What is a mutual fund?

What is a mutual fund?

A mutual fund is a legal vehicle that enables a collective group of individuals to:

i. Pool their surplus funds and collectively invest in instruments / assets for a common investment
objective.

ii. Optimize the knowledge and experience of a fund manager, a capacity that individually they may
not have

iii. Benefit from the economies of scale which size enables and is not available on an individual
basis.

Investing in a mutual fund is like an investment made by a collective. An individual as a single
investor is likely to have lesser amount of money at disposal than say, a group of friends put

together.

Now, let’s assume that this group of individuals is a novice in investing and so the group turns over
the pooled funds to an expert to make their money work for them. This is what a professional Asset
Management Company does for mutual funds. The AMC invests the investors’ money on their
behalf into various assets towards a common investment objective.
Hence, technically speaking, a mutual fund is an investment vehicle which pools investors’ money
and invests the same for and on behalf of investors, into stocks, bonds, money market instruments
and other assets. The money is received by the AMC with a promise that it will be invested in a
particular manner by a professional manager (commonly known as fund managers). The fund
managers are expected to honour this promise. The SEBI and the Board of Trustees ensure that this
actually happens.
The organisation that manages the investments is the Asset Management Company (AMC). The
AMC employs various employees in different roles who are responsible for servicing and managing
investments.

The AMC offers various products (schemes/funds), which are structured in a manner to benefit and
suit the requirement of investors’. Every scheme has a portfolio statement, revenue account and
balance sheet.
 1. Open ended funds
These funds are available for subscription throughout the year. These funds do not have a fixed
maturity. Investors have the flexibility to buy or sell any part of their investment at any time, at
the prevailing price (Net Asset Value - NAV) at that time.

2. Close Ended funds
These funds begin with a fixed corpus and operate for a fixed duration. These funds are open for
subscription only during a specified period. When the period terminates, investors can redeem
their units at the prevailing NAV.
 Asset classes
1. Equity funds
These funds invest in shares. These funds may invest money in growth stocks, momentum
stocks, value stocks or income stocks depending on the investment objective of the fund.
2. Debt funds or Income funds
These funds invest money in bonds and money market instruments. These funds may invest into
long-term and/or short-term maturity bonds.
3. Hybrid funds
These funds invest in a mix of both equity and debt. In order to retain their equity status for tax
purposes, they generally invest at least 65% of their assets in equities and roughly 35% in debt
instruments, failing which they will be classified as debt oriented schemes and be taxed
accordingly. (Please see our Tax Section on Page 39 for more information.) Monthly Income
Plans (MIPs) fall within the category of hybrid funds. MIPs invest up to 25% into equities and the
balance into debt.
4. Real asset funds
These funds invest in physical assets such as gold, platinum, silver, oil, commodities and real
estate. Gold Exchange Traded Funds (ETFs) and Real Estate Investment Trusts (REITs) fall within
the category of real asset funds.

Source: Personalfin.com