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What is Mutual Fund?


What is a Mutual  Fund?
A Mutual Fund, a body corporate registered with the Securities and Exchange Board of India (SEBI), pools the money of individual/corporate investors, invests the same on their behalf (in equity shares, government securities, bonds, call money markets etc.), and subsequently distributes the earnings/profits. 

What is the Regulatory Body for Mutual Funds?
Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds. All the mutual funds must get registered with SEBI.

What are the benefits of mutual fund?
For a retail investor, who does not have the time and expertise to analyse and invest in stocks and bonds, mutual funds offer a viable investment alternative. This is because:

-They provide the benefit of easy and inexpensive access to expensive stocks

-They diversify the risk of the investor by investing in a basket of assets

-A team of professional fund managers manages them, along with indepth research inputs from investment analysts.

-Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information, which individual investors cannot access.

How do mutual funds diversify their risks?
Financial theory states that an investor can reduce his total risk by holding a portfolio of assets instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially reduced.


What are the risks involved in investing in mutual funds?
A very important risk involved in mutual fund investments is the market risk. When the market is in the doldrums, most of the funds might  also experience a downturn. However, the company specific  risks are largely eliminated due to professional fund management.

 

What are open ended and closed ended mutual funds?
In an open ended mutual fund, there are no limits on the total size of the corpus. Investors are permitted to enter and exit the open ended mutual fund at any point of time at a price that is linked to the Net Asset Value (NAV). In case of closed ended funds, the total size of the corpus is limited by the size of the initial offer.

 

What is the investor’s exit route in case of a closedended fund?
According to Sebi regulations, all closedended funds have to be necessarily listed on a recognised stock exchange. Thus, the secondary market provides an exit route in case of closedended funds. 

How do I invest money in Mutual Funds?
One can invest by approaching a registered broker of mutual funds, or the respective offices of the mutual funds in that particular town/city. An application form has to be filled up giving all the particulars, along with the cheque or Demand Draft for the amount to be invested.

Is there any difference between investing in a Mutual Fund and in an Initial Public Offering (IPO) of a company?
Yes, there is a difference. IPOs of companies may open at a lower or higher price than the issue price, depending on market sentiment and perception of investors. However, in the case of Mutual Funds, the par value of the units may not rise or fall immediately after allotment. A Mutual Fund scheme takes some time to make investment in securities. NAV of the scheme depends on the value of securities in which the funds have been deployed.