Whether you are an experienced investor or a beginner, you must have heard the term ‘mutual fund’. So today we will tell you in detail about mutual funds.
What is a Mutual Fund ?
Mutual funds are a common pool of money to which multiple investors can contribute simultaneously. The amount thus collected is used for investment like a large fund.
Where does the money of the mutual fund go?
Money raised from mutual funds can be invested in stocks, bonds, money market instruments, gold and other assets. These funds are operated by fund managers, who try to achieve the goal of increasing the amount for investors.
how does it work ?
Just as a debt fund has certain objectives such as investing in government schemes, bonds, etc., an equity fund invests in stocks and other equities instruments.
Categories of mutual funds
- Equity Fund – Funds that invest only in stocks and other equity instruments.
- Debt Funds – Funds that invest only in fixed income instruments.
- Money Market Funds – Funds that invest in short-term money market instruments.
- Hybrid Funds – Funds that divide between equity and debt to balance investment.
How is a mutual fund established?
A mutual fund is set up as a trust, which would have a sponsor, trustee, asset management company (AMC) and custodian. The trust is established by a sponsor who is like a promoter of a company.
Mutual fund trustees hold their assets for the benefit of every person involved in the fund.
Role of sebi
The custodian of a mutual fund is registered with SEBI, which holds the security of various schemes of the fund. Trustees have the power to oversee and direct AMC. They monitor the fund according to Sebi’s norms.
What does AMC do?
The AMC employs professional money managers specializing in investing in equities, debt, or both, who invest and manage funds collected from investors. Apart from this, AMC may have several mutual fund schemes.
Benefits of investing in mutual funds
An inherent advantage of investing in mutual funds is that each investor receives professional wealth management and expertise. In addition, it would be difficult for an investor to prepare investment portfolio on his own with little money.
Like all securities, mutual funds are subject to market risk. The reason for this is that there is no way to predict what will happen in the future or whether an asset will increase or decrease in value. Because the market cannot be accurately estimated, no investment is risk-free.