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A mutual fundis a type of professionally managedcollective investment schemethat pools money

from many investors to purchasesecurities.[1]

While there is no legal definition of the term "mutual

fund", it is most commonly applied only to those collective investment vehicles that are regulated and

sold to the general public. They are sometimes referred to as "investment companies" or "registered

investment companies."[2]Most mutual funds are "open-ended," meaning investors can buy or sell

shares of the fund at any time.Hedge fundsare not considered a type of mutual fund.

In the United States, mutual funds must be registered with the Securities and Exchange Commission,

overseen by a board of directors (or board of trustees if organized as a trust rather than a corporation

or partnership) and managed by a registered investment adviser. Mutual funds, like other registered

investment companies, are also subject to an extensive and detailed regulatory regime set forth in the

Investment Company Act of 1940.[3]

Mutual funds are not taxed on their income and profits if they

comply with certain requirements under the U.S. Internal Revenue Code.

Mutual funds have both advantages and disadvantages compared to direct investing in individual

securities. They have a long history in the United States. Today they play an important role inhousehold finances, most notably in retirement planning.

There are 3 types of U.S. mutual funds: open-end, unit investment trust, and closed-end. The most

common type, the open-end fund, must be willing to buy back shares from investors every business

day. Exchange-traded funds(or "ETFs" for short) are open-end funds or unit investment trusts that

trade on an exchange. Open-end funds are most common, but exchange-traded funds have been

gaining in popularity.

Mutual funds are generally classified by their principal investments. The four main categories of funds

are money market funds, bond or fixed income funds, stock or equity funds and hybrid funds. Funds

may also be categorized as index or actively managed.

Investors in a mutual fund pay the funds expenses, which reduce the fund's returns/performance.There is controversy about the level of these expenses. A single mutual fund may give investors a

choice of different combinations of expenses (which may include sales commissions or loads) by

offering several different types of share classes.

Contents

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Structure[edit]

In the US, a mutual fund is registered with theSecurities and Exchange Commission(SEC) and is

overseen by aboard of directors(if organized as a corporation) orboard of trustees(if organized as a

trust). The board is charged with ensuring that the fund is managed in the best interests of the fund's

investors and with hiring the fund manager and other service providers to the fund.

Thefund manager,also known as the fund sponsor or fund management company,trades(buys and

sells) the fund's investments in accordance with the fund's investment objective. A fund manager must

be aregistered investment advisor.Funds that are managed by the same fund manager and that

have the same brand name are known as a "fund family" or "fund complex".

Mutual funds are not taxed on their income and profits as long as they comply with requirements

established in the U.S. Internal Revenue Code. Specifically, they must diversify their investments,

limit ownership of voting securities, distribute a high percentage of their income and capital gains (net

of capital losses) to their investors annually, and earn most of the income by investing in securitiesand currencies.[4]
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Mutual funds pass taxable income on to their investors by paying out dividends and capital gains at

least annually. The characterization of that income is unchanged as it passes through to the

shareholders. For example, mutual fund distributions of dividend income are reported as dividend

income by the investor. There is an exception: net losses incurred by a mutual fund are not distributed

or passed through to fund investors but are retained by the fund to be able to offset future gains.

Mutual funds may invest in many kinds ofsecurities.The types of securities that a particular fund may

invest in are set forth in the fund's prospectus, which describes the fund's investment objective,

investment approach and permitted investments. The investment objective describes the type of

income that the fund seeks. For example, a "capital appreciation" fund generally looks to earn most of

its returns from increases in the prices of the securities it holds, rather than from dividend or interest

income. The investment approach describes the criteria that the fund manager uses to select

investments for the fund.

A mutual fund's investmentportfoliois continually monitored by the fund'sportfolio manageror

managers.

Hedge fundsare not considered a type of (unregistered) mutual fund. While they are another type of

collective investment vehicle, they are not governed by the Investment Company Act of 1940 and are

not required to register with the Securities and Exchange Commission (though many hedge fund

managers must register as investment advisers).

