What are Mutual Funds?
A mutual fund is a collective investment vehicle with the specific goal of raising money from a large number of
individuals and investing it according to a specified mandate. The mutual fund signifies a vehicle wherein the
benefits of investment come proportionately to all the investors.

What are the plus points of a Mutual Fund?

It is ideal for today's complex world as the markets for equity shares, bonds and other instruments have
become mature and information-driven. Price changes in these assets are driven by global events occurring far
away and a typical individual will not have the knowledge, skills, inclination and time to track events,
understand implications and act speedily. He also finds it difficult to keep track of registrations, brokerage
account and bank account reconciliation etc. A mutual fund is the answer to all these situations as it appoints
professionals to manage these functions full time.

The money collected by the fund allows it to hire such staff at very low costs. In effect, the mutual fund vehicle
exploits economies of scale and all three areas – research, investing and transaction.

How does this work?
A mutual fund scheme is initiated by a sponsor, which markets the fund. It specifies the investment goals,
risks, costs involved and broad rules for entry and exit and other areas of operation. In India, the sponsors
need approval from SEBI (Securities Exchange Board of India), which looks at the sponsor’s track record and
its financial strengths.

A sponsor then hires an Asset Management Company (AMC) to invest the funds according to the investment
objective. It also hires a custodian and perhaps a third one to handle registry (unitholders’) work. In the Indian
context, the sponsor promotes the AMC also in which it holds a majority stake.

So is the mutual fund registered as a separate company?
The mutual fund scheme itself is a trust administered by a trustee company, which is promoted by the sponsor.
For all practical purposes, the trustee company is a shell vehicle. Typically, the trustees are experienced and
eminent people representing a cross section of the industry and society

The AMC has to hire an outside custodian responsible for the custody of the fund assets. The custodian is also
responsible for the receipt of all kinds of cash and non-cash benefits such as bonus, dividends, rights etc. The
custodian is usually a bank/ financially sound institution. The AMC receives a fee for its services. In addition
SEBI also permits AMCs to charge expenses for the management of the fund upto certain limits.