Once upon a time…..
…..all villagers who hail from one of the intelligent part of country, gathered during evening hour, to discuss their day to day chaos.
The problem in hand today was that each of them had small money each day but did not know how to make best use of it. The money was so small individually that none of the scheme accepted that money as investment. The Panchayat decided to form a Group who would solve this problem.
Why Mutual Fund Emerged
Actually through this analogy, we have just understood how a Mutual Fund works. As the name say, it is a mutual way of investing in Markets. They emerged because of two concerns faced by the Investors. First was the Quantum of investment, as people had small money to save on day to day or month on month basis(5 Reasons to invest Systematically). Second was the knowledge part as each of us have different education and profession, so we find our selves ill equipped when it come to investment Markets. So each of us need the experts help during the investment process.
Organisation of a Mutual Fund
In the above story the villagers are each of us and the Group is the Asset Management Company(AMC), who runs the entire affairs of the mutual fund. Since this group is appointed and answerable to the Panchayat , the Panchayat is the Sponsor of this Mutual Fund. The Wiseman appointed, is the Fund Manager and his team who would take decisions in investing in different asset classes. The Rules laid are nothing butObjectives, which are set for each schemes and the basic guidelines about the investment made under the scheme(Fund). The Value of investment that the wise man is reporting is the Net Asset Value or the NAV. NAV is the unit value of the asset and is calculating by dividing the assets by the numbers of unit holders.
The Record Team is Registrar & Transfer Agent or R & T for short. They keep the record of the investors and take care of the queries of the units holders. And finally, the Care taker Team is the Custodian, who shoulders the responsibility of keeping records and possession of all the physical asset of the scheme. And Fees that the scheme is charging are called the Asset Management Fees. All villagers were Investors. Simple… isn’t it?
Now, through the picture you can very well correlate the working of the mutual fund.
Benefits of Mutual Funds
Now let’s discuss the benefits of investing in mutual fund. The biggest advantage is the Diversification. Each units holder contributing in small proportion becomes the owner of a large portfolio comprising of different assets. He therefore minimizes his risk by dividing his investments in many securities. Other advantage are, though mutual fund you and expert managing your investment. Also you can invest in small amounts. Since this is a collective investment, the cost of management is very low and most important the liquidity aspect. Mutual Funds have schemes as per the time horizon of your investment. So you can get money back when the need arises.
In subsequent series, we shall learn more about Mutual Funds benefits, types and how to choose & invest in these schemes.
CAclubindia
