Mutual funds are one of the most talked about investments in today’s dynamic world. They have the benefit of providing an investment opportunity for every class of investor. But what are the core objectives and functions of a mutual fund? Given here are the answers to these questions.
Read More: Do mutual funds invest only in stocks?
What are mutual funds?
Mutual funds are a pool of funds from different investors that are invested in different types of assets with the aim to get maximum returns for the investors at minimum risk. Investors can buy and sell units of a fund at the NAV (Net Asset Value) which is updated on the stock exchanges every day. These funds can be highly liquid assets (except ELSS funds that come with a lock-in of 3years) and can be efficiently used to meet investment goals of varying tenures. The primary classification of mutual funds includes equity-oriented funds, debt-oriented funds, and hybrid funds.
What are the objectives of mutual funds in India?
Some of the common objectives of mutual funds in India are highlighted below.
- Professional Management
The primary objective of mutual funds is to provide professional management of investments to individual and institutional investors. Mutual fund managers have expertise in selecting and managing investments across different asset classes such as equity, debt, and money market instruments based on their internal investment model that is fine-tuned to achieve the objective of the fund.
- Diversification
Mutual funds offer investors the benefits of diversification, which is achieved by investing across different sectors and asset classes. This helps in reducing the overall risk of the portfolio and ensuring a well-diversified investment that can provide better returns that are also often inflation adjusted.
- Capital protection
Capital protection is one of the key features or primary objectives of many mutual funds. This is an important investment criterion, especially for risk-averse investors. The risk of investment in these funds is quite lower and so are the returns as compared to the more aggressive funds like pure equity funds or aggressive hybrid funds.
- Liquidity
Mutual funds offer investors the flexibility to redeem their investments at any time, which provides liquidity to the investors. This makes it a crucial benefit for investors who allocate a part of their emergency fund in mutual funds.
- Convenience
Investing in mutual funds is easy and convenient. Investors can buy or sell units of a mutual fund scheme through online platforms, agents, or distributors, and even directly from the mutual fund company. Furthermore, investors also have the option to invest through the SIP mode or through the lumpsum investment mode as per their capital availability. This makes it highly flexible for the investors ensuring maximum participation across investor categories.
What are the functions of mutual funds in India?
Mutual funds in India are charged with many key functions which are highlighted hereunder.
- Investment Management
Mutual funds are charged with the function of collecting money from investors and using it to invest in a diversified portfolio of securities like stocks, bonds, and money market instruments in varied proportions based on their asset allocation model. They are responsible for managing the portfolio in accordance with the investment objectives of the scheme.
- Professional Expertise
Mutual funds employ professional fund managers who have the required experience and expertise in managing investments across different asset classes. These fund managers have access to in-depth and timely research and analysis of different asset classes and market movements to help them make informed investment decisions.
- Transparency
Mutual funds are required to provide investors with regular updates on various aspects of the fund like the performance of the scheme, the portfolio holdings, and other important information through regular reports and newsletters. This helps investors in making informed decisions about their investment portfolio.
- Risk Management
Mutual funds are required to manage the overall risk of the fund by diversifying the portfolio across different sectors and asset classes and using prudent risk management techniques to align the risk of the funds with the investor expectations.
- Convenience
Mutual funds provide a convenient and flexible way for investors to invest in a diversified portfolio of securities. Investors can buy or sell units of a mutual fund scheme through online platforms, agents, or distributors, and even directly from the mutual fund company. Mutual fund managers are also charged with buying and selling the instruments on behalf of their clients to ensure optimum portfolio allocation.
Conclusion
The introduction of mutual funds in the Indian markets was a dynamic move and investors are still reaping the returns of the same. There have been many changes in the SEBI guidelines relating to the regulation of mutual funds as well as taxation changes by the government. However, despite these changes, mutual funds are still a staple investment option in an investment portfolio.
FAQs
As per an amendment to Finance Bill 2023, debt mutual funds having equity allocation of up to 35% will no longer be eligible for indexation benefits for long-term capital gains. Therefore they will be taxed in line with STCG on debt mutual funds.
The prime benefits of investing in mutual funds include diversification of portfolio, the potential for better returns, lower risk of investment, taxation benefit, liquidity, flexibility of investment, and investment horizon
A few limitations of mutual fund investment like no control over the investment portfolio, lack of consistency or guarantee of performance, over diversification, high cost of investment including expense ratio, fees and charges like exit load, dependency on fund manager skills to generate profits, etc.
Some of the prime considerations while investing in mutual funds include aligning the objectives of the fund with personal financial objectives, ensuring the risk-return ratio is in line with individual expectations, reviewing the reputation of the fund house, past performance, and the composition of the fund, etc.
