Structure of Mutual Fund
All of you are aware that “mutual funds are prone to risks in the markets. So read the documents clearly before investing”. It is highly unlikely that you must have missed something like this. So what is a mutual fund? A mutual fund is a type of investment strategy that is expertly managed by an asset management firm. The asset management organization pools several investors’ money into a single fund and invests it in stocks, bonds, and other securities.
The units of mutual funds that an investor purchases will represent his ownership stake in the specific scheme. Based on NAV (Net Asset Value), which is updated daily by the mutual fund house, the units are purchased and sold. Due to the unstable market conditions, the NAV fluctuates based on mutual fund holdings.
Also Read: Common Misconceptions About Mutual Funds
Every mutual fund company is required to register its fund with SEBI. SEBI has established stringent regulations for the mutual fund institutions to abide by to safeguard the interests of all investors. Even with a little investment, a mutual fund enables access to a wide portfolio of bonds, assets, and stocks that would not otherwise be attainable. Over the past few years, mutual funds have established a reputation for providing investors with profitable returns on their smart investments.
Mutual fund structure consists of different elements like Board of Trustees, Sponsor, Custodian, Asset Management Company, Registrar and Transfer Agent, and Brokers/Dealers.
Structure of Mutual funds in India
The structure of mutual funds in India consists of these elements. They are as discussed below.
The Fund Sponsor
A mutual fund’s primary founder is referred to as its promoter or, more often, its sponsor. The sponsor is expected to contribute at least 40% of the total net worth. A sponsor is someone with a five-year track record in the financial services industry who has made money in at least three of those five years, be it an individual, financial institution, corporate house, or bank.
Trust and Trustees
A CEO and a board of trustees make up the management team for any mutual fund company. The management group has to conduct business in the shareholders’ best interests. The Board of Trustees’ primary duty is to address and take care of administrative matters. The sponsor appoints the trustees. The board decides which funds the trust will make available to the general public. Each fund’s investment advisor, custodian, and transfer agent are employed by the trust.
Asset Management Companies
The Asset Management Company manages the trust’s investments following the portfolio of the fund and the administrative requirements of the mutual fund. The fund manager of the mutual fund is another name for the investment advisor. The Chief Investment Officer, fund managers, and analysts who oversee the different launched schemes make up the AMC. The fund manager receives a management fee, which is often a percentage of the fund’s value, in addition to a bonus on performing well.
Other Components in the structure of mutual funds in India
Custodian
The investments are looked after by the custodian. All the shares and other purchased securities are under his possession. The custodian is in charge of the securities that the corporation has purchased. The custodian is in charge of keeping the assets secure at all times and making sure that withdrawals are processed following SEBI regulations.
Registrar and Transfer Agent (RTA)
The Registrar and Transfer agents handle the management, upkeep, and updating of all investor- and investment-related records, including processing requests to buy, redeem, or cancel fund shares, as well as handling dividend payments to investors. For the services provided, the transfer agent is paid.
Brokers/Dealers
On the stock exchange, brokers and dealers purchase shares for the AMC and sell equities. Dealers also provide the Fund Manager with insightful research reports and market outlooks.
Types of Mutual funds by structure
There are different types of mutual funds by structure. To make the best decisions regarding mutual funds, one must have a clear idea of the different kinds of mutual funds available.
Lump sum mutual fund investment
Investors must pay the entire investment amount for these mutual funds all at once when buying the mutual fund scheme.
Systematic Investment Plan (SIP)
Investors can pay the investment amount in convenient monthly installments as opposed to a flat sum.
Open-ended Mutual Funds
Continuously purchasing and repurchasing open-ended funds is possible. There is no maturity time for these funds. Investors can buy and sell the funds every day based on the NAV (Net Asset Value).
Close-ended Mutual Funds
Closed-ended funds, in a contrast to open-ended funds, have a fixed maturity time, such as five to seven years. Only during the period set forth at the moment, the scheme is launched are the funds available for subscription.
