A mutual fund is a vehicle that pools the money of many investors and invests it in various stocks and securities. In return, investors receive units, and profits and losses are distributed proportionately. This process is called diversification, as investments are spread across different sectors, reducing risk. Before launching a mutual fund, every scheme must be registered with the Securities and Exchange Board of India (SEBI).
How is a mutual fund formed?
A mutual fund is formed as a trust, consisting of four key components: a sponsor, trustees, an asset management company (AMC), and a custodian. The sponsor promotes the fund, the trustees protect investors' interests, while the AMC manages the investments. The custodian safeguards the scheme's securities. By law, 50% of the AMC's directors and two-thirds of the trustee board must be independent.
What is NAV, and why is it important?
The performance of a mutual fund scheme is measured by its net asset value (NAV). This is calculated by dividing the market value of the total securities held by the scheme by the total number of units issued. Since the value of securities changes daily, the NAV also fluctuates daily or weekly. For example, if a scheme's total securities are worth ₹200 lakh and 1 million units have been issued, the NAV of one unit would be ₹20.
Mutual Fund Schemes
Mutual funds are primarily of two types:
Open-ended schemes: Investors can buy or sell units at any time. They have no fixed maturity period, and their biggest advantage is liquidity.
Closed-ended schemes: They have a fixed maturity period, such as 5–7 years. They can only be purchased at the time of launch and can later be sold on the stock exchange.
Furthermore, based on the investment objective, mutual fund schemes fall into growth, income, and balanced categories.
Disclaimer: This content has been sourced and edited from News 18 hindi. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.
