Investing in the right source is very important for individuals who want to have financial security after their retirement period or to be financially stable in the long run. However, to invest in the right source is crucial if you are a beginner or just have very little knowledge of investments. So if you are looking to invest in Mutual Funds, then this blog is for you. In this blog, we will be explaining to you what Mutual Funds are, the types of Mutual funds, what is fund structure and the role of AMC.
What are Mutual Funds?
A Mutual fund is a type of investment that pulls money from many investors to buy a diversified portfolio of assets like stocks, other securities and bonds. A professional Fund Manager makes and takes decisions on behalf of the investors, who can then help you in achieving their financial goals through a professionally managed investment.
In simple words, a Mutual Fund is an investment option which helps many investors to put their money together as a single investment in stocks, bonds or other securities; rather than investing individually. This investment is handled by a fund manager, and they make all decisions on your behalf.
What is Fund Structure in Mutual Funds, and how do they work?
A Mutual Fund’s structure is a legal and organisational framework that includes the sponsor, an Asset Management Company and trustees who are responsible for making investments through the pooled money. The fund operates as a trust that holds the assets, while the trustee acts as a custodian to protect investor interests and make sure that the AMC follows its investment policy. The investors of Mutual Funds buy the units from the fund, which are then managed professionally to meet the common financial goals.
How does Fund Structure work in real time?
The fund structure acts as the legal and operational framework that helps in pooling money from multiple investors to achieve a specific investment objective. This structure provides the essential mechanisms, such as professional management, asset segregation to protect investors’ capital, regulatory oversight and liquidity parameters. Allowing individuals and institutions to collectively invest in diverse assets which they might not be able to access alone.
Role of Asset Management Company
An Asset Management Company is a financial institution that pools money from various investors and then puts their money into a diversified portfolio of securities like stocks, bonds and real estate with the objective of generating returns and growth for clients.
The basic primary role of an AMC includes:
- Professional Fund Management: The AMCs employ expert fund managers and analysts who conduct extensive market research to make informed investment decisions on behalf of the clients. This also gives the individual investors access to professional expertise they might not have otherwise.
- Pooling Funds and Diversification: By collecting a large amount of capital, AMCs can then invest the amount in a wide range of assets, while also creating a diversified portfolio that helps in mitigating the risks.
- Strategy and Allocation: They also define the specific investment strategies for each fund and allocate assets accordingly to meet the fund’s stated objectives and clients’ risk profiles.
- Risk Management: The AMCs then actively manage the risk through continuous monitoring and portfolio adjustments to respond to changing market conditions.
- Administration and Operations: They handle the day-to-day administration of funds that include accounting, record-keeping, calculating the Net Asset Value (NAV) and processing investor transactions like subscriptions and redemptions.
- Transparency and Reporting: The AMCs are required to provide investors with regular updates and comprehensive reports on fund performance, associated fees, and ensure transparency and asset allocation.
- Regulatory Compliance: The AMCs operate under the strict regulatory bodies and must also adhere to guidelines designed to protect investor interests and also make sure there are ethical operations.
