Mutual funds – What is mutual fund.

A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt and other assets. A mutual fund is an open-end professionally managed investment fund that pools money from many investors to purchase securities.

Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund.

In India, SEBI has prescribed it to be formed as trust with board of trustees to take care of interest of investors.

Trustees appoint AMC (Asset Management company) which takes care of day to day affair of Mutual fund investment management.

There are four broad types of mutual funds: Equity (stocks), fixed-income (bonds), money market funds (short-term debt), or both stocks and bonds (balanced or hybrid funds). The classification depends upon where the investments are made from a particular scheme of a mutual fund company.

The value of the scheme of the mutual fund company depends on the performance of the securities it decides to buy. So, when you buy a unit or share of a mutual fund, you are buying the performance of its portfolio or, more precisely, a part of the portfolio’s value.

A mutual fund is a professionally managed investment vehicle. Practically, one does not invest in mutual fund, but invests through mutual funds. However, we hear of “investing in mutual funds” or “investing in mutual fund schemes”. While that is fine for the purpose of discussions, technically it is not correct.  It is critical to understand the difference between the two concepts.

When someone says that one has invested in a mutual fund scheme, often, the scheme is perceived to be competing with the traditional instruments of investment, viz. equity shares, debentures, bonds, etc. The reality is that one invests in these instruments through a mutual fund scheme. In other words, through investment in a mutual fund, an investor can get access to equities, bonds, money market instruments and/or other securities, that may otherwise be unavailable to them and avail of the professional fund management services offered by an asset management company.

Thus, an investor does not get a different product, but gets a different way of investing. The difference lies in the professional way of investing, portfolio diversification, and a regulated vehicle.

Mutual fund is a vehicle (in the form of a “trust”) to mobilize money from investors, to invest in different markets and securities, in line with stated investment objectives. In other words, through investment in a mutual fund, an investor can get access to equities, bonds, money market instruments and/or other securities, that may otherwise be unavailable to them and avail of the professional fund management services offered by an asset management company.