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Monday, September 27, 2010

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 investor's money on their behalf into various assets towards a common investment objective.

Hence, technically speaking, a mutual fund is an investment vehicle which pools investor's 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 investor's. Every scheme has a portfolio statement, revenue account and balance sheet.