There is a fund which is contributed by the owner and remains with the company. Also,this fund stays with the company and the company has no liability to repay the fund. (a). Which fund is being referred to here? (b). Explain the types of fund which is identified above. *
Answers
Answer:
a. The fund referred in the paragraph is owner’s fund.
b. Types of owner’s fund:
i. Equity shares: Equity share is the most important source of raising long term capital. Capital raised from equity shares is called ownership capital or
owner’s funds. Thus, equity shareholders are the owners of the company.
Merit:
The holders of equity shares contribute permanent capital to the
company as and when required. Thus, there is no responsibility on its
part to repay any money or to pay dividends to shareholders.
Demerit:
Before any equity shares can be issued to the public, a lot of legal
formalities need to be completed.
ii. Retained Earnings: For the future expansion of the company, part of the
profits is retained in the organisation instead of completely distributing
profits in the form of dividends among shareholders.
Merit:
No acquisition cost is involved as these funds are raised internally
and do not depend on any outside resource.
Demerit:
Business fluctuations occur from time to time because of which
retained earnings are an uncertain source of finance.
Answer:
a. Equity Funds
Equity funds primarily invest in stocks, and hence go by the name of stock funds as well. They invest the money pooled in from various investors from diverse backgrounds into shares/stocks of different companies. The gains and losses associated with these funds depend solely on how the invested shares perform (price-hikes or price-drops) in the stock market. Also, equity funds have the potential to generate significant returns over a period. Hence, the risk associated with these funds also tends to be comparatively higher.
b. Debt Funds
Debt funds invest primarily in fixed-income securities such as bonds, securities and treasury bills. They invest in various fixed income instruments such as Fixed Maturity Plans (FMPs), Gilt Funds, Liquid Funds, Short-Term Plans, Long-Term Bonds and Monthly Income Plans, among others. Since the investments come with a fixed interest rate and maturity date, it can be a great option for passive investors looking for regular income (interest and capital appreciation) with minimal risks.
c. Money Market Funds
Investors trade stocks in the stock market. In the same way, investors also invest in the money market, also known as capital market or cash market. The government runs it in association with banks, financial institutions and other corporations by issuing money market securities like bonds, T-bills, dated securities and certificates of deposits, among others. The fund manager invests your money and disburses regular dividends in return. Opting for a short-term plan (not more than 13 months) can lower the risk of investment considerably on such funds.
d. Hybrid Funds
As the name suggests, hybrid funds (Balanced Funds) is an optimum mix of bonds and stocks, thereby bridging the gap between equity funds and debt funds. The ratio can either be variable or fixed. In short, it takes the best of two mutual funds by distributing, say, 60% of assets in stocks and the rest in bonds or vice versa. Hybrid funds are suitable for investors looking to take more risks for ‘debt plus returns’ benefit rather than sticking to lower but steady income schemes.