Source of Long-Term Finance: Mutual Funds, Features and Types of Mutual Funds, Leasing Companies (For CBSE, ICSE, IAS, NET, NRA 2022)

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Mutual Funds

Mutual fund refers to a fund established in the form of a trust by a sponsor to raise money through one or more schemes for investing in securities. It is a special type of investment institution, which acts as an investment intermediary that collects or pools the savings of a large number of investors and invests them in a fairly large and well diversified portfolio of sound investments. This minimizes their risk and ensures good returns to the investors. Thus, they act as an investment agency for small investors and a good source for long-term finance for the business.

Features of Mutual Funds

The essential features of mutual funds are as follows:

  • It is a trust into which a number of investors invest their money in the form of units to form a large pool of funds.
  • The amount is invested in securities by the managers of the fund.
  • The amount is invested in different securities of reputed companies to ensure definite and regular income. Thus, it helps in minimizing the risk.
  • The mutual fund schemes often have the advantages of high return, easy liquidity, safety and tax benefits to the investors.
  • The net income received on the investments of the fund is distributed over the units held.
  • The managers of the fund are obliged to redeem the units on demand or on the expiry of a specified period.

Types of Mutual Funds

Keeping in view the investment objectives of the investors the mutual funds usually have a large variety of schemes such as equity fund, debt fund, balanced fund, growth fund, income fund, liquid fund, tax saver fund, index fund and so on. These schemes are broadly classified into two categories as follows:

Types of Mutual Funds

Open Ended Funds

These funds have no fixed corpus and period. Such fund continuously offers units for sale and is ready to buy back the units surrendered. In other words, investors are free to buy from, or sell to, the trust any number of units at any point of time at prices which are linked to the net asset value (NAV) of the units.

Close Ended Funds

In case of these funds, subscriptions from the investors are collected during a specified time period and have a fixed corpus. Not only that, the investors cannot redeem their units till the specified maturity date. However, to provide liquidity, these are listed on the stock exchange and the investors can purchase and sell through the brokers at the market price without any difficulty. It may be noted that Unit Trust of India was the first mutual fund started in India as early as 1964. Later, LIC, GIC and some nationalised banks also launched their mutual funds with high degree of success. However, during post liberalisation era, many private sector mutual funds have entered the fray. To mention a few, these are: Birla Sun Life, HDFC, HSBC, ICICI Prudential, DSP Merrill Lynch, DBS Chola Mutual Fund.

Leasing Companies

  • This method has become quite common among the manufacturing companies. Leasing facility is usually provided through the mediation of leasing companies who buy the required plant and machinery from its manufacturer and lease it to the company that needs it for a specified period on payment of an annual rent.
  • For this purpose, a proper lease agreement is made between the lessor (leasing company) and lessee (the company hiring the asset) . Such agreement usually provides for the purchase of the machinery by the lessee at the end of the lease period at a mutually agreed and specified price. It may be noted that the ownership remains with the leasing company during the lease period.
  • Sometimes, a company, to meet its financial requirements, may sell its own existing fixed asset (machinery or building) to a leasing company at the current market price on the condition that the leasing company shall lease the asset back to selling company for a specified period. Such an arrangement is known as ‘Sell and Lease Back’ . The company in such arrangement gets the funds without having to part with the possession of the asset involved which it continues to use on payment of annual rent for the lease.
  • It may be noted that in any type of leasing agreement, the lease rent includes an element of interest besides the expenses and profits of the leasing company. The leasing business in India started, in seventies when the first leasing company of India was promoted by Chitambaram Group in 1973 in Chennai.

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