How Mutual Fund works

Mutual funds launch schemes for investors

A typical MF launches a number of schemes- each with a specific investment objective. Investors are offered units of the scheme with face value typically Rs. 10 equivalent to the amount of their investment in the scheme.

Entry and Exit into schemes

An open-ended scheme allows investors to enter or exit whenever they want. A closed-ended scheme on the other hand allows entry only at the time of new fund offering and exit when the scheme is wound up after a pre-defined period.

All Mutual Funds are regulated

As a Mutual Fund collects money from a large number of investors, it has to be regulated. In India, Securities and Exchange Board of India (SEBI) regulates all mutual funds on the basic principles of trust, protecting the interests of small investors, transparency and compliance with extant laws.

Role of a Fund Manager

There is a fund manager to manage each scheme. The fund manager buys and sells securities held in a portfolio based on the fund’s objectives and his assessment of suitability of the investment in his portfolio. All the information about a fund manager’s background is available in Statement of Additional Information (SAI).

Expense Ratio

This is the money that an investor pays annually to the Mutual Fund to manage his money. This is typically a percentage of his investment that is charged annually. This covers the cost of the fund management team, and administrative costs of running the Mutual Fund’s operations, fees of service providers and distribution and marketing expenses.

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