What Is Mutual Fund – Mutual Fund Definition
A mutual fund is not an alternate investment option to stocks and bonds, instead it pools the funds of several investors and invests this in stocks, bonds, money market instruments and other kinds of securities.
Putting money into a mutual fund is like investing in a small slice of a big pizza. The owner of a mutual fund unit gets an equivalent share of the fund’s gains, losses, income and expenses.
Each and every mutual fund has a specific stated objective. The fund’s objective is laid out in the fund’s scheme which is the authorized document that consists of briefing about the fund, its history, its administrators and its performance.
Some popular objectives of a mutual fund are –
| Fund Objective | What the fund will invest in |
|---|---|
| Equity (Growth) | Only in stocks |
| Debt (Income) | Only in fixed-income securities |
| Money Market (including Gilt) | In short-term money market instruments (including government securities) |
| Balanced | Partly in stocks and partly in fixed-income securities, in order to maintain a ‘balance’ in returns and risk |
Role Of AMC: Mutual fund is managed by an Asset Management Company (AMC). The organization that puts together a mutual fund is called an AMC. An AMC may have a number of mutual fund schemes with similar or varied investment objectives.
The AMC appoints an expert money manager, who buys and sells securities in line with the fund’s stated objective.
Role Of SEBI: All AMCs regulated is by SEBI, and Funds is governed by board of directors. The Securities and Exchange Board of India (SEBI) mutual fund regulations direct that the fund’s purposes are clearly spelt out in the prospectus.
In addition, every mutual fund has a board of directors that is supposed to symbolize the shareholders’ interests, rather than the AMC’s.
What Is NAV: Net Asset Value also known as NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the AMC at the completion of every business day.
The worth of all the securities in the portfolio in calculated every day. From this, all expenditures are deducted and the resultant value divided by the total units in the fund is the fund’s NAV.
What Is Expense Ratio: AMCs charge a yearly fee, or expense ratio that covers management expenses, salaries, advertisement expenses, brokerage fee, etc. A 1.5% expense ratio means the AMC charges Rs1.50 for every Rs100 in assets under management.
A fund’s expense ratio is normally to the scale of the funds under management and not to the returns earned. Usually, the expenses of running a fund grow slower than the growth in the fund size – so, the more assets in the fund; the lower should be its expense ratio.
What Is Load: Some AMCs even have sales charges, or loads, on their funds (entry load and/or exit load) to balance the distribution costs. Funds that can be bought without a sales charge are called no-load funds.
Open-Ended Funds: At any time during the scheme period, investors can enter and exit the fund scheme (by buying/ selling fund units) at its NAV (net of any load charge). Increasingly, AMCs are issuing mostly open-ended funds.
Close-Ended Funds: Redemption can take place only after the period of the scheme is over. Nevertheless, close-ended funds are listed on the stock exchanges, and investors can buy/ sell units in the secondary market (there is no load).
Important Documents: Two prime documents that show up the fund’s strategy, and behavior are the prospectus (legal document) and the shareholder reports (normally quarterly).
Mutual funds may be a better choice of small investment for the beginners.