Understand the concept of Mutual Funds with our detailed Class 10 Notes. Learn about types of mutual funds, their advantages, risks, and working process. These notes are prepared as per the latest CBSE Class 10 syllabus to help students build a strong foundation in financial literacy and perform well in exams.
Mutual Funds Class 10 Notes
What is the regulatory body for mutual funds?
The Securities and Exchange Board of India (SEBI) is the regulatory body for all the mutual funds. All the mutual funds must get registered with SEBI.
What are the benefits of investing in mutual funds?
There are several benefits from investing in a mutual fund:
- Small investments: You can start with small money.
- Experts manage your money: professionals decide where to invest the money.
- Less risk: Your money can invest in many companies.
- Transparency: Mutual funds tell you how your money is growing.
- Lots of choice: you can pick a fund that matches your goal.
- Safe and regulated: SEBI keeps track of mutual funds to make them fair and honest.
What is NAV?
NAV stands for Net Asset Value; it is the price of one unit of a mutual fund. For example, suppose you have stocks, bonds and other investments in one account. The total value is called the net asset value.
Are there any risks involved in investing in mutual funds?
Mutual funds do not give any guarantee of returns. The performance depends on how the investments, like shares, bonds and debentures, perform in the market. If the investments go up, then the returns go up, and if investments go down, then returns will go down. Mutual funds carry different types of risk.
- Market Risk: if the stock or bond market goes down, the value of the mutual fund can also go down.
- Non-Market Risk: If any bad news is there, then the stock price can go down.
- Interest Rate Risk: If the interest rate goes down, then the bond prices will also go down.
- Credit Risk: If the company fails to pay back its debt, then the bond loses value.
- Key Takeaway: Mutual funds are a smart way to invest, but they come with risks.
What are the different types of mutual funds?
Mutual funds are classified in the following manner:
(a) On the basis of Objective
- Equity Funds/Growth Funds: Funds that invest in equity shares are called equity funds. They are best suited for investors who are seeking capital appreciation. There are different types of equity funds, such as diversified funds, sector-specific funds and index-based funds.
- Diversified Funds: Invest across many industries; lower risk
- Sector Funds: Focus on one industry (like IT or pharma); higher risk
- Index Funds: Copy popular stock market indices like Nifty 50; aim to match market returns.
- Tax Saving Funds: These funds offer tax benefits to investors under the Income Tax Act.
- Debt/Income Funds: These funds invest predominantly in high-rated fixed-income-bearing instruments like bonds, debentures, government securities, commercial paper and other money market instruments.
- Liquid Funds/Money Market Funds: These funds invest in highly liquid money market instruments. The period of investment could be as short as a day.
- Gilt Funds: These funds invest in central and state government securities.
- Balanced Funds: These funds invest both in equity shares and fixed-income-bearing instruments (debt) in some proportion.
(b) On the basis of flexibility
- Open-ended Funds: These funds do not have a fixed date of redemption. Generally they are open for subscription and redemption throughout the year.
- Close-ended Funds: These funds are open initially for entry during the Initial Public Offering (IPO) and thereafter closed for entry as well as exit.
What are the different investment plans that mutual funds offer?
The term ‘investment plans’ generally refers to the services that the funds provide to investors, offering different ways to invest. Some of the investment plans offered by mutual funds in India are:
- Growth Plan and Dividend Plan: A growth plan is a plan under a scheme wherein the returns from investments are reinvested and there are very few income distributions.
- Dividend Reinvestment Plan: This is referred to as the dividend reinvestment plan. Under this plan, dividends declared by a fund are reinvested in the scheme on behalf of the investor, thus increasing the number of units held by the investors.
What are the rights that are available to a mutual fund holder in India?
As per SEBI Regulations on Mutual Funds, an investor is entitled to:
- Proof of Investment: You can ask for a mutual fund certificate, which you can receive within 6 weeks.
- Know What You’re Investing In: You have a right to know about the fund goals, how to invest and general updates.
- Get your money on time: If any company provides a dividend, then as per the SEBI rule, you will receive it within 30 days. If you sell, then you should get your money within 10 days.
- Be Warned About Risks: If there is any negative effect on your investment, then it is the responsibility of the trustees to inform you.
- Shut Down the Fund: 75% of the unit holders can pass a resolution to wind up the scheme.
- Complain to SEBI: If something goes wrong, you can complain to SEBI.
What is a Fund Offer Document?
The Fund Offer Document, also known as the Scheme Information Document (SID), is a legal and regulatory document that provides comprehensive details about a mutual fund scheme. These guidelines stipulated by SEBI and the prospectus must disclose details about:
- Investment objectives
- Risk factors and special considerations
- Summary of expenses
- The Constitution of the fund
- Guidelines on how to invest
- Organisation and capital structure
- Tax provisions related to transactions
- Financial information
What is Active Fund Management?
An actively managed fund is a type of mutual fund where a fund manager decides where to invest your money. This manager knows about the market, reads the news, does the search and makes the decision to buy or sell shares. It is like a professional driver steering your investment car. The two common styles of active investing are:
- Growth Investing Style: The primary objective of equity investment is to obtain capital appreciation. A growth manager looks for companies that are expected to give above-average earnings growth, where the manager feels that the earnings prospects.
- Value Investment Style: A value manager looks to buy companies that they believe are currently undervalued in the market but whose worth they estimate will be recognised in the market valuations eventually.
What is Passive Fund Management?
Passive fund management is a type of investment where the fund manager does not make decisions and does not actively choose which stocks to buy or sell. The fund simply copies a market index like Nifty 50 or Sensex. The passive fund managers do not try to beat the market; instead of that, they just follow it. For example, index funds are less risky, low cost and simple. There are two different types of passive fund:
- Index fund: These are mutual funds that invest in all the stocks of a market index.
- Exchange-Traded Funds (ETFs): Similar to index funds, but traded like stocks on the exchange.
What is an ETF?
An Exchange-Traded Fund (ETF) is a type of investment that combines the benefits of a mutual fund with the flexibility of a stock. An ETF, however, isn’t a mutual fund; it trades just like any other company on a stock exchange. Unlike a mutual fund that has its net asset value (NAV) calculated at the end of each trading day, an ETF’s price changes throughout the day, fluctuating with supply and demand. When buying and selling ETFs, you pay your broker the same commission that you’d pay on any regular trade.
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