Advantages and disadvantages[edit]

This article contains apro and con list.Please helpimprove itby

integrating both sides into a moreneutralpresentation. (November 2012)

Mutual funds have advantages compared to direct investing in individual securities.[5]These include:

Increased diversification

Daily liquidity

Professional investment management

Ability to participate in investments that may be available only to larger investors

Service and convenience

Government oversight

Ease of comparison

Mutual funds have disadvantages as well, which include:[6]

Fees

Less control over timing of recognition of gains

Less predictable income

No opportunity to customize

History[edit]

The first mutual funds were established in Europe. One researcher credits a Dutch merchant with

creating the first mutual fund in 1774.[7]

The first mutual fund outside the Netherlands was the Foreign

& Colonial Government Trust, which was established in London in 1868. It is now theForeign &

Colonial Investment Trustand trades on the London stock exchange.[8]
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Mutual funds were introduced into the United States in the 1890s.[9]

They became popular during the

1920s. These early funds were generally of the closed-end type with a fixed number of shares which

often traded at prices above the value of the portfolio.[10]

The first open-end mutual fund with redeemable shares was established on March 21, 1924. This

fund, the Massachusetts Investors Trust, is now part of theMFS family of funds.However, closed-endfunds remained more popular than open-end funds throughout the 1920s. By 1929, open-end funds

accounted for only 5% of the industry's $27 billion in total assets.[11]

After thestock market crash of 1929,Congresspassed a series of acts regulating the securities

markets in general and mutual funds in particular. TheSecurities Act of 1933requires that all

investments sold to the public, including mutual funds, be registered with the Securities and Exchange

Commission and that they provide prospective investors with aprospectusthat discloses essential

facts about the investment. TheSecurities and Exchange Act of 1934requires that issuers of

securities, including mutual funds, report regularly to their investors; this act also created the

Securities and Exchange Commission, which is the principal regulator of mutual funds. TheRevenue

Act of 1936established guidelines for the taxation of mutual funds, while theInvestment CompanyAct of 1940governs their structure.

When confidence in the stock market returned in the 1950s, the mutual fund industry began to grow

again. By 1970, there were approximately 360 funds with $48 billion in assets.[12]The introduction

of money marketfunds in the high interest rate environment of the late 1970s boosted industry growth

dramatically. The first retailindex fund,First Index Investment Trust, was formed in 1976 byThe

Vanguard Group,headed byJohn Bogle;it is now called theVanguard 500 Index Fundand is one of

the world's largest mutual funds, with more than $100 billion in assets as of January 31, 2011.[13]

Fund industry growth continued into the 1980s and 1990s, as a result of three factors: abull

marketfor both stocks and bonds, new product introductions (includingtax-exempt bond,sector,

international andtarget datefunds) and wider distribution of fund shares.[14]Among the new

distribution channels were retirement plans. Mutual funds are now the preferred investment option in

certain types of fast-growing retirement plans, specifically in401(k)and otherdefined contribution

plansand inindividual retirement accounts(IRAs), all of which surged in popularity in the 1980s. Total

mutual fund assets fell in 2008 as a result of thecredit crisis of 2008.

In 2003, the mutual fund industry was involved in ascandalinvolving unequal treatment of fund

shareholders. Some fund management companies allowed favored investors to engage inlate

trading,which is illegal, ormarket timing,which is a practice prohibited by fund policy. The scandal

was initially discovered by then-New York State Attorney GeneralEliot Spitzerand resulted in

significantly increased regulation of the industry.

