Understanding Mutual Funds
A vehicle for investing in stocks and bonds
A mutual fund is not an alternative investment option to stocks and bonds, rather it pools the money of several investors and invests this in stocks, bonds, money market instruments and other types of securities.
Buying a mutual fund is like buying a small slice of a big pizza. The owner of a mutual fund unit gets a proportional share of the fund’s gains, losses, income and expenses.
Each mutual fund has a specific stated objective
The fund’s objective is laid out in the fund's prospectus, which is the legal document that contains information about the fund, its history, its officers and its performance.
Some popular objectives of a mutual fund are -
||What the fund will invest in
||Only in stocks
||Only in fixed-income securities
|Money Market (including Gilt)
||In short-term money market instruments (including government securities)
||Partly in stocks and partly in fixed-income securities, in order to maintain a 'balance' in returns and risk
Managed by an Asset Management Company (AMC)
The company that puts together a mutual fund is called an AMC. An AMC may have 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.
All AMCs Regulated by SEBI, Funds governed by Board of Directors
The Securities and Exchange Board of India (SEBI) mutual fund regulations require that the fund’s objectives are clearly spelt out in the prospectus.
In addition, every mutual fund has a board of directors that is supposed to represent the shareholders' interests, rather than the AMC’s.