Working of Mutual Funds

An Overview of Indian Mutual Funds

Any type of mutual fund that exists in the U.S. is mirrored in some way in the Indian market. There are mutual funds that invest in equity or stocks, and are managed to achieve a range of goals. Some equity mutual funds are designed to generate long-term capital gains through growth or value investing strategies, like the Birla SL Frontline Equity Fund, while others are focused on generating dividend income for shareholders. Some combine the two, such as the popular ICICI Prudential Equity & Debt Fund.

Indian mutual funds may also invest in bonds and other debt securities with the goal of generating regular interest income. Indian debt funds invest in government or corporate debt instruments and money market securities just like American funds.

There are also Indian balanced funds that invest in both equity and debt instruments to create portfolios that offer a degree of stability without completely ignoring the potential for big gains in the stock market. A good example is the DSP Equity Opportunities Fund. Just like in the American market, the Indian market offers mutual funds that specialize in certain sectors, only invest in government or inflation-protected debt, track a given index or are designed to maximize tax-efficiency.

Regulation

Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI). Indian mutual funds are subject to stringent requirements about who is eligible to start a fund, how the fund is managed and administrated and how much capital a fund must have on hand. To start a mutual fund, for example, the fund sponsor must have been in the financial industry for at least five years and have maintained positive net worth for the five years immediately preceding registry.

The SEBI regulations include a minimum startup capital requirement of Rs. 500 million for open-ended debt funds and Rs. 200 million for closed-ended funds. In addition, Indian mutual funds are only allowed to borrow up to 20% of their value for a term not to exceed six months to meet short-term liquidity requirements.

 It’s very important to know the area in which mutual funds works, the basic understanding of stocks and bonds will be helpful to understand mutual funds.