At the end of 2011, there were over 14,000 mutual funds in the United States with combined assets of

$13 trillion, according to theInvestment Company Institute(ICI), a trade association of investment

companies in the United States. The ICI reports that worldwide mutual fund assets were $23.8 trillion

on the same date.[15]

Mutual funds play an important role in U.S. household finances and retirement planning. At the end of

2011, funds accounted for 23% of household financial assets. Their role in retirement planning is

particularly significant. Roughly half of assets in 401(k) plans and individual retirement accounts were

invested in mutual funds.[15]

Leading complexes[edit]

At the end of October 2011, the top 10 mutual fund complexes in the United States were:[16]
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1. Vanguard

2. Fidelity

3. American Funds(Capital Research)

4. BlackRock

5. PIMCO

6. Franklin Templeton

7. JPMorgan Chase

8. State Street Global Advisors

9. T. Rowe Price

10.Federated Investors

Types[edit]

There are 3 principal types of mutual funds in the United States:open-end funds,unit investment

trusts(UITs); andclosed-end funds.Exchange-traded funds(ETFs) are open-end funds or unit

investment trusts that trade on an exchange; they have gained in popularity recently. While the term"mutual fund" may refer to all three types of registered investment companies, it is more commonly

used to refer exclusively to the open-end type.

Open-end funds[edit]

Main article:Open-end fund

Open-end mutual funds must be willing to buy back their shares from their investors at the end of

every business day at the net asset value computed that day. Most open-end funds also sell shares to

the public every business day; these shares are also priced at net asset value. A professional

investment manager oversees the portfolio, buying and selling securities as appropriate. The total

investment in the fund will vary based on share purchases, share redemptions and fluctuation in

market valuation. There is no legal limit on the number of shares that can be issued.

Open-end funds are the most common type of mutual fund. At the end of 2011, there were 7,581

open-end mutual funds in the United States with combined assets of $11.6 trillion.[15]

Closed-end funds[edit]

Main article:Closed-end fund

Closed-end funds generally issue shares to the public only once, when they are created through

aninitial public offering.Their shares are then listed for trading on astock exchange.Investors who

no longer wish to invest in the fund cannot sell their shares back to the fund (as they can with an

open-end fund). Instead, they must sell their shares to another investor in the market; the price theyreceive may be significantly different from net asset value. It may be at a "premium" to net asset value

(meaning that it is higher than net asset value) or, more commonly, at a "discount" to net asset value

(meaning that it is lower than net asset value). A professional investment manager oversees the

portfolio, buying and selling securities as appropriate.

At the end of 2011, there were 634 closed-end funds in the United States with combined assets of

$239 billion.[15]

Unit investment trusts[edit]

Main article:Unit investment trust

Unit investment trusts or UITs issue shares to the public only once, when they are created. UITsgenerally have a limited life span, established at creation. Investors can redeem shares directly with
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the fund at any time (as with an open-end fund) or wait to redeem upon termination of the trust. Less

commonly, they can sell their shares in the open market.

Unit investment trusts do not have a professional investment manager. Their portfolio of securities is

established at the creation of the UIT and does not change.

At the end of 2011, there were 6,022 UITs in the United States with combined assets of $60 billion.[15]

Exchange-traded funds[edit]

Main article:Exchange-traded fund

A relatively recent innovation, the exchange-traded fund or ETF is often structured as an open-end

investment company, though ETFs may also be structured as unit investment trusts, partnerships,

investments trust, grantor trusts or bonds (as anexchange-traded note). ETFs combine

characteristics of both closed-end funds and open-end funds. Like closed-end funds, ETFs are traded

throughout the day on a stock exchange at a price determined by the market. However, as with open-

end funds, investors normally receive a price that is close to net asset value. To keep the market price

close to net asset value, ETFs issue and redeem large blocks of their shares with institutionalinvestors.

