What is Mutual Funds
Mutual Funds collect the savings from small investors to invest them in government and other corporate securities and cash income through interest and dividends decides capital gains. It works on the principle of “small drops of water make a big ocean” to get funds from investors, the fund adopts a simple technique. Each fund is divided into a small fraction Called ‘units’ of equal value. Each investor is allotted units in proportion to the size of his investment.
There are various investment avenues available to an investor such as real estate, bank deposits, post office deposits, shares, debentures, bonds etc. A mutual fund is one more type of investment avenue available to investors.
There are many reasons why investors prefer mutual funds. Buying shares directly from the market is one way of investing. But this requires spending time to find out the performance of the company whose share is being
purchased, understanding the future business prospects of the company, finding out the track record of the promoters and the dividend, bonus issue history of the company etc. An informed investor needs to do research before investing. However, many investors find it cumbersome and time consuming to pore over so much of information, get access to so much of details before investing in the shares. Investors therefore prefer the mutual fund route.
They invest in a mutual fund scheme which in turn takes the responsibility of investing in stocks and shares after due analysis and research. The investor need not bother with researching hundreds of stocks. It leaves it to the
mutual fund and it’s professional fund management team. Another reason why investors prefer mutual funds is because mutual funds offer diversification. An investor’s money is invested by the mutual fund in a variety of shares, bonds and other securities thus diversifying the investors
portfolio across different companies and sectors. This diversification helps in reducing the overall risk of the portfolio. It is also less expensive to invest in
a mutual fund since the minimum investment amount in mutual fund units is fairly low (Rs. 500 or so). With Rs. 500 an investor may be able to buy only a few stocks and not get the desired diversification. These are some of the
reasons why mutual funds have gained in popularity over the years.
This is the role of the Asset Management Company (the Third tier).
Trustees appoint the Asset Management Company (AMC), to manage
investor’s money. The AMC in return charges a fee for the services provided
and this fee is borne by the investors as it is deducted from the money
collected from them. The AMC’s Board of Directors must have at least 50% of Directors who are independent directors. The AMC has to be approved by SEBI. The AMC functions under the supervision of it’s Board of Directors, and
also under the direction of the Trustees and SEBI. It is the AMC, which in the name of the Trust, floats new schemes and manage these schemes by buying and selling securities. In order to do this the AMC needs to follow all rules and regulations prescribed by SEBI and as per the Investment anagement Agreement it signs with the Trustees.