How Does a Mutual Fund Operate?

Narendra Kumar

01 Nov, 2019

Generally, it is noted that every common man also wants to invest in shares/securities and debentures of good and sound companies. But due to the non-availability of sufficient funds and knowledge on his part, he is unable to enter the stock exchange market and avail the benefits of good investments. In fact, one can say that he is deprived of investment benefits for not having sufficient funds and market knowledge to mutual fund operate.

Here comes the mutual fund to help such investors and have all investment benefits of investment.

If one is still in a “learn to trade stocks” mode, a mutual fund can help a lot to improve his portfolio, particularly if one is a modest investment.

What is a Mutual Fund?

It can be aptly described that a mutual fund is nothing but a collection of investments, such as stocks, bonds and other funds owned by a group of investors (generally small investors) and such investment is managed by a skilled /experienced money manager.

The purpose and objective of such mutual fund investment are to earn a maximum profit for their investors. There are millions of such small investors in any country who desire to invest their small but surplus money to reap some stock benefits.

How does a Mutual Fund Work?

The mutual fund offers and invites the investor to invest in their funds (schemes) as per their requirements and needs. In other words, the mutual fund offers a variety of funds with different features suitable to the needs of investors.

A mutual fund offers different schemes mainly debt and equity and mix (combined) one. Equity schemes are those schemes where the fund is invested in equity shares of good companies and this scheme is having a high risk of investment. Similarly, one can earn super high profit also as it is volatile. Further, debt schemes are those schemes where the fund is invested in government securities and bonds hence it is not risky and the investor gets a moderate rate of return and with less risk. The units of this scheme may not appreciate much in the short run like units of equity scheme.

In other words, the mutual fund invests the funds of millions of small investors pooled by it in such schemes instead of the individual investor to do the same.

The other equity Schemes of Mutual Funds are like

• Large-cap funds: Under this scheme, the funds are invested mostly in big companies. Mutual Fund identifies these companies by their market capitalization. Large-cap (often known as “big cap”) implies a company with a market capitalization value between Rs 200 bn to 3500 bn.
• Midcap Funds: It is a type of investment fund that mainly invests in companies with a capitalization in the middle range of stocksin the stock market. Companies with market capitalizations between Rs 50 bn to 200 bn are generally known as mid-cap companies

Small-cap fund: It is a term used to categorized companies with relatively small market capitalization. It is generally companies with a market capitalization of less than Rs 50 bn

Equity-oriented hybrid funds: These schemes invest in equity and debt both in a mix. Equity-oriented hybrid schemes invest at least 65 percent of its fund in equity. As compared to pure equity funds these schemes are less volatile because of their mixed portfolio.

Diversified funds: As the name suggests, it is a diversified equity fund investing in companies regardless of their size and sector. It diversifies investments across the stock market in order to maximize gains for its investors.

Sectoral funds the name denotes, this fund largely invests in a particular sector or along the lines of a defined theme by the mutual fund. The investor has to select from various sectors like realty, software, FMCG, hotels, and hospitality, etc. Since the investments of a mutual fund are concentrated on a single sector or theme, sector funds are considered extremely risky for investments.

There are many such schemes run by mutual fund operate depending on their knowledge and expertise in operation in order to maximize the return of the investors.

How to invest in Mutual Fund Scheme? 

It is not necessary for an investor to invest a big amount as such but he may start with a small amount of even 500 rupees on monthly basis through a Systematic Investment Plan^[1] (SIP) offered by mutual funds.  This is very popular nowadays among the small investors all over the country by allowing them to participate in stock exchange activities, of course through mutual funds. It is observed that the investors who have invested over a period of 12 to 15 years consistently in such schemes have earned supernormal profit beyond imagination. Generally, every scheme has units to offer to the investor to enter that particular scheme and it has to pay a price for such purchase known as net asset value (NAV).

Similarly, for the sale of the purchased units, he will be guided by the NAV only. Every scheme has to publish its NAV on a daily basis so that the investor is informed about the performance of his scheme. If NAV appreciates the investor may sell its units and earn the profit.

The investments in mutual fund operations are managed by an expert person known as a portfolio manager.

The investment in the scheme of mutual funds can be done either through the fund house directly or any online platform as such. Investment in a mutual fund operates is also risky and it is subject to the stock market fluctuations.

To mention a few names of top leading mutual funds operating in India are

• Axis Asset Management Company Ltd.
• Birla Sun Life Asset Management Company Ltd
• Edelweiss Asset Management Ltd
• Franklin Templeton Asset Management (India) Pvt Ltd.
• HDFC Asset Management Company Ltd
• ICICI Prudential Asset Management Company Ltd
• Kotak Mahindra Asset Management Company Ltd.
• L&T Investment Management Ltd.
• MotilalOswal Asset Management Company Ltd.
• Reliance Capital Asset Management Ltd.
• SBI Funds Management Private Ltd.
• Tata Asset Management Ltd
• UTI Asset Management Company Ltd