A vehicle for investing in stocks and bonds
A mutual fund is not an alternative investment option to
stocks and bonds, rather it pools the money of several investors and invests
this in stocks, bonds, money market instruments and other types of securities.
Buying a mutual fund is like buying a small slice of a big
pizza. The owner of a mutual fund unit gets a proportional share of the fund’s
gains, losses, income and expenses.
Each mutual fund has a specific stated objective
The fund’s objective is laid out in the fund's prospectus,
which is the legal document that contains information about the fund, its
history, its officers and its performance.
Some popular objectives of a mutual fund are -
Fund Objective What the
fund will invest in
Equity (Growth) Only in
stocks
Debt (Income) Only in
fixed-income securities
Money Market (including Gilt) In short-term money market instruments (including government
securities)
Balanced Partly
in stocks and partly in fixed-income securities, in order to maintain a
'balance' in returns and risk
Managed by an Asset Management Company (AMC)
The company that puts together a mutual fund is called an
AMC.
An AMC may have several mutual fund schemes with similar or varied
investment objectives.
The AMC hires a professional money manager, who buys and
sells securities in line with the fund's stated objective.
All AMCs Regulated by SEBI, Funds governed by Board of
Directors
The Securities and Exchange Board of India (SEBI) mutual
fund regulations require that the fund’s objectives are clearly spelt out in
the prospectus.
In addition, every mutual fund has a board of directors that
is supposed to represent the shareholders' interests, rather than the AMC’s.
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