What is a Mutual Fund and how can it help to fight against inflation?

Hope, you have seen the recent advertisement on Mutual Funds by Association of Mutual Funds in India (AMFI).

“Mutual Fund ko injection bhi kah sakte hain, inflation ka injection. Zara sa chubhega, lekin salo tak mahangaee ki bimari se ladega”.

The English translation will be ” Mutual Fund can also be termed as an injection against inflation. It will fight inflation for years”.

What is Mutual Fund?

The above advertisement is too short to explain what is Mutual Fund. Let us see what is a Mutual Fund?

Mutual Fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with the objectives as disclosed in the Offer Document. In simple words, the Mutual Fund collects investments from many investors like you and invests them in various instruments as per the mandate. The investments can be in equity shares or in debt instruments as per the mandate of the scheme. There will be a professional fund management which ensures better management of your money.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. You will get units according to the amount invested by you. The profits or losses are shared by the investors in proportion to their investments. Mutual Funds have given much better returns in the past, that is why, the AMFI advertisement presents Mutual Funds as a solution to inflation.

Who controls Mutual Funds in India?

A Mutual Fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets.

History of Mutual Funds in India

Unit Trust of India (UTI) was the first mutual fund started in India in the year 1963. In early 1990s, Government allowed public sector banks and institutions to set up mutual funds.

SEBI formulates policies and regulates the mutual fund industry to protect the interest of the investors. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors. After the Mutual Fund Regulations 1993, private sectors were allowed in mutual funds. All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI.

Setting up of a Mutual Fund

A Mutual Fund is set up as a trust with a Sponsor, Trustees, Asset Management Company and a Custodian. The Trust is established by a Sponsor who is like the promoter of a company. The trustees of the Mutual Fund hold its assets for the benefit of the investors. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities as per the mandate. A SEBI registered Custodian will hold the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence over the AMC.

What is the Net Asset Value (NAV) of a Mutual Fund?

The performance of a Mutual Fund scheme is measured by the Net Asset Value (NAV). Mutual Funds invest the money collected from the investors in securities markets. Net Asset Value is the market value of the securities held by the scheme calculated per unit. Since market value of securities changes every day, NAV of a scheme also varies daily. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme. For example, if the market value of securities of a Mutual Fund scheme is Rs. 3 Crores and the Mutual Fund has issued 10 lakh units of Rs. 10 each to the investors, then the NAV per unit of the Fund is Rs.30. Depending on the type of the scheme, NAV is required to be disclosed by the Mutual Funds on a regular basis – daily or weekly.

How to invest in a Mutual Fund?

Mutual Funds normally announce the launch of new schemes through advertisements. You can also contact the agents and distributors of mutual funds. Now most of the banks are also distributing mutual funds.

You can also invest in mutual funds directly through the website of most of the fund houses. From 1^st January, 2013 most mutual funds have started the Direct Plan Option in mutual funds. This option will offer you better returns, because there is a savings of agency commission in this.

How to make money in Mutual Funds?

There are different types of Mutual Funds depending on their investment style. Broadly, there are 2 divisions which are as follows:

1. Equity Mutual Funds – which invests in equity shares of companies
2. Debt Mutual Funds – which invests in debt instruments like government securities, corporate bonds etc.

You may select good Mutual Fund schemes with the help of an expert advisor. For short-term goals, you may invest through Debt Mutual Funds, while for long-term goals, you can invest in Equity Mutual Funds. Investing through Systematic Investment Plan (SIP) will be the best option for the long-term goals.

In what way can a Financial Planner help you in Mutual Fund investments?

A Financial Planner will analyse your financial goals and he will recommend the ideal Mutual Fund schemes depending on your investment horizon and financial goals. He will name a few funds where you can invest regularly. He will also review their performance periodically and suggest changes, if required. If you invest in direct plan option as per his recommendation, you can make more money, rather than investing through agents.

By now, you will be having a clarity on what is a Mutual Fund. But ensure that, you select the better schemes from the large number of mutual funds available in India.