A Mutual fund is a popular financial instrument wherein the money (resources) collected from the investors is pooled by issuing units to them in return. The units are priced according to the free market i.e. demand from the buyers and sellers.
Mutual funds gained popularity among the investors as it require very less amount (minimum INR 500) to start an investments in securities and can reach up to any amount or as prescribed by the AMC. The amount invested by a person is spread across wide industries and sectors so that the risk of default from dependency on one sector is reduced. However, such MFs are known as diversified MFs.
There are several types of mutual funds about which we have mentioned in the sections mentioned below. Read on to find out complete details about the MFs such as, how mutual fund functions, types of mutual funds, parties involved, risk factor, and many more details.
Mutual Funds - Parties Involved
The parties that are involved in the mutual fund market are:-
Securities and Exchange Board of India (SEBI) - It is the regulator, enabler, facilitator of the mutual fund market. In other words, SEBI is the apex body that monitors the parties involved in the trading of MFs.
Asset Management Company (AMC) - It is basically the company that pools the investors money to invest in other lucrative avenues to generate profit for the investors in return. You can say that if you buy a Mutual funds of XYZ Ltd. Then XYZ Ltd. Is the AMC for your mutual fund.
Fund Manager - A professional who manages the funds collected from investors by the AMC. Fund manager is responsible for keeping a track record of the investments and there after invest them in profitable avenues/sectors.
Broker - It is the prime platform, or enabler through which you will be able to buy the Mutual fund. It offers a trading platform through which MF transactions can be carried out easily. To invest in the MF, one needs to open DMAT account with the broker for which they charge a minimal fee. For instance, if you buy MF of XYZ Ltd. You need to contact a Broker that will help you build financial relation with the MF provider.
Unit-holder - An investor who buys a unit of the mutual fund by paying the unit price/NAV (which is also known as Net Asset Value- NAV) is known as a unit holder. So if you buy 10 units of mutual fund from the XYZ Ltd., then you are their unit-holder.
Types of Mutual Funds
There are various types of MFs and an investor should decide the nature of investment in the MF only after understanding types of MFs available in the market. Read on about them here:-
Open Ended Scheme
The open ended scheme of mutual funds allows investors to buy or sell units at any point in time. Unlike Bank FDs, there is no fixed maturity date to redeem money . The liquidity factor makes this option more popular in the market.
Close Ended Scheme
This type of mutual fund scheme requires an investors to have patience as the investor can put money only during the initial launch period popularly known as the New Fund Offer (NFO).
After the offer closes, no investor can put money in the scheme.
How to Invest in Mutual Funds
It is quite easy and simple to invest in a mutual fund scheme. It is recommended that you follow the steps mentioned as under to start your financial journey right away:
Step 1: Find a broker who offers a platform to trade Mutual funds.
Step 2: Create an DMAT/investment account with the broker
Step 3: Provide necessary personal details
Step 4: Link your bank account with the DMAT account, as all the transactions will be carried out through that account.
Step 5: Get your KYC done. If you go for e-KYC, the process will barely take few minutes of your time and save you from the hassles of visiting authority office.
Step 6: Invest in the mutual fund of your choice.
*Disclaimer - The information provided above is only for information purposes to spread financial knowledge and enhance literacy among our readers. It shouldn’t be taken as financial advice by anyone.