What Are Mutual Funds?
When a large number of investors come together and pool their limited monetary resources to create a bigger fund to invest in the stock market, it is known as a Mutual Fund.
How Do Mutual Funds Work?
- > An appointed Fund Manager utilises his expertise to manage this fund and channelize it into fulfilling the fund’s objective. Mutual Funds can be invested in many ways, depending upon the risk and return profile of the investors.
- > Each investor is allotted units proportionally on the basis of their contribution to the fund. Thus, a unit is the fundamental block of a Mutual Fund.
- > The number of units purchased by the investor is determined by the amount of money that the investor is willing to invest. It is for the same reason that the investor is also known as a Unit Holder.
- > The net return on the investment is determined after deducting tax expenses, research and administrative expenses and other such likely reductions.
Mutual funds fAQ
The mutual funds industry is regulated by the stock market regulator Securities and Exchange Board of India (SEBI).
The Net Asset Value is the price of a unit of a fund. When a fund comes out with an NFO, it is priced at Rs 10. Later, depending on the value of the investments, this price could rise or fall.
New Fund Offers (NFOs) are first time subscription offers for a new scheme launched by an asset management company. It is launched to raise capital from the public in order to buy securities like shares or government bonds from the market.
An Asset Management Company (AMC) is the fund house or the company that manages the money.
The mutual fund is a trust registered under the Indian Trust Act. It is initiated by a sponsor. A sponsor is a person who acts alone or with a corporate to establish a mutual fund. The sponsor then appoints an AMC to manage the investment, marketing, accounting and other functions pertaining to the fund. For instance, ABN AMRO Trustee (India) Private Limited is appointed as the trustee to the ABN AMR() mutual fund. ABN AMRO Asset Management (India) Limited is appointed as its investment manager.
ABN AMRO Equity Fund, ABN AMRO Opportunities Fund and ABN AMRO Flexi Debt Fund are all independent schemes of ABN AMR() Mutual Fund. They are managed by the ABN AMRO AMC.
Load is a fee that is charged when you buy or sell the units of a fund. What is entry load? When you buy the units of a fund, you pay a percentage of it as a fee. This is known as the entry load. Let's say you are investing Rs 10,000 and the entry load is 2%. That means you pay Rs 200 as the entry load and Rs 9,800 is invested in the fund.
Exit load is a fee or an amount charged from an investor for exiting or leaving a scheme or the company. If you are selling the units of your fund, and the Rs 10,000 you invested initially is now Rs 15,000. If the exit load is 2%, so you pay Rs 300 and get back Rs 14,700. What is a portfolio? Portfolio is the term given to all the investments made by the fund as well as the amount held in cash.
Let's assume a very small mutual fund has an initial investment of 1,000 units and each unit is worth Rs 10. Hence, the total amount with the fund is Rs 10,000. This is referred to as the corpus.
Assets Under Management (AUM) is the total value of all the investments currently being managed by the fund.
A Systematic Investment Plan refers to periodic investing in a mutual fund. Every month or every three months, the investor will have to commit to putting in a fixed amount. This will go towards the purchase of units.
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