mutual funds
There is a pool of professionally managed funds where the fund manager has to buy/sell securities as per the investment objective of the scheme. What fund houses do is that they pool money from investors who share common investment objectives and invest this pool of money in the Indian economy. The money is distributed across multiple asset classes like equity, debt, corporate bonds, government securities, call money, certificate of deposits etc.
Mutual fund investors are allotted mutual fund units based on the investment amount and the current net asset value (NAV) of the fund. The performance of a mutual fund may depend on the performance of its underlying assets. Mutual funds are supposed to lead to a diversified portfolio. Because these funds invest in different asset classes, they not only offer diversification but also help investors manage risk. Because if one of the asset classes the mutual funds are invested in falls, there is less chance of all the other asset classes falling at the same time. In fact, other asset classes may even be able to offset losses through that one sector.
SEBI, the regulator of mutual funds in India, describes them as, ”
A mechanism for pooling resources by issuing units to investors and investing the funds in securities in accordance with the objectives stated in the offer document. Investing in securities is spread over a wide cross-section of industries and sectors, and thus reduces risk. Diversification reduces risk because not all stocks can move in the same direction at the same time in the same proportion. Mutual funds issue units to investors according to the amount of money invested by them. The investors of mutual funds are known as unitholders.
Regular and Direct Plan in Mutual Funds
If you are planning to invest in Mutual Funds, you must be aware of the fact that they offer two plans – Regular Plan and Direct Plan. A direct mutual fund scheme is generally a mutual fund scheme offered directly by the fund house / asset management company. In a direct mutual fund scheme, there is no third party involvement and hence the fund house is not required to pay fees and make distributions or commissions. The investor does not need to visit the fund house in person to buy the regular plan. They can do this by purchasing a regular mutual fund scheme through intermediaries such as distributors, advisors or brokers. However, the fund house has to pay commission to the third party through whom the funds are being bought by the investors. The fund house adjusts the commission fee by charging a higher expense ratio on regular mutual funds.
Dividend Vs Growth Option
Just like you have two schemes to choose from while investing in mutual funds, investors have two different investment options in the form of growth and dividend. In the Growth option, if the mutual fund you invest in is successful in earning a profit, then this profit is reinvested back into the scheme. Over time, this may (or may not) result in an increase in the net asset value of the scheme. The Growth Payout option in mutual funds is generally availed by those who have a long term investment horizon and wish to remain invested for a long period of time.
On the other hand, the dividend payout option is more suitable for anyone who is investing in mutual funds to generate regular income. This is because in the dividend payout option, the profits made by the fund are not reinvested back into the scheme. Instead, investors receive income from time to time in the form of dividends. These dividends which are rolled out by the fund manager are from the NAV of the fund. The profits made by the scheme are distributed to the investor in the form of dividends. However, it is up to the fund manager to decide when to roll out these dividends.
So that’s dividends and growth for you. If you are planning to invest in Mutual Funds are you planning to go with Growth option or Dividend option? No matter what you choose, make sure it is in line with your investment objective.
“This is an investor education and awareness initiative by Axis Mutual Fund. Investors need to complete a one-time KYC process. For more details visit www.axismf.com or contact us at Customerservice@axismf.com. Investors should only Should deal with registered Mutual Funds, details of which are available at www.sebi.gov.in – Intermediaries/Market Infrastructure Institutions section. For any grievance redressal, investors can call us at 1800 221 322 or write to us at customerservice@ axismf.com or register a complaint on SEBI Scores Portal https://scores.gov.in.
Mutual Fund investments are subject to market risks, read all scheme documents carefully.