Most ETFs are index funds. ETFs have been gaining in popularity. At the end of 2011, there were

1,134 ETFs in the United States with combined assets of $1.1 trillion.[15]

Investments and classification[edit]

Theneutralityof this article isquestionedbecause of itssystemic

bias.Please see the discussion on thetalk page.Please do not remove

this message until the issue is resolved. (August 2012)

Mutual funds are normally classified by their principal investments, as described in the prospectus

and investment objective. The four main categories of funds are money market funds, bond or fixed

income funds, stock or equity funds and hybrid funds. Within these categories, funds may be

subclassified by investment objective, investment approach or specific focus. The SEC requires that

mutual fund names not be inconsistent with a fund's investments. For example, the "ABC New Jersey

Tax-Exempt Bond Fund" would generally have to invest, under normal circumstances, at least 80% of

its assets in bonds that are exempt from federal income tax, from the alternative minimum tax and

from taxes in the state of New Jersey.[17]

Bond, stock and hybrid funds may be classified as either index (passively managed) funds or actively

managed funds.

Money market funds[edit]

Main article:Money market fund

Money market funds invest in money market instruments, which are fixed income securities with a

very short time to maturity and high credit quality. Investors often use money market funds as a

substitute for bank savings accounts, though money market funds are not government insured, unlike

bank savings accounts.

Money market funds strive to maintain a $1.00 per share net asset value, meaning that investors earn

interest income from the fund but do not experience capital gains or losses. If a fund fails to maintain

that $1.00 per share because its securities have declined in value, it is said to "break the buck". Only
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two money market funds have ever broken the buck: Community Banker's U.S. Government Money

Market Fund in 1994 and the Reserve Primary Fund in 2008.

At the end of 2011, money market funds accounted for 23% of open-end fund assets.[15]

Bond funds[edit]

Main article:Bond fund

Bond funds invest in fixed income or debt securities. Bond funds can be subclassified according to the

specific types of bonds owned (such as high-yield orjunk bonds,investment-grade corporate bonds,

government bonds or municipal bonds) or by the maturity of the bonds held (short-, intermediate- or

long-term). Bond funds may invest in primarily U.S. securities (domestic or U.S. funds), in both U.S.

and foreign securities (global or world funds), or primarily foreign securities (international funds).

At the end of 2011, bond funds accounted for 25% of open-end fund assets.[15]

Stock or equity funds[edit]

Main article:Stock fund

Stock or equity funds invest in common stocks which represent an ownership share (or equity) in

corporations. Stock funds may invest in primarily U.S. securities (domestic or U.S. funds), in both U.S.

and foreign securities (global or world funds), or primarily foreign securities (international funds). They

may focus on a specific industry or sector.

A stock fund may be subclassified along two dimensions: (1) market capitalization and (2) investment

style (i.e., growth vs. blend/core vs. value). The two dimensions are often displayed in a grid known

as a "style box."

Market capitalization ("cap") indicates the size of the companies in which a fund invests, based on the

value of the company's stock. Each company's market capitalization equals the number of shares

outstanding times the market price of the stock. Market capitalizations are typically divided into the

following categories:

Micro cap

Small cap

Mid cap

Large cap

While the specific definitions of each category vary with market conditions, large cap stocks generally

have market capitalizations of at least $10 billion, small cap stocks have market capitalizations below

$2 billion, and micro cap stocks have market capitalizations below $300 million. Funds are alsoclassified in these categories based on the market caps of the stocks that it holds.

Stock funds are also subclassified according to their investment style: growth, value or blend (or

core). Growth funds seek to invest in stocks of fast-growing companies. Value funds seek to invest in

stocks that appear cheaply priced. Blend funds are not biased toward either growth or value.

At the end of 2011, stock funds accounted for 46% of the assets in all U.S. mutual funds.[15]

Hybrid funds[edit]

Hybrid funds invest in both bonds and stocks or inconvertible securities.Balanced funds, asset

allocation funds, target date or target risk funds and lifecycle or lifestyle funds are all types of hybrid

funds.
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Hybrid funds may be structured as funds of funds, meaning that they invest by buying shares in other

mutual funds that invest in securities. Most fund of funds invest in affiliated funds (meaning mutual

funds managed by the same fund sponsor), although some invest in unaffiliated funds (meaning those

managed by other fund sponsors) or in a combination of the two.

