KOCHI: Amutual fund is a trust that pools together the resources of like minded investors for investment in the capital market. By investing in the units of mutual funds, the investor becomes a part owner of the assets of the mutual funds. When the value of the mutual funds investment goes up, the return for the investors increases. When the value of investments comes down, the return for the investor also comes down. The net income earned on the funds including capital appreciation is shared amongst the investors (called unit holders). Thus, the mutual fund becomes the indirect vehicle for the investor to invest in capital markets.
In 1987, the mutual fund industry was opened to public sector and in June 1987, the
State Bank of India became the first Public sector bank to enter the market. Within that year, assets under management of UTI had touched 6700 Crores. Others followed soon.
To understand a mutual fund, let us take a look at the its crucial features
a) Investors place money with mutual fund. The fund invests the money in capital market. That way mutual fund channelizes peoples savings into investments.
b) Mutual funds are managed by professionals who are trained in the science and art of security analysis.
c) An investor is a part of the mutual fund. He is not a lender. This has two implications. One as part owner he is not entitled to any guaranteed return. Two, he is not entitled to any interest on his investments as he is an investor not a lender.
d) When the fund takes the money, it issues units to the investor. Each unit represents the ownership of a part of the underlying securities.
e) An investor who has bought a certain percentage of mutual fund units owns that percentage of assets and liabilities of the fund.
f) Dividend Income of a mutual fund registered with Securities and Exchange Board of India Act 1992 is exempt under section10(23D) of the Income Tax Act, 1961 Sale of Mutual Fund units will attract capital gains tax as per the Income Tax Act, 1961