In a mutual fund many investors contribute to form a common pool of money. A mutual fund uses this money that is collected from investors, to buy those assets which are specifically permitted by its stated investment objective. For example, a growth fund will buy mainly equity assets- ordinary shares, preference share, warrants etc. An income fund would mainly buy debt instruments like debentures and bonds. The fund’s assets are owned by the investors in the same proportion as their contributions bears to the total contributions of all investors put together. In India, a mutual fund is constituted as a trust and the investor subscribes to the units of the scheme launched by the fund.
If mutual fund is emerging as the favourite investment vehicle, it is because of the many advantages it enjoys over other forms and avenues of investing. Following are the most important ones among others.
Mutual fund normally invests in a well diversified portfolio of funds. This enables him to hold a diversified investment portfolio even with a small amount of investment, which would otherwise require a big capital.
Professional Management Skills
Mutual fund managers with an excellent research team can do a better job of monitoring and selecting stocks. Mutual funds can afford to hire full-time, high-level investment analysts and have real-time access to crucial market information. Thus, they are able to execute trades on the largest and most cost-effective scale.
Economies of Scale
A direct investor bears all the costs of investing such as brokerage or custody of securities which may be very high. Mutual fund benefits through economies of scale and pay lesser cost of brokerage because of larger volumes which allows them to reduce costs significantly.
Liquidity, Convenience and Flexibility
Often investors hold shares or bonds that they cannot easily sell. Investments in the mutual fund, on the other hand, are more liquid, convenient and flexible as it offers many investor services, like switching or transfer from one fund to another, sale or redemptions.
A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc. depending upon the investment objective of the scheme. Each unit holder thus gets an exposure to such portfolios with an investment as modest as Rs.500/- which otherwise would be expensive.
Specific schemes of mutual funds (Equity Linked Savings Schemes) give investors the benefit of
deduction of the amount invested, from their taxable income. Further, the dividend that the investor receives from the scheme is tax‐free in his hands.
As per SEBI circular: SEBI/IMD/CIR No. 4/ 168230/09, following are the details of the comparative commission earned by Indusind Bank from various fund-houses, whose products are being distributed:
|Disclosure on Commission received By IndusInd Bank for Various Company's|
|SchemeTypes||Upfront Commisson Brokerage||Trail 1st Year Onwards(annualised)||Other Fees(if any)|
|Portfolio Management service||0 to 4.50%||0 to 0.75%||Nil|
|Private Equity Fund||0 to 3.60%||0 to 0.75%||Nil|
|Structured Product||0 to 3.00%||Nil||Nil|
|Capital Gain Bonds||0 to 0.01%||Nil||Nil|
|Debt MF||0 to 1.00%||0 to 1.00%|
|Equity MF||0 to 4.50%||0 to 1.75%|
|Liquid MF||0 to 1.00%||0 to 0.80%|
|MIP MF||0 to 1.85%||0 to 1.60%|
# 25% of portfolio managers fees in case of profit sharing option
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