Financial Institutions Mutual & Pension Funds: NPS, Government Pension Scheme Commerce YouTube Lecture Handouts Part 1

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Financial Institutions Mutual & Pension Funds: NPS, Government Pension Scheme | Commerce
  • A mutual fund is professionally managed investment fund that pools money from many investors to purchase securities.
  • Mutual fund investors may be retail or institutional in nature.
  • In India, mutual funds are regulated by Securities and Exchange Board of India, the regulator of the securities and commodity market owned by the Government of India.
  • Mutual funds have advantages and disadvantages compared to direct investing in individual securities. The advantages of mutual funds include
    • Increased diversification - A fund diversifies holding many securities.
    • economies of scale,
    • diversification reduces risk,
    • ability to participate in investments that may be available only to larger investors,
    • Government oversight - Mutual funds are regulated by a governmental body
    • transparency and ease of comparison - All mutual funds are required to report the same information to investors, which makes them easier to compare to each other,
    • liquidity and professional management.
  • However, these come with following disadvantages –
    • mutual fund fees and expenses,
    • less control over the timing of recognition of gains,
    • less predictable income, and
    • no opportunity to customize.
Financial Institutions-Mutual & Pension Funds

Funds may also be categorized as index funds, which are passively managed funds that match the performance of an index, or actively managed funds.

Primary Structures of Mutual Funds

  • open-end funds,
  • unit investment trusts,
  • closed-end funds and
  • exchange-traded funds (ETFs) .

Open-End Mutual Funds

Open-end mutual funds typically do not limit the number of shares they can offer, and are bought and sold on demand. When an investor purchases shares in an open-end fund, the fund issues those shares and when someone sells shares, they are bought back by the fund.

Closed-End Fund

A closed-end fund is a portfolio of pooled assets that raises a fixed amount of capital through an initial public offering (IPO) and then lists shares for trade on a stock exchange … Instead, like individual stock shares, the fund can only be bought or sold on the secondary market by investors.

Exchange Traded Fund (ETF)

An exchange traded fund (ETF) is a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same as a regular stock. It is a hybrid between an exchange-traded fund (ETF) and an open-end mutual fund, allows a standard net asset value (NAV) -based mutual fund to trade in real-time on a stock exchange, similar to the trading of a stock or ETF.

Classification of Funds by Types of Underlying Investments

  • Mutual funds may be classified by their principal investments, as described in the prospectus and investment objective.
  • The four main categories of funds are
    • money market funds,
    • bond or fixed-income funds,
    • stock or equity funds, and
    • hybrid funds.
  • Within these categories, funds may be sub-classified by investment objective, investment approach, or specific focus.
  • Bond, stock, and hybrid funds may be classified as either index (or passively-managed) funds or actively managed funds.

Hybrid Funds

  • Hybrid funds invest in both bonds and stocks or in convertible securities.
  • Balanced funds, asset allocation funds, target date or target-risk funds, and lifecycle or lifestyle funds are all types of hybrid funds.
  • A type of mutual fund that invests in more than one asset class, most often, a combination of Equity and Debt assets, and sometimes also include Gold or even Real estate. Portfolio risk can be reduced by combining assets that have a low correlation.

Stock Fund

A stock fund, or equity fund, is a fund that invests in stocks, also called equity securities. Fund assets are typically mainly in stock, with some amount of cash, which is generally quite small, as opposed to bonds, notes, or other securities. This may be a mutual fund or exchange-traded fund.

Bond Funds

A bond fund or debt fund is a fund that invests in bonds, or other debt securities. Bond funds typically pay periodic dividends that include interest payments on the fund՚s underlying securities plus periodic realized capital appreciation

Money Market Funds

Money market funds invest in money market instruments, which are fixed income securities with a very short time to maturity and high credit quality. Investors often use money market funds as a substitute for bank savings accounts, though money market funds are not insured by the government, unlike bank savings accounts.