What is Mutual Fund?
A mutual fund is a financial mechanism by which pooled resources of multiple investors are invested in different forms of securities. Investors are allotted units for their investments, and unit holders share the resulting profits and losses in proportion with their investments. Since the pooled resources are invested in different securities, risk gets diversified and since the investments are done by an experienced, professional fund manager, investors are assured significantly better returns at relatively low risk. From time to time, mutual funds come out with different schemes that have varied objectives. And to be eligible to solicit funds from investors, it is necessary that mutual funds be registered with the Securities and Exchange Board of India.
A mutual fund is set up as a trust which includes the following entities:
Sponsor: Establishes the trust and functions like the promoter of a company
Trustees: Have a hold on the property of the trust, and ensure benefit of the investors
Asset Management Company (AMC): Needs to be approved by Securities and Exchange Board of India (SEBI), and manages funds by making investments in different types of securities
Custodian: Needs to be registered with SEBI and holds the securities of various schemes of the fund in its custody Trustees superintend and monitor the AMC and ensure compliance with SEBI regulations. SEBI mandates that at least 2/3rd of the directors of the Trustee Company or board of trustees, and 50% directors of the AMC should be independent, and not associated with the sponsors in any way.
Basically, mutual funds are pooled investments, managed by professionals who have knowledge about how the market works. It is not just your money alone that gets invested. The common pool of money invested by many investors like you is managed by the mutual fund’s investment manager. The manager then uses sound judgement and market understanding to invest the total amount, called corpus, in different financial securities like shares, debentures and money market instruments. Profit generated through these investments is then distributed among investors in proportion to the investments made by them.
Your mutual fund investments earn returns in any of these three ways:
Funds receive income in the form of dividends or interest on the securities they own
When prices of securities increase, and a fund sells securities at a higher price, it gains profits
If a fund holds on to securities after their prices have increases, the Net Asset Value (NAV) of the fund increases and units can then be sold off at a profit
The performance of your mutual fund is reflected in its Net Asset Value (NAV), which is declared at the end of every business day. These are accessible on the website of the Association of Mutual Funds in India (AMFI), where it is mandatory by law, as well as on the fund’s own website. The mutual fund company also has a legal obligation to publish an annual report as well as a half-yearly report on the performance of their mutual funds. Some mutual fund companies may send this out to investors too. Apart from NAV, a ratio of the mutual fund’s returns / yields tracked across time periods ranging from the last 6 months, I year, 3 years, 5 years and since inception is used as a performance measure. Apart from these, various studies are published by financial newspapers and research agencies which provide insights on the performance of funds as well as their ranking in terms of performance. These could be looked at to track performance and you could even compare fund performance with that of other funds in the same category to judge how well it is doing.
You can refer to any of these for information about mutual funds:
The websites of different mutual fund companies
The website of the Association of Mutual Funds in India (AMFI)
The ‘Mutual Funds’ section of the Securities and Exchange Board of India (SEBI) website
Annual reports of SEBI
Financial websites or newspapers or finance sections of general publications and websites
Information from mutual fund agents or distributors
The Scheme Information Document of the mutual fund you have invested in; will have contact details of the person you should get in touch with in case of a problem or clarification. If that does not work, and you are not satisfied by the response from the company, you can approach the Securities and Exchange Board of India (SEBI). SEBI will then take up the matter with the company and follow up till it is resolved.
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