Introduction to Mutual Funds, Indian Financial System | Indian Financial System - B Com PDF Download

Mutual Funds

A mutual fund is an investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in assets and securities such as stocks, bonds or money market instruments. Mutual funds are operated by fund managers, who invest the fund capital and attempt to produce capital gains and income for the fund investors. An asset management company (AMC) is a company that manages a mutual fund. For all practical purposes, it is an organized form of a money portfolio manager which has several mutual fund schemes with similar or varied investment objectives. The AMC hires a professional money manager, who buys and sells securities in line with the fund's stated objective. A mutual fund portfolio is structured and maintained to match the investment objectives stated in its prospectus. Each investor owns shares, which represent a portion of the holdings of the fund. Thus, a mutual fund is one of the most viable investment options for the small investor as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. Mutual funds invest in a wide amount of securities, and performance is usually tracked as the change in the total market cap of the fund, derived by aggregating performance of the underlying investments. Mutual fund units, or shares, can typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per share. A fund's NAV is derived by dividing the total value of the securities in the portfolio by the total amount of shares outstanding.

When an investor purchases shares in a mutual fund, he is usually assessed a fee known as an expense ratio. A fund's expense ratio is the summation of its advisory fee or management fee and its administrative costs. Additionally, these fees can be assessed on the front-end or back-end, known as the load of a mutual fund. When a mutual fund has a front-end load, fees are assessed at the time of the initial purchase. For a back-end load, mutual fund fees are assessed when an investor sells his shares. Sometimes, however, an investment company offers a no-load mutual fund, which is a fund sold without a commission or sales charge. These funds are distributed directly by an investment company rather than through a secondary party.

Investing in a mutual fund offers the investor a gamut of benefits. With mutual fund investments, the money can be spread in small bits across varied companies. This way, the investor reaps the benefits of a diversified portfolio with small investments. The pool of money collected by a mutual fund is managed by professionals who possess considerable expertise, resources and experience. Through analysis of markets and economy, they help pick favourable investment opportunities for their investors. A mutual fund usually spreads the money in companies across a wide spectrum of industries. This not only diversifies the risk, but also helps take advantage of the position it holds. Mutual funds clearly present their investment strategy to their investors and regularly provide them with information on the value of their investments. Also, a complete portfolio disclosure of the investments made by various schemes along with the proportion invested in each asset type is provided. A wide variety of schemes allow investors to pick up those which suit their risk/ return profile. All the mutual funds are registered with SEBI. They function within the provisions of strict regulations created to protect the interests of the investors.