A mutual fund is essentially a common pool of money in which investors put in their contribution. This collective amount is then invested according to the investment objective of the fund.
The money could be invested in stocks, bonds, money market instruments, gold and other similar assets. These funds are operated by money managers or fund managers, who by investing in line with the specified investment objective attempt to create growth or appreciation of the amount for investors.
How is a mutual fund set up?
A mutual fund is set up in the form of a trust, which has a sponsor, trustees, Asset Management Company (AMC) and custodian. The trust is established by a sponsor who is like the promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. The custodian, who is registered with the Securities and Exchange Board of India (SEBI), holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over the AMC. They monitor the performance and compliance with SEBI Regulations.
The AMC employs professional money managers, having expertise in investing in equity, debt or both, who then invest the collected amount from investors and manage it on their behalf.
The AMC may have several mutual fund schemes with their specific investment mandates. An investor can choose which scheme he or she wants to invest in, based on the given mandate or objective.
All AMCs are governed by a Board of Directors and come under the SEBI (Mutual Funds) Regulations, 1996. The regulator or SEBI has set clear mutual fund regulations and requires all mutual fund schemes of an AMC to clearly spell out the fund's objectives in its prospectus that an investor must read before he/she invests in a mutual fund.