At the end of 2011, hybrid funds accounted for 7% of the assets in all U.S. mutual funds.

[15]

Anopen-endedfundoperated by aninvestment

companywhich raisesmoneyfromshareholdersandinvestsin a group ofassets,

inaccordancewith a stated set ofobjectives.

Mutual funds raise moneybysellingsharesof the fund to thepublic,much like any other

type ofcompanycansell stockin itself to the public. Mutual funds

thentakethe moneythey receive from thesaleof their shares(along with any money

made frompreviousinvestments)and use it topurchasevarious investment vehicles,

such asstocks,bondsandmoney market instruments.Inreturnfor the money they giveto the fund when purchasing shares, shareholders receive anequitypositionin the fund

and, ineffect,in each of itsunderlying securities.For most mutual funds, shareholders

are free toselltheir shares at any time, although thepriceof a share in a mutual

fundwillfluctuatedaily, depending upon theperformanceof thesecuritiesheldby the

fund.

Benefitsof mutual fundsincludediversificationand professionalmoney management.

Mutual fundsofferchoice,liquidity,and convenience, but chargefeesand

oftenrequireaminimum investment.

ASPECTS.

Mutual fund is a trust that pools the savings of a number of investors who share a

common financial goal. This pool of money is invested in accordance with a stated

objective. The joint ownership of the fund is thus Mutual, i.e. the fund belongs to

all investors. The money thus collected is then invested in capital market

instruments such as shares, debentures and other securities. The income earned

through these investments and the capital appreciations realized are shared by its

unit holders in proportion the number of units owned by them. Thus a Mutual Fund

is the most suitable investment for the common man as it offers an opportunity to

invest in a diversified, professionally managed basket of securities at a relatively low

cost. A Mutual Fund is an investment tool that allows small investors access to a
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well-diversified portfolio of equities, bonds and other securities. Each shareholder

participates in the gain or loss of the fund. Units are issued and can be redeemed as

needed. The funds Net Asset value (NAV) is determined each day.

Investments in securities are spread across a wide cross-section of industries and

sectors and thus the risk is reduced. Diversification reduces the risk because all

stocks may not move in the same direction in the same proportion at the same time.

Mutual fund issues units to the investors in accordance with quantum of money

invested by them. Investors of mutual funds are known as unit holders.

When an investor subscribes for the units of a mutual fund, he becomes part owner

of the assets of the fund in the same proportion as his contribution amount put up


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with the corpus (the total amount of the fund). Mutual Fund investor is also known

as a mutual fund shareholder or a unit holder.

Any change in the value of the investments made into capital market instruments

(such asshares,debentures etc) is reflected in the Net Asset Value (NAV) of the

scheme. NAV is defined as the market value of the Mutual Fund scheme's assets net

of its liabilities. NAV of a scheme is calculated by dividing the market value of

scheme's assets by the total number of units issued to the investors.

ADVANTAGES OF MUTUAL FUND

Portfolio Diversification

Professional management

Reduction / Diversification of Risk

Liquidity

Flexibility & Convenience

Reduction in Transaction cost

Safety of regulated environment

Choice of schemes

Transparency
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DISADVANTAGE OF MUTUAL FUND

No control over Cost in the Hands of an Investor

No tailor-made Portfolios

Managing a Portfolio Funds

Difficulty in selecting a Suitable Fund Scheme


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Mutual funds can be classified as follow :

Based on their structure:

Open-ended funds: Investors can buy and sell the units from the fund, at any

point of time.

Close-ended funds: These funds raise money from investors only once.

Therefore, after the offer period, fresh investments can not be made into the fund. If

the fund is listed on a stocks exchange the units can be traded like stocks (E.g.,

Morgan Stanley Growth Fund). Recently, most of the New Fund Offers of close-ended

funds provided liquidity window on a periodic basis such as monthly or weekly.

