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Mutual Funds

Mutual Fund

  • Meaning of Mutual Funds:- A mutual fund is a specific kind of investment instrument that collects funds from numerous people to buy securities, often stocks, bonds, or a combination of both. The net asset value (NAV) of a mutual fund represents the value of its investments. Shares in the mutual fund are purchased by investors, and the price per share is determined by the NAV. An expert money manager oversees the management of the fund and makes investment decisions on behalf of the fund's owners. With hefty fees, mutual funds give investors the advantages of professional management and diversity.
  • Meaning of AMC:- Asset Management Company is the full name of the AMC in mutual funds. In India, AMCs are established as trusts. AMCs invest customer money that has been pooled into a variety of securities and assets.
Sponsor:- A mutual fund is promoted by the Sponsor. The trustee board is chosen by the sponsor, who also creates the trust.
Trustees:- They maintain mutual fund regulation while abiding by SEBI and AMFI standards. Investor protection is also ensured by the trustee.
Custodians:- It is in the role of storing and protecting the mutual fund units.
RTA:- Registrar and Transfer Agents (RTA) are SEBI-registered entities that provide services related to assisting mutual fund companies in getting record maintenance.
  • Risks involved in Mutual Funds:
  1. Manager's Risk: Any mutual fund's performance depends, among other things, on the manager's qualifications, competency, and investment techniques and processes. If any of the aforementioned factors are lacking, the fund's performance will suffer, which will be negative for unit holders.
  2.  Risks particular to security – Each security is subject to a variety of risks. Examples include the potential for a business to fail to make the principal or coupon payments on its debentures.  
  3. Returns Are Not Guaranteed - Investors should be informed that there is no assurance of any income distribution, returns, or capital growth when investing in a mutual fund. 
  • Benefits of Mutual Funds:-
  1. Transparency- Get access to price levels, market position audited financial reports, etc., about the companies.
  2. Diversification- Your portfolio will get exposure to different securities across various sectors.
  3. Flexibility- There are no time or location constraints while investing in mutual funds. 
  4. Ease of Investment- You can store and trade in different securities hassle-free.
  5. Security- You will get the utmost security while storing and trading in any financial instrument.
  6. Monitoring- You will be able to check and observe the performance of your securities and other trading activities.
  7. Convenience- You can trade quickly and comfortably.
  8. High Returns- Generate a higher return on investment (ROI) over a predefined period.
  9. Liquidity- You can quickly convert your asset into liquid cash without affecting its market price.
  • Meaning of Index Fund:- An index fund is a specific kind of mutual fund designed to replicate or follow the elements of an index of the financial markets. A mutual fund that invests in indexes is considered to offer low operating costs and minimal portfolio turnover. Regardless of how the markets are performing, these funds continue to invest in their benchmark index.
  • Meaning of Rupee Cost Averaging:- The concept behind rupee cost averaging is to average out the cost at which you buy mutual fund units. By purchasing during both falling and rising markets, rupee cost averaging enables investors to balance out their cost of investment while maximizing the returns on their assets. When the market is declining it adds more units for the same amount of investment.
  • Meaning of STP:- A lump sum investment can be made in one scheme under the Systematic Transfer Plan (STP). This strategy allows investors the ability to switch their investments from one resource to another, protecting them from market swings. While the risk cannot be eliminated, it is diminished.
  • Meaning of SIP:- A systematic investment plan invests predetermined sums every month in your selected mutual fund strategy. Your savings account will have a fixed amount withdrawn each month, which will be invested in the mutual fund of your choice. You can withdraw your SIP Investment as an emergency fund because it is an open-ended fund with no tenure.
  • Meaning of SWP:- SWP is an abbreviation for "Systematic Withdrawal Plan." Certain mutual funds allow you to periodically withdraw a set amount of money from your mutual fund investment. Without having to sell any of your fund units, this may be a convenient means for an individual to get regular income from your mutual fund investment.

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