Mutual fund is the professionally managed investment fund that is collected from many small and large investors for the purpose of investing in the securities such as stocks, bonds, money market instruments etc. Mutual fund is a mechanism for pooling resources from public by issuing units to them and investing the funds in securities in accordance with objectives previously disclosed in offer letter. Investors of mutual funds are known as unit holders.
The mutual fund allows small and individual investors to get benefits of a diversified portfolio. The value of investment is known as Net Assets Value (NAV) of the scheme. NAV is the calculated value of holdings which is calculated monthly. Investor can purchase and redeem depending upon the NAV.
In context of Nepal, mutual fund companies will invest in a combination of or in all the following instruments as stipulated by Rule 34 of prevailing mutual fund regulation.
Mutual funds can be classified into two categories depending on their basic characteristics.
Open ended mutual fund has an infinite life which means that there is no ending date of this scheme. This scheme can continue to go on forever and due to this factor scheme allows investors to come and go with some conditions. The advantage of these scheme is that investor can put additional money into the scheme or exit as per their wish.
Close ended mutual fund schemes are those schemes that will come to an end after a specific period of time. After the specific time period, all the assets of schemes are sold off and these are distributed to the unit holders after deducting the necessary expenses for the entire process. Close ended mutual funds are listed on the stock exchange where investors can buy units from others via secondary market.
The fund size differs from scheme to scheme however the total units issued by the scheme remains the same as the fund will not issue any additional units after initial offering.
A scheme can be classified as Growth fund, Income fund or Balanced fund considering its investment objective.
The objective of growth scheme is to provide capital appreciation over medium to long term period. Such schemes normally invest a major part of their corpus in equities. These schemes are comparatively higher risky which provide different options to the investors like divided option, capital appreciation and investors may choose an option depending on their preferences.
The aim of income scheme is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds, corporate debentures, government securities and money market instruments which are less risky compared to equity scheme.