Introduction:
Mutual funds combine the savings of a large number of investors and manage them as a single pool of money. Instead of investors worrying about what stock or bond or commodity to invest in, professional fund managers do the job. Mutual funds are run by mutual fund companies, also as Asset Management Companies (AMCs). Each AMC operates a number of fund schemes that suit different type of investment needs.
For individual investors who don’t have time to study and research investments, mutual funds are the best option for reaping the benefits of diversified investments with minimum effort. In most funds, it is possible to start investing with as little as a few hundred rupees. Also, unlike many other investments, mutual fund investments
There are other participants in a mutual fund, such as board of trustees; an asset management company or AMC (the investment manager); and unit-holders, who are the investors in the fund.
The sponsor is a shareholder of the AMC, as per SEBI regulation, the effective control of the AMC is with the board of trustees, who function as the governing body.
It is for this reason that most of the trustees are independents, while the sponsor can have nominees. Moreover, maximum limits have been prescribed for management fees and other chargeable expenses by SEBI.
SEBI regulations provide the framework for mutual funds to operate and prescribe the limits for management fee and other chargeable expenses. SEBI also regulates many other aspects of an AMC’s operations and policies. All of these actions make the mutual fund industry highly regulated and safe.
Investment objective
Each asset management company manages several schemes. The way to distinguish one scheme from another is to look at their stated investment objectives. Simply put, investment objective indicates the financial goal that the scheme invests to
In the current example, the fund manager invests Rs.1 crore in various instruments such as stocks and bonds. In the beginning, the NAV is Rs.10 and each unit is worth Rs.10.
Let’s say that after a year the investments have done well and Rs.1 crore grow to Rs.1.1 crore. Now, the NAV of each unit is Rs.11 (1.1 crore divided by 1, 00,000). Each investor owns 1, 000 units, so the value of his investments has grown to Rs.11, 000. It is important to understand that the only relavent thing here is the total assets have grown by 10 per cent and therefore the investors have had a gain of 10 per cent. If the scheme initially had a face value of Rs.100, then the NAV would have grown to Rs.110; or if the face value was Rs. 1, then NAV would have grown to Rs.1.10. From the investors point of view, only the percentage change in the NAV is important, not the actual number.
Whenever an investor has to invest or redeem his money, he either buys fresh units or sells them at the NAV at the point. Sometimes, there might be a small extra charge at the time of redemption. Also, some scheme allow entry and exit at any time, while others allow entry only when the scheme is launched and exit only after a pre-determined period when the scheme is