Difference between Mutual Funds, FDs and Stock Investments
| Features | Mutual Funds | Fixed Deposits (FDs) | Stock Investment |
| Risk Level | Moderate, varies across Mutual Fund Types | Low | High |
| Returns | Market-linked can outperform FDs | Guaranteed fixed returns | High potential but uncertain |
| Liquidity | High (depends on fund structure) | Medium with penalties | High during market hours |
| Management | Professionally managed by an AMC | Managed by banks | Self-managed |
| Investment Amount | Flexible (SIP or lump sum) | Fixed | Flexible |
| Best For | Long-term wealth creation | Safety-first investors | High-risk seekers |
| Taxation | Depends on fund category & period | Interest fully taxable | STCG/LTCG applicable |
Key Mutual Fund Types Based on Structure
| Features | Open-Ended Funds | Closed-Ended Funds | Interval Funds |
| Description | Open for subscription and redemption on all business days. | Issued for a fixed period; units offered only during the initial NFO. | A hybrid structure combining open-ended and closed-ended features. |
| Liquidity | Highly liquid; buy/sell anytime at NAV. | Listed on stock exchanges; cannot be redeemed directly before maturity. | Units can be bought or redeemed only during specific intervals. |
| Maturity | No fixed maturity; perpetual schemes. | Fixed maturity date; payout at the end of the term. | Function like closed-ended funds between intervals. |
| Trading | Not listed on exchanges; transactions happen with the fund house. | Units trade on stock exchanges at market prices. | Usually listed on stock exchanges to offer an additional exit route. |
| Fund Size | Varies based on investor flows. | Fixed size decided during NFO. | Size varies based on investor participation during intervals. |
Mutual Fund Types based on Investment Objective
| Features | Equity Funds | Debt Funds | Hybrid Funds (Balanced Funds) |
| Description | Invest primarily in company stocks with the aim of long-term capital appreciation. | Invest in fixed-income securities like government bonds, corporate bonds, T-bills, and money market instruments. | Invest in a mix of equity and debt to balance growth and stability. |
| Risk / Return | High-risk, high-return; value fluctuates with stock markets. | Lower-risk; focuses on steady income and capital preservation. | Moderate risk and return; sits between equity and debt funds. |
| Suitability | Best for long-term investors (5+ years) seeking growth and comfortable with volatility. | Suitable for conservative investors seeking stable returns or short/medium-term goals (1–3 years). | Ideal for moderate investors wanting both growth and stability in one fund. |
| Sub-Types | Large-cap, mid-cap, small-cap, sectoral, thematic funds. | Liquid funds, ultra-short duration funds, corporate bond funds, G-sec funds. | Balanced advantage, aggressive hybrid, conservative hybrid, and multi-asset allocation funds. |
Advantages and Disadvantages of Mutual Funds
Investing in Mutual Funds has its own set of advantages and disadvantages. So it is always better to know the benefits and cons before investing in mutual funds.
Advantages of Mutual Funds
- Professional Management: The invested money is handled by an experienced individual who is called a fund manager. These fund managers research and select securities on your behalf. This seems to be beneficial for investors who lack the time or expertise to manage their own portfolios.
- Diversification: By collecting money from numerous investors, the mutual funds invest in a wide range of stocks, bonds and other assets. Thai diversification helps in reducing the risk, as the poor performance of one asset can be offset by gains in another, which is often very difficult for an individual to achieve on their own.
- Liquidity: In many cases, if you are handling your portfolio on your own, then you can sell or buy mutual fund shares on any business day. However, the company involved will redeem your shares at the end of the trading day for their current net asset value (NAV).
- Affordability Accessibility: The Mutual fund market has a low barrier to entry, which allows investors to start with relatively small amounts of money. They can make investments through SIPs and make them accessible to a broad range of people.
Disadvantages of Mutual Funds
- Costs and Fees: The Mutual funds charge various fees, which can erode your overall returns. These may include the following:
- Expense Ratios: The annual operating fees that cover the management and administrative costs.
- Sales Charges (Loads): The commissions paid when you buy or sell shares.
- Other Account Fees: The fees for early withdrawal or maintaining low balances.
- Market Risk: The value of the investment is tied to the performance of the underlying securities and market conditions. The returns are not guaranteed, and you could lose some or all of your principal investment.
- Lack of Control: As an investor, you have no say in which specific stocks or bonds are bought or sold within the funds. All the investment decisions are made by the fund manager.
- Tax Implications: You may also get capital gains taxes even if you don’t sell your shares. When the fund manager sells securities within the fund for a profit, the gains are distributed to the investors and are generally considered as taxable income.
Conclusion
Mutual Funds are a type of investment which gathers money from multiple investors and then makes use of this money and buys bonds, securities or shares. A Fund Manager is an experienced and full-time individual who looks after your portfolio and makes decisions on your behalf about selling and buying shares in Mutual funds. AMC is a legal organisation that gathers money from various investors and invests it on their behalf for financial growth and profit.
