What is Mutual Fund?
Mutual Fund Basics
Mutual Funds are one of the kickoff point for individual investors to the world of financial investments. In this article we shall learn what is a mutual fund and how does it operate.
It is a type of financial vehicle made up of a pool of money collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments, and other assets. They are operated by professional money managers. These money managers allocate the fund’s assets and attempt to produce capital gains and/or income for the fund’s investors. The portfolio is structured and maintained to match the investment objectives stated in its prospectus.
- According to Oxford Dictionary Mutual Fund is defined as “An investment programme funded by shareholders that trades in diversified holdings. And it is professionally managed.”
- In simple words it is ‘number of investors who share a common investment objective pool in their money with the sole intention of earning returns’.
Mutual Fund process
- Investing in Mutual Funds is normally much easier than buying or selling financial securities like stocks, bonds or money market instruments.
- Mutual funds are managed by professional ‘fund managers’. They invest the fund’s capital in various financial securities based on its objective. Thus, attempting to produce capital gains and income for the fund’s investors. These Fund Managers are highly qualified individuals who invest your money based on a lot of backend research.
- A mutual fund is required to be registered with the Securities and Exchange Board of India (SEBI). SEBI regulates securities markets before it can collect funds from the public.
- Each investor owns units, which represent a portion of the holdings of the fund. The income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value or NAV”.
- Simply put, It is one of the most viable investment option for the common man. Since it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
- Each Mutual Fund has a different investment objective, which is set by Fund Manager before launching it in the market.
- Based on this objective, the Fund Manager picks up financial securities for the fund. Thus, sets its return and risk expectation.
- If Fund’s objective is wealth conservation, then Fund Manager would invest most of the money in Debt and Liquid instruments. Because they are less risky and give inflation comparable returns.
- Examples of few big Mutual Fund houses in India: ICICI Prudential, HDFC, Reliance , SBI, Birla Sun Life etc.