Redemption of units can be made during specified intervals. Therefore, such funds

have relatively low liquidity.

Based on their investment objective:

Equity funds: These funds invest in equities and equity related

instruments. With fluctuating share prices, such funds show volatile

performance, even losses. However, short term fluctuations in the market,

generally smoothens out in the long term, thereby offering higher returns at

relatively lower volatility. At the same time, such funds can yield great capital

appreciation as, historically, equities have outperformed all asset classes in the

long term. Hence, investment in equity funds should be considered for a period

of at least 3-5 years. It can be further classified as:


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i) Index funds- In this case a key stock market index, like BSE Sensex or Nifty is

tracked. Their portfolio mirrors the benchmark index both in terms of composition

and individual stock weightages.

ii) Equity diversified funds- 100% of the capital is invested in equities spreading

across different sectors and stocks.

iii|) Dividend yield funds-it is similar to the equity diversified funds except that they

invest in companies offering high dividend yields.

iv) Thematic funds-Invest 100% of the assets in sectors which are related through

some theme.

e.g. -An infrastructure fund invests in power, construction, cements sectors etc.

v) Sector funds-Invest 100% of the capital in a specific sector. e.g. - A banking sector

fund will invest in banking stocks.

vi) ELSS- Equity Linked Saving Scheme provides tax benefit to the investors.

Balanced fund:Their investment portfolio includes both debt and equity. As a

result, on the risk-return ladder, they fall between equity and debt funds. Balanced

funds are the ideal mutual funds vehicle for investors who prefer spreading their risk

across various instruments. Following are balanced funds classes:

i) Debt-oriented funds -Investment below 65% in equities.

ii) Equity-oriented funds-Invest at least 65% in equities, remaining in debt.


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Debt fund: They invest only in debt instruments, and are a good option for

investors averse to idea of taking risk associated with equities. Therefore, they invest

exclusively in fixed-income instruments like bonds, debentures, Government of India

securities; and money market instruments such as certificates of deposit (CD),

commercial paper (CP) and call money. Put your money into any of these debt funds

depending on your investment horizon and needs.

i) Liquid funds- These funds invest 100% in money market instruments, a large

portion being invested in call money market.

ii) Gilt funds ST-They invest 100% of their portfolio in government securities of and

T-bills.

iii) Floating rate funds - Invest in short-term debt papers. Floaters invest in debt

instruments which have variable coupon rate.

iv) Arbitrage fund- They generate income through arbitrage opportunities due to

mis-pricing between cash market and derivatives market. Funds are allocated to

equities, derivatives and money markets. Higher proportion (around 75%) is put in

money markets, in the absence of arbitrage opportunities.

v) Gilt funds LT- They invest 100% of their portfolio in long-term government

securities.

vi) Income funds LT-Typically, such funds invest a major portion of the portfolio in

long-term debt papers.


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vii) MIPs- Monthly Income Plans have an exposure of 70%-90% to debt and an

exposure of 10%-30% to equities.

viii) FMPs-fixed monthly plans invest in debt papers whose maturity is in line with

that of the fund.

INVESTMENT STRATEGIES


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1. Systematic Investment Plan: under this a fixed sum is invested each month on a

fixed date of a month. Payment is made through post dated cheques or direct debit

facilities. The investor gets fewer units when the NAV is high and more units when

the NAV is low. This is called as the benefit of Rupee Cost Averaging (RCA)

2. Systematic Transfer Plan: under this an investor invest in debt oriented fund and

give instructions to transfer a fixed sum, at a fixed interval, to an equity scheme of

the same mutual fund.

3. Systematic Withdrawal Plan:if someone wishes to withdraw from a mutual fund

then he can withdraw a fixed amount each month.

RISK V/S. RETURN:


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