What is Mutual Fund?

A mutual fund (MF) is a vehicle to pool money from investors, with a promise that the money would be invested in a particular manner, by professional managers who are expected to carry out the promise.

The idea behind a mutual fund is that individual investors generally lack the time, the inclination or the skills to manage their own investments. Thus, MF hires professional managers to manage the investments for the benefit of their investors in return for a management fee. The organization that manages the investment is called the Asset Management Company (AMC). The hired professionals who are in the role of managing investments are fund managers.

Investors are free to invest money in schemes of MF as per their risk bearing capacity. The MF manages investments of the scheme for the benefit of its investors. MFs are formed in form of Trust in India and Indian mutual fund industries are governed by the regulation of Security Exchange Board of India (SEBI). As MF is a critical mechanism to channel investors fund to capital market hence it is highly regulated business to protect the interest of investors.

Basically investors delegate their role of investing to MF by investing in them. In Indian context followings are parties involved in MF business.

1. Investors

2. Trustees are the people within a mutual fund organization who are responsible for ensuring that investors’ interest in a scheme are properly taken care of. They are paid trustee fee in return, which are normally charged to scheme.

3. Asset Management Company (AMC) manage the investment portfolios in scheme. An AMC’s income comes from the management fee it charges the scheme it manages. It is usually certain percentage of net assets managed.

4. Distributors earn commission for bringing the investors into the schemes of MF.

5. An investor’s holding in MF is tracked by scheme’s Registrar & Transfer Agent (R&T). The registrar (R&T) maintain an account of the investor’s investment and disinvestments from the scheme. Investment, reinvestment, redemption etc transactions are processed by R&T.The custodian/depository maintains custody of the securities in which the scheme invest- as distinct from the registrar who tracks the investment by investors in the scheme. This ensures an on going independent record of investment scheme. As the securities are increasingly kept in electronic form (dematerialized), the role of the depository is ever growing. The custodian also follow various corporate actions, such as rights, bonus and dividend declared by investee companies.

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