Capital Markets: Mutual Funds Concept and functiong

What is a mutual fund?

A mutual fund is an investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets.

The pool money managed by portfolio managers, some one knows about market very well or certified financial analysts. The mangers to create a portfolio with investment objective and with respect to risk.

These Mutual funds will give the opportunity to retail investors to invest in the market with certified portfolio managers to manage these funds.

Who are the origins of these Mutual Funds?

Mutual funds created by AMC (Asset Management Companies), in India we have near about 40 asset management companies, those guys are launched more than 4000 funds with different objectives.

We will consider one example and will discuss properly about the funds distribution.

Let me take one fund XYZ and the fund value 1000rs and these thousand rupees will invest in different stocks with different weightage or depends on risk profile .and this will be divided by 10rs as a face value.

No of units = Total fund/price of per unit

X = 1000/10

X= 100 units

Above 100 units will distribute or sell into the market (New fund offer) and after this will register in exchange for liquidity or trading purpose .once the funds will get any capital appreciation or depreciation into the market and that will distributed into equally.

Note: When a scheme is first made available for investment, it is called a ‘New Fund Offer’ (NFO). During the NFO, investors may have the chance of buying the units at their face value.

Types of Funds

Three types of funds having in the market

Open-Ended funds

Close-Ended funds

Interval Funds

Open ended Funds: The investors enter or exit any time, even after the NFO. if any investor want to exit from the fund he can sell at NAV price it’s called repurchase transaction. The fund will continue with remaining investors.

Closed ended Funds: Have fixed maturity .Investors can buy units form the fund during its NFO. In this case any investor wants to exit means he can sell his units from the exchange to other investor and the price will depends on Demand and supply situation .

Interval Funds: Combine feature of both open and close ended funds schemes. They are largely close ended but become open –ended at pre specified intervals.

Let me take any example: any fund might be open-ended scheme between Jan 1-15 and July 1-15 in a year and in case client want to exit in between he can exit from exchange also like close- ended funds.

Under these funds we have different options like Equity, Debt and balanced funds these funds will come under open-ended funds and capital protection, fixed maturity plans will come under close –ended funds.