Mutual Fund Explained

Mutual Fund is a method by which the Mutual Fund Company invests the money from many individual investors in stocks, bonds, Financial Market Instruments and other kinds of securities. It is not an alternative to investing in stocks and bonds directly by an entity.

For understanding Mutual Fund we need to understand that the investment in mutual fund by an individual/entity means that there are many more such investors who are also purchasing Mutual Fund, i.e., each one is buying a piece of a larger cake. The collective amount being subsequently used by the Funds Managing Company to invest in monitory instruments as mentioned in the first paragraph. Thus the holders of a mutual fund unit gets the advantage of proportional share of the fund’s gains, losses, income and expenses.

Each Mutual Fund has a specified objective which is mentioned in the prospectus which constitutes the legal document disseminating information about the fund, funds history and its past performance in terms of yield etc.

Some of the objectives of a mutual fund are listed here:-

Objectives of the Fund

Instruments in which fund will be invested

Equity (Growth)

Invests only in stocks

Debt (Income)

Invests only in fixed-income securities

Money Market

Invests in short-term money market instruments (including government securities)

Balanced

Distributed between stocks and fixed-income securities, to maintain a ‘balance’ in gains and risks

The company that manages a mutual fund is called an Asset Management Company AMC and may have many mutual fund schemes with same or different investment objectives and hire a professional money manager, who purchases and sells securities in line with the fund’s stated objective.

As per Mutual fund regulations by the Securities and Exchange Board of India (SEBI) the fund’s objectives are to be clearly mentioned in the prospectus.

Also, every mutual fund constitutes a Board of Directors who represents the shareholders’ interests, rather than the interest of the AMCs.

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