks will not be in the same direction all the time.

In India first mutual fund UTI introduced in 1963 by the Government of India. Mutual Funds in India are regulated by SEBI. AMC required SEBI approval before starting the collection of public money for any mutual fund schemes.

Like everything has some pros and cons mutual funds also have some advantages and disadvantages, below is listed some.

Advantages:- 

1. High diversification of investment.
2. Liquidity.
3. Less risk than investing directly in securities.
4. Investment management by professionals.
5. Small investor can also invest in market by mutual fund.
6. Government oversight or highly regulated.
7. Ease of comparison.
8. Service and convenience

Disadvantages:- 

1. Fees which reduce the overall gain.
2. Less predictability.
3. No control over type of investment like direct investment in securities.
4. No or less control over the timing of recognition of gains.

Types of Mutual Funds

There are two types of mutual funds based on maturity:- 

1. Open Ended
2. Close Ended

Above mentioned mutual fund types can be categories based on investment objective of mutual fund. Some of them are:- 

1. Equity Mutual Funds
2. Income/Debt Mutual Funds
3. Balanced Mutual Funds
4. Liquid or Money Market Mutual Funds
5. Index Mutual Funds
6. Gilt Mutual Funds

Nextblog explains the types of mutual funds in details.