September 29th, 2010 03:59 PM

INTRODUCTION TO MUTUAL FUNDS

INTRODUCTION

Saving for future is basic instinct of the human being. It started with hiding the money and assets in pots, underground, roofs and any other safe place for retrieval at the time of need. Today an individual wants to invest surplus assets for safety and growth in a large number sources such as fixed income instruments of post offices, banks provident funds, real estates, equity shares, bonds, derivatives and other assets. However the individual does not possess the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily to save or appreciate his investments

A mutual fund is a professionally managed firm of collective investments that collects money from many investors and puts it in stocks, bonds, short-term money market instruments, and/or other securities. The fund manager known as portfolio manager, invests and trades the fund's underlying securities, realizing capital gains or losses and passing any proceeds to the individual investors.

Currently, the worldwide value of all mutual funds totals more than $26 trillion. Since 1940, there have been three basic types of investment companies in the United States open-end funds, also known in the US as mutual funds; unit investment trusts (UITs); and closed-end funds. However, in the rest of the world, mutual fund is used as a generic term for various types of collective investment vehicles, such as unit trusts, open-ended investment companies (OEICs), unitized insurance funds, and undertakings for collective investments in transferable securities (UCITS).

MF is a retail product designed to target small investors, salaried people and others who are intimidated by the mysteries of stock market but, nevertheless, like to reap the benefits of stock market investing. At the retail level, investors are unique and are a highly heterogeneous group. Hence, their fund/scheme selection also widely differs. Investors demand inter-temporal wealth shifting as he or she progresses through the life cycle. This necessitates understanding the fund/scheme selection/switching behavior of the investors to design suitable products to meet the changing financial needs of the investors.

Indian financial sector has undergone significant expansion during the last decade. A well developed infrastructure has been promoted to cater the needs of growing saving and expanding capital market of India. Of late, mutual funds have become a favorite of millions of people all over the world. The driving force of mutual funds is the safety of the principal guaranteed, plus the added advantage of capital appreciation together with the income earned in the form of interest or dividend.

Thus mutual funds act as a gateway to enter into big companies hitherto inaccessible to an ordinary investor with his small investment. A mutual fund collects the savings from small investors, invest them in Government and other corporate securities and earn income through interest and dividends, besides capital gains. Hence, a mutual fund is nothing but a form of collective investment.

It is a group of various investors coming together who transfer their surplus funds to a professionally qualified organization to manage it. Each fund is divided into a small fraction called units of equal value. Each investor is allocated units in the proportion to the size of his investment.

Thus, every investor, whether big or small, will have a stake in the fund and can enjoy the wide portfolio of the investment held by the fund. Hence, mutual funds enable millions of small and large investors to participate in and derive the benefit of the capital market growth. It has emerged as a popular vehicle of creation of wealth due to high return, lower cost and diversified risk.

The Securities and Exchange Board of India (Mutual Funds) Regulations, 1993 defines a mutual fund as a fund established in the form of a trust by a sponsor, to raise monies by the trustees through the sale of units to the public, under one or more schemes, for investing in securities in accordance with these regulations.