What is a mutual fund?
A mutual fund is a legal vehicle that enables a collective group of individuals to:
i. Pool their surplus funds and collectively invest in instruments / assets for a common investment
objective.
ii. Optimize the knowledge and experience of a fund manager, a capacity that individually they may
not have
iii. Benefit from the economies of scale which size enables and is not available on an individual
basis.
Investing in a mutual fund is like an investment made by a collective. An individual as a single
investor is likely to have lesser amount of money at disposal than say, a group of friends put
together.
Now, let’s assume that this group of individuals is a novice in investing and so the group turns over
the pooled funds to an expert to make their money work for them. This is what a professional Asset
Management Company does for mutual funds. The AMC invests the investors’ money on their
behalf into various assets towards a common investment objective.
Hence, technically speaking, a mutual fund is an investment vehicle which pools investors’ money
and invests the same for and on behalf of investors, into stocks, bonds, money market instruments
and other assets. The money is received by the AMC with a promise that it will be invested in a
particular manner by a professional manager (commonly known as fund managers). The fund
managers are expected to honour this promise. The SEBI and the Board of Trustees ensure that this
actually happens.
The organisation that manages the investments is the Asset Management Company (AMC). The
AMC employs various employees in different roles who are responsible for servicing and managing
investments.