Mutual Fund is a regulated way of getting the money from retail investors(like us) and invests the same in a variety of different financial instruments or securities such as stocks, bonds. Each mutual fund invests in group of portfolio based of expected returns and risk. The income earned/loss through these investments by the scheme are shared by its investors. The Investment objectives outlined by a Mutual Fund in its prospectus are binding on the Mutual Fund scheme. The investment objectives specify the class of securities a Mutual Fund can invest in. Mutual Funds invest in various asset classes like equity, bonds, debentures, commercial paper and government securities. Here fund managers shares the profit as well as loss with investors. Mutual funds are highly dominated by stock exchange. Mutual fund reduce the loss by investing in diversified portfolio. Mutual fund schemes classified as large cap, mid-cap, small cap and ELSS funds based of investment objectives.
For example, we invested 1000 rupees on large cap mutual fund. Fund manager invest our 1000 rupees as below, 200 rupees in Wipro, 150 rupees in HCL, 250 in ITC, 150 in Sun Pharma, 150 in SBI, 100 in Ramco Cements. After 1 year of investment each portfolio returns as below,
200 rupees in wipro => 40 rupees gain
150 rupees in HCL => 20 rupees gain
250 rupees in ITC => 5 rupees loss
150 rupees in Sun => 20 rupees gain
150 rupees in SBI => 5 rupees loss
100 rupees in Ramco => 30 rupees gain.
Overall 110 rupees gain and 10 rupees loss. Finally 1000 rupees, we gained 100 rupees as a gain in 1 year. (All numbers and gain/loss mentioned for your understanding. Fund manager actual investment and returns may vary based on his portfolio.)
“Mutual Funds are highly regulated investment In India”
Each mutual fund scheme is managed by an Asset Management Company (AMC). AMC is a highly regulated organisation that pools money from retail investors(like us) and invests the same in a portfolio. AMC manages the portfolio by experience fund manager and collects fee from retail investor for managing the portfolio. Asset Management Company (AMC) is registered with Securities and Exchange Board of India (SEBI) as a Mutual Fund trustee An Asset Management Company (AMC) approved by SEBI manages the fund by making investments in various types of securities. The Asset Management Company is responsible for managing the investments for the various schemes operated by the mutual fund. It also undertakes activities such like advisory services, financial consulting, customer services, accounting, marketing and sales functions for the schemes of the mutual fund.
Famous AMC in india, Aditya Birla Sun Life AMC Limited, Axis Asset Management Company Ltd, DSP BlackRock Investment Managers Private Limited, HDFC Asset Management Company Limited, ICICI Prudential Asset Mgmt.Company Limited, Reliance Nippon Life Asset Management Limited.
As a retail investor like us earn a return from a mutual fund in three ways:
- Income is earned from dividends on stocks and interest on bonds held in the fund’s portfolio.
- If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.
- If fund holdings increase in price but are not sold by the fund manager, the fund’s shares increase in price. You can then sell your mutual fund shares for a profit in the market.
We discussed on what is AMC and how mutual fund works. Finally how we earn money in mutual fund investment.