Interval Funds
Both open-ended and closed-ended mutual fund schemes are combined in these funds. These funds’ units are only available for purchase or redemption at NAV-related prices during the pre-set intervals.
Different types of Mutual Funds
Equity Funds
The main asset class of these mutual funds is stock investing. These funds may be managed actively or passively (through an index fund). These investments in mutual funds provide substantial returns over an extended period. They, therefore, come with significant dangers. Stock funds and equity funds are similar terms.
Also Read: Top Tax Saving Mutual Funds
Money Market Funds
These are investment vehicles that make investments in highly liquid money market securities including certificates of deposits, treasury bills, commercial papers, etc. As these investments are made for a brief period of 15 days, they provide great liquidity.
Balanced or hybrid mutual funds
They are designed for medium- and long-term investors who have a modest appetite for risk. As their name implies, these mutual funds keep their portfolios balanced by investing a combination of riskier investments, such as equity funds, and less risky investments, such as debt funds. This aids in reducing the mutual fund portfolio’s exposure to risk while pursuing growth and acting as a reliable source of income.
Debt Funds
In this type of fund, investments are made in debt securities such as corporate bonds, government securities, debentures, etc. When compared to stock mutual funds, they pose less risk. This suggests that while the returns are lower than those of equities mutual funds, they nonetheless provide a regular and reliable source of income.
Sector Funds
As implied by the name, these funds make equity investments in companies that operate in a specific industry or sector. They are riskier because they produce bigger returns than diversified funds.
Index Funds
As implied by the name, this mutual fund invests in prominent stock market indices in a manner akin to an individual. The NAV changes in tandem with index movements since the fund’s value are correlated to the benchmark index.
Equity Tax Saving Funds
ELSS or Equity Linked Saving Scheme are funds that provide tax advantages under Section 80C of the Income Tax Act of 1961. A system like this allows investors to make investments both monthly in convenient installments and all at once. It fulfills the function of investment and savings.
Growth Schemes
Growth schemes are the best for capital growth over the medium to long term since they invest in equity funds. The funds have a high level of short-term risk but often offer significant long-term returns.
Income Schemes
Investors who want a consistent return on their investment can consider income schemes. The income scheme invests the money in bonds, corporate bonds, and comparatively safer government securities.
How do Mutual Funds work?
According to the recommendations of the professional investment advisor, mutual fund firms purchase a variety of bonds or stocks using the money gathered from small, large, as well as other institutional investors. For the benefit of the investors, a fund manager, who may be either a person or a third-party organization, is in charge of managing the portfolio.
The board of directors of a mutual fund business appoints a qualified fund manager to supervise and manage the bonds or stocks in the portfolio. The main goal of the fund manager’s activities is to maximize growth and returns for mutual fund investors. A team of investment specialists, each with specialized knowledge in a particular area connected to mutual fund investments such as determining the best moment to trade the assets in the portfolio, monitoring fund performance, etc., support the fund manager.
Some fund managers might be the owners of these funds, while others might not be. The money that investors choose to invest is collected by fund managers, who then make investment selections based on each investor’s particular financial goals and risk tolerance.
Benefits of Mutual Funds
AMC (Asset Management Company), a professionally run organization, manages mutual funds through professional fund managers that actively manage investment portfolios of different mutual fund schemes. Some of the advantages provided are:
Portfolio Diversification: A small investor can hold a diversified investment range even if the amount invested is modest because mutual funds invest in a diverse portfolio of financial products.
Low Risk: Investors can build a diverse portfolio of financial products even with a small investment. The risk is lower when investing in such funds.
Low Transaction Costs: Because mutual funds benefit from economies of scale, their transaction costs are lower. These advantages are shared with the investors.
Liquidity: A mutual fund’s units can be readily redeemed, and the money is credited to the investor’s account by ECS payment.
Choice: Mutual funds give investors a selection of plans with a range of financial goals. These programs also offer a variety of plans and options, such as a dividend option, growth option, reinvestment option, etc.
Transparