• HDFC
• 28 Jun 2018
• MF Overview

HDFC, Tester

What is a mutual fund?

As the name suggest, a mutual fund is a pool of savings, contributed by multiple investors. This is a scheme where the funds collected from many people is invested in financial securities, like shares, and many other asset classes such as equity, debt, or liquid assets. In a mutual fund, all the risks, rewards, gains and losses,that arise out of this pool of funds, are shared by the investors, in proportion with their contributions.

 

How does a mutual fund work?

A mutual fund is, in a way, a trust with a sponsor. They are required to be registered with the Securities Exchange Board of India (SEBI). This regulatory body approves the Asset Management Company (AMC) that manages the fund. The trustees watch over the AMC, while ensuring that the mutual fund in compliance with the regulations.

 

What do I need to know before investing?

There are certain terms and features of mutual funds you need to understand in order to get started on your own journey of investment. Here is some basic information on Mutual Funds.

 

1. Fund Units/Shares

In order to invest in a mutual fund, you need to buy fund units or shares of the fund. The more shares you have, the higher your investment.

 

2. Net Asset Value(NAV)

This is the value of the unit or share of the mutual fund. The NAV varies depending upon how the fund itself performs. However, the unit will be sold/purchased at its prevailing value at the time of the sale/purchase, and not the NAV.

 

3. Lock-in period

Certain mutual funds do not allow investors to liquidate their investment for a certain period of time. This means that if you have invested in a mutual with a lock-in period, then you cannot sell your units or shares during that period. Breaking the lock-in period rule usually results penalties.

 

4. Load charges

In addition to the NAV, entry load or exit load is also paid on every sale, purchase or transfer of funds units in a mutual fund.

 

5. Offer document

This is a document that outlines the basic features of the fund. It contains all information about the objectives, the asset classes the fund will invest in, terms and conditions, as well as who will manage the funds, the fund’s history, performance and risks etc. Always read the offer document very carefully, before investing in a mutual fund.

 

6. Assets Under Management

The total market value of the funds managed by the mutual fund company is referred to as assets under management. The assets here are the funds.

 

7. Expense Ratio

The ratio of expenses incurred by the fund, in comparison to the total assets.

 

8. New Fund Offer (NFO)

These are the new funds or schemes launched by the AMC. You can invest in these funds at the offer price, after which, all subsequent transfers of the funds will have to be at the prevailing NAV.

 

9. Redemption

This is the process of redeeming the value of your shares or fund units in a mutual fund. This is basically a withdrawal of fund units from the mutual fund.

 

What types of Mutual Funds are there?

There are various types of mutual funds, but in order to understand how mutual funds function, there are two main types, on the basis of which we can understand them

 

1. Open-ended mutual funds

These are open for investment at any point in time. You do not have to wait until the lock in period is finished, in order to buy and sell your fund units. This offers investors liquidity.

 

2. Closed-ended mutual funds

These mutual funds are open for transfer of fund units, only for a short duration. In order to provide liquidity, these funds are listed on the stock exchanges and they can be traded by investors.

 

Apart from these two, there is a variation of close-ended mutual funds, called interval mutual funds. In this, the scheme is open for redemption for a short duration, and investors are given the option of selling their units back to the fund.