The growth of any economy very much depends on the extent of promoting investments in the corporate sector. The savings of the investors or the public have to be mobilised for a productive use and this is possible only by certain specialized agencies, who not only have a thorough knowledge or investment but also have the technique of attracting the investment. It is in this manner that the mutual funds came into existence to provide an investment opportunity to such people who do not want to take any risks. So, mutual funds, after mobilising the deposits, invest them in various securities in such a manner that the investors are able to get a higher return without any risk. In addition to this, they also enjoy tax benefits for their income.
A mutual fund is a corporate body (trust) that attracts savings, which are then invested in money market, debt market and capital market instruments such as shares and debentures. A mutual fund acts as a link between the public and the capital market. It is promoted by an agreement between three entities, namely
- Sponsor – They are like the promoters of a company and are responsible for starting the mutual fund. They are initiative of fulfilling all the initial measures required for promoting the mutual fund
- Trustee – These are the people who act as the watch dog for the properties of the mutual fund. Judges, Bankers and insurance companies are appointed as Trustees, who will look after the assets of the mutual fund. Their main task is to supervise the assets of the mutual fund, so that on any account there should not be any erosion in the value of these assets.
- ALM – The assets mobilised by the mutual fund are entrusted in the ALM company for investment in various companies. There will be diversified investments such as debt instruments (Bonds or Bills), Equities and Foreign securities. As the ALM consists of experts in the field of investment portfolio, the profitability of the investment is not only ensured, but it is also kept transparent through the declaration of NAV’s.
Need of Mutual Funds:
In a society, we have different type of investors who would like to earn a higher return for their meager savings. Opportunities must be provided to such types of investors, consisting of pensioners, middle income group people, etc. They cannot afford to directly invest in companies’ shares for lack of knowledge and are quite averse to risks. Keeping such factors in mind, investment companies in India like the Unit Trust of India promoted mutual funds by which they attract the savings of lower and middle income group people and give them the benefit of corporate profits by distributing attractive dividends at the end of the year. Mutual funds also cater to different types of customers who are interested in
- Fixed income or
- a higher return for investment or
- who are ‘growth oriented’.
As mutual funds fulfill all these requirements, they have not only come to stay but are growing too. The government has also felt the need for regulating their activities through proper legislation.
General benefits of Mutual Funds:
- A mutual fund promotes savings among the lower and middle income groups.
- Mutual fund provides attractive return on investment.
- Mutual fund minimizes the risk on investment by diversifying the investment.
- Different types of investment opportunities are given for different categories of investors, such as income, growth, reinvestment, etc.
- Benefits of corporate sector are made available to common man.
- As mutual funds are managed by experts, their services are made available at a nominal cost to the investors from lower and middle income group.
- There is no risk on investment as mutual funds offer assured returns.
- A stricter control on the activities of the mutual funds has made them very transparent and they express the value of the units under Net Asset Value method. This emables the investors to compare the performance of different mutual funds.
- They have contributed to the improvement of the capital market with their bulk investment.
- Reploughing of capital into investment is made possible by the mutual funds by issuing bonus shares to their unit holders against dividends due to them.
- Foreign investment by foreign financial institutions in mutual funds have been made possible – Example is Morgan Stanley.
- Tax concessions have enabled more investment in Infrastructure development bonds by which the economy is able to attract funds for infrastructure growth.
- Old age pensioners, war widows and children are benefited by different schemes of mutual funds.
- Mutual funds are not merely confining their assistance to investment but also undertake banking, credit rating, underwriting and asset liability management. By these multi-various activities, they could obtain better knowledge of the capital market.
- Future growth or expectations about the market are predicted more precisely by mutual funds and they help capital market in corrective measures.
- Liquidity for the investors: Those who invest in mutual funds, can encash their units or the mutual fund certificate at any time by selling them to the organization itself, if they are open-ended fund or by selling them in the market, if they are close-ended fund.
- Convenience and flexibility: The investors in the mutual fund, can transfer their investment from one scheme to the other on the basis of updated market information.