2. Introduction to mutual fund
A Mutual Fund is a trust that pools the savings of a number of investors who share a common
financial goal. The money thus collected is then invested in capital market instruments such as
shares, debentures and other securities. The income earned through these investments and the
capital appreciation realized is shared by its unit holders in proportion to the number of units
owned by them. Thus, a Mutual Fund is the most suitable investment for the common man as it
offers an opportunity to invest in a diversified, professionally managed basket of securities at a
relatively low cost.
3. What are Mutual Funds?
A mutual fund is formed when capital collected from different investors u
pajsaau company shares, stocks or bonds. Shared by thousands of investors,
mutual fund is managed collectively to earn the highest possible returns. The
person driving this investment vehicle is a professional fund manager.
4. Definition
A mutual fund is a type of financial vehicle made up of a pool of money collected
from many investors to invest in securities such as stocks, bonds, money market
instruments, and other assets, Mutual funds are operated by professional money
managers, who allocate the fund's assets and attempt to produce capital gains or income
for the funds investors. A mutual fund portfolio is structured maintained to match the
investment objectives stated in its prospectus.
6. Organization of Mutual Fund
In India, mutual funds have a typical Organizational structure. There are five key parties involved in it.
They are,
The sponsoring institute to promote the mutual fund.
The policy-making body for raising fund and for mortaring is operations. This body consists of
trustees known as BOT i.e. Board of Trustees or Trust Company (TC).
The asset management company (AMC).
The custodian and
The unit-holders.
11. ➢ Professional Management: Investors avail the services of experienced and skilled
professionals who are backed by a dedicated investment research team
which analyses the performance and prospects of companies and selects suitable investments to
achieve the objectives of the scheme.
➢ Diversification: Mutual funds invest in a number of companies across a broad
cross-section of industries and sectors. This diversification reduces the risk because seldom do
all stocks decline at the same time and in the same proportion. Investors achieve this
diversification through a Mutual Fund with far less money than one can do on his own.
12. ➢ Convenient Administration: Investing in a mutual fund reduces paper work and helps investors to avoid
many problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies.
Mutual funds save investors time and make investing easy and convenient.
➢ Return Potential: Over a medium to long term, Mutual funds have the
potential to provide a higher return as they invest in a diversified basket of selected securities.
➢ Low Costs: Mutual funds are a relatively less expensive way to invest
compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial
and other fees translate into lower costs for investors.
13.
14. The Sponsor
The company which sets up the mutual fund is called the sponsor or
sponsoring institute. A sponsor establishes the mutual fund, along with any
individual or body corporate. The sponsor’s liability is restricted to his
contribution. Sponsor must contribute a minimum 40% to the net worth of
assets management company. Sponsor is a person who has a continuing
interest in the mutual fund and whose creditability is significantly responsible
for mobilizing the savings of the public for the mutual fund.
15. Trustees
The trustees, forming a board called Board of Trustees (BOT), are the people who
are entrusted to oversee the operations of the fund and to provide checks for the
efficient, efficient, profitable and transparent operation of the fund. They are
responsible to safeguard the interest of the unit holders (Investors). They enjoy
very wide powers in the management of the fund and they can even dismiss the
Asset Management Company with the approval of the SEBI.
16. Asset Management Company
(AMC)
The BOT may hire or contract a separate AMC run by professional managers. The AMC actually deals
with the funds of the various schemes of the mutual fund. It employs a large number of professionals to
make investments. Carry out research and to render services to the agents and investors. It thus actually
implements the policy of the fund and manages investment operations. It is thus responsible (or floating,
managing and redeeming the various schemes of the mutual fund. It also handles the administration of the
fund. It receives the fees for its services. It should be remembered that the success of mutual fund depends
upon the efficiency of the Assets Management Company. It is the responsibility of the Assets management
Company to submit a quarterly report on the functioning of the mutual fund to the board of trustees who
will guide and control the assets management company.
17. The Custodian
Every mutual fund has a custodian who acts as a registrar and transfer agent and
renders various services for the mutual fund. The custodian is responsible for
coordinating with brokers, the actual transfer and storage of stocks and handling of the
property of the trust. He is also answerable to the Assets management company. Mutual
funds are required by law to protect their portfolio security by placing them with a
custodian.