Mutual Funds Decoded

In past 2-3 years we have seen huge growth in Indian Mutual Fund industry. In spite of being a cash rich country, Indians mostly chose to keep funds in banks rather than investments. But with strengthening of economy interest rates on Bank deposits have fallen, which created the urgent need of another investment vehicle. Mutual funds filled up this empty space of safer investments. As per AMFI (Association of Mutual Funds in India) Average Assets Under Management (AAUM) of Indian Mutual Fund Industry for the month of September 2018 stood at ₹ 24,31,342 crore. But most of the investors have invested on the basis of their own perception without having proper knowledge of entire process of MF investment.
Let us learn a detailed explanation of What are Mutual Funds? – By definition, A mutual fund is a professionally managed investment fund which pools money from various investors for the purpose of investing in securities such as stock, bond, money market instruments etc. to generate return on investment for the investors.
The functioning of MF has been explained in the pictorial format given below:

Who are investors?
Any person who wants to invest money into assets which generate returns on invested amount.
Mutual funds provide a wide range of choices to the investors on the basis of risks and returns. Once the investor chooses a particular mutual fund he gets two options- lump-sum investment where a sum of money is invested at a time and SIP(Systematic Investment Plan) where a fixed sum of money is invested periodically.

Who is a Fund Manager?
A Fund Manager is the person who is responsible to manage the sum of money invested into a particular fund. His objective is to generate returns on that pool of money.
He has to select market linked securities such as stocks, bonds, money market instruments depending upon the type of fund. Basically, there are three types of funds:

  1. Equity (Stocks)
  2. Debt (Bonds, Debentures)
  3. Hybrid (A mixture of Equity & Debt)

Returns are generated through interest on debts, dividend on shares and capital gains. These returns are then passed backed to the investors after keeping a percentage by the asset management companies for their service. In nutshell, the investors don’t need to take the trouble of direct investment in equities or debts, they can rely upon the professionals for their investments.
But, there are risks of market volatility and fraudulent activities and so this is a humble request to all investors “Mutual Fund investments are subjected to market risk please read all schemes related documents carefully”.

Published by Sweta Sharma

I am a Research Associate working in an Equity Research Company having knowledge and experience in Equity Fundamental research.

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