Let's talk Mutual Funds

Stock Market has always been scary for me and i guess there are many who would support me in this. I always wanted to make some money through the stocks but the numbers always bewildered me. Thanks to Mutual Funds. They are my favourites. MFs are the tools rescued me from the demons of stocks.

So, what exactly is a Mutual Fund..

A vehicle for investing in stocks and bonds
A mutual fund is not an alternative investment option to stocks and bonds, rather it pools the money of several investors and invests this in stocks, bonds, money market instruments and other types of securities.

Buying a mutual fund is like buying a small slice of a big pizza. The owner of a mutual fund unit gets a proportional share of the fund’s gains, losses, income and expenses.

So a mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds). When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund.

Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest in (you don't have to figure out which stocks or bonds to buy). If you would like to know the history of mutual funds, click here.
By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification.

Each mutual fund has a specific stated objective
The fund’s objective is laid out in the fund's prospectus, which is the legal document that contains information about the fund, its history, its officers 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


Managed by an Asset Management Company (AMC)
The company that puts together a mutual fund is called an AMC. An AMC may have several mutual fund schemes with similar or varied investment objectives.

The AMC hires a professional money manager, who buys and sells securities in line with the fund's stated objective.
All AMCs Regulated by SEBI, Funds governed by Board of Directors
The Securities and Exchange Board of India (SEBI) mutual fund regulations require that the fund’s objectives are clearly spelt out in the prospectus.

In addition, every mutual fund has a board of directors that is supposed to represent the shareholders' interests, rather than the AMC’s.



Inputs from www.moneycontrol.com & other sources