A mutual
fund is a professionally managed type of collective investment scheme that
pools money from any investors and invests it in stocks, bonds, short-term
money market instruments and other securities. Mutual funds have a fund manager
who invests the money on behalf of the investors by buying / selling stocks,
bonds etc. The income
earned through these investments and the capital appreciations realized are
shared by its unit holders in proportion to the number of units owned by them.
Thus a Mutual Fund is the most suitable investment for the common man as it
offers an opportunity to invest in a diversified, professionally managed basket
of securities at a relatively low cost. The flow chart below describes broadly
the working of a mutual fund:
WHO
MANAGES INVESTOR’S MONEY?
This
is the role of the Asset Management Company (the Third tier). Trustees appoint
the Asset management Company (AMC), to manage investor’s money. The AMC in
return charges a fee for the services provided and this fee is borne by the
investors as it is deducted from the money collected from them. The AMC’s Board
of Directors must have at least 50% of Directors who are independent directors.
THE
ROLE OF THE AMC?
The
role of the AMC is to manage investor’s money on a day to day basis. Thus it is
imperative that people with the highest integrity are involved with this
activity. The AMC cannot deal with a single broker beyond a certain limit of
transactions. The AMC cannot act as a Trustee for some other Mutual Fund. The
responsibility of preparing the OD lies with the AMC. Appointments of intermediaries
like independent financial advisors (IFAs), national and regional distributors,
banks, etc. is also done by the AMC. Finally, it is the AMC which is responsible
for the acts of its employees and service providers.
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ADVANTAGES
OF MUTUAL FUNDS
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The
advantages of investing in a Mutual Fund are:
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