What are Mutual Funds?

A mutual fund is set up by a sponsor, who is its promoter.
Trustees are appointed to take care of the interests of the investors in the various schemes launched by the mutual fund.
An asset management company (AMC) is appointed to manage the activities related to launching a scheme, marketing it, collecting funds, investing the funds according to the scheme’s investment objectives and enabling investor transactions.

In this, they are assisted by other entities such as banks, registrars to an issue and transfer agents, investor service centres (ISC), brokers or members of stock exchanges, custodians, among others. For example, the sponsor of the HDFC Mutual Fund is HDFC and Standard Life Investments Ltd and the trustees are the HDFC Trustee Company Ltd. The AMC is HDFC Asset Management Company Ltd.

The mutual fund will indicate the minimum amount that needs to be invested and the multiples in which investment can be made. The investors participate in the benefits and costs in proportion to the units held by them. The value of the portfolio will depend upon the value of the securities held in it. If the price of the securities goes up, the value of the portfolio will also increase and vice versa. Depending upon the structure of the mutual fund, investors can redeem or withdraw their investment form the mutual fund at any time, and make additional investments into the fund.

Types Of Mutual Funds

Mutual fund schemes can be structured as open-ended or closed-end schemes. An open-ended scheme allows investors to invest in additional units and redeem investment continuously at current NAV. The scheme is for perpetuity unless the investors decide to wind up the scheme. The unit capital of the scheme is not fixed but changes with every investment or redemption made by investors. A closed-end scheme is for a fixed period or tenor. It offers units to investors only during the new fund offer (NFO). The scheme is closed for transactions with investors after this. The units allotted are redeemed by the fund at the prevalent NAV when the term is over and the fund ceases to exist after this. In the interim, if investors want to exit their investment they can do so by selling the units to other investors on a stock exchange where they are mandatorily listed. The unit capital of a closed-end fund does not change over the life of the scheme since transactions between investors on the stock exchange does not affect the fund.

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