This famous statement is all I remember when someone asks me about mutual funds.
Sometime before, when I was looking for investment advice everyone would suggest “Try Mutual Funds” and I will be like okay, explain what it is.
Either it will be a lousy answer or a half cooked answer.
So, my next option was to Google and self study.
This article is for all people who have got a lousy answer or an answer where you couldn’t understand what exactly mutual fund is.
Like I always say, before investing knowing more about the investment will help you to make good decisions.
To start with, the mutual fund is an investment option like the stock market real estate and bonds.
In the above investments, you invest the money, you buy, you sell for a profit and you keep the profit by paying some brokerage or commission.
But in mutual funds, they pool in money from a group of people/ investors, form a fund. And they use the fund to buy stocks, bonds, and sell for a profit and share the profit with all investors according to their contribution to the fund.
So here you will have a fund manager to moderate your funds and investments. He will do all the calculative investment and he will take the call when to sell your investment and make a profit.
Fund managers are usually highly qualified people who do all the job for you like he studies the market and takes all the calls on behalf of you. Basically he works for you to make wealth.
And he doesn’t do it for free , he charges 1-3% of your profit.
If you see the above picture you will have a small idea how this works
SEBI: Security and Exchange Board of India is the government regulatory board that controls all stock markets and mutual funds, its like RBI for stocks and mutual funds. All mutual fund schemes have to be approved by SEBI. It sees no bogus schemes are made to swindle money from the public.
Sponsor: These are the people who set up mutual funds like ICICI bank is the sponsor for ICICI prudential mutual funds. Basically any financial institution with a license can be a sponsor. Sponsors are like the owners of those mutual fund schemes.
Trustees: The funds which are collected from investors are governed by the trustees. They will ensure that the money collected will be used in the interest of the investors. Trustees are the appointed people who see that all rules and compliance are followed and they govern the AMC.
AMC: Asset management company are the salesperson, managers, and investment specialists, they are the workforce of a mutual fund. They are responsible for scheme launches, fund collection, and all transactions.
In ICICI prudential mutual fund, ICICI bank Ltd is the sponsor and ICICI prudential trust LTD is the trustee and ICICI Prudential AMC is the asset management company.
After the sponsor (ICICI) makes a mutual fund scheme like ICICI prudential bluechip. The sponsor gets the necessary approval from SEBI. Then the AMC will do the necessary marketing and bring investors/subscribers for the scheme.
Remember this? so read all scheme related documents. What you will find in scheme documents?
There are high-risk and low-risk mutual funds, kindly ask your advisor and make sure all these before investing.
Few people forget this rule of high returns comes with high risk when they see high return schemes.
This is how the pie chart will be in your mutual fund scheme explaining how your funds will be distributed.
You buy your mutual funds with the respective unit ( like how you buy shares in share market) Like you invest Rs 10,000 in a mutual fund, and each unit price is Rs 10 you will get 1000 units.
Each scheme will have an option of lump-sum investment or SIP ( systematic investment plan, where you invest monthly according to your plan selection ) it’s like your bank FD and RD
Like the share market, you can buy mutual funds through online trading platforms or mobile applications.
Mutual funds schemes comes under few categories
In mutual funds, the income generated by dividends, stock trading, or interest from bonds is calculated yearly and distributed among investors after deducting the management fees. Normally the returns should be somewhere around 10-15% of your investment.
This article gives you a basic idea of how a mutual fund works and prepares you to understand more when you discuss it with your mutual fund advisor.
Stay tuned….
The pie chart has some errors. Other than that good article
Ya, just saw it thanks for the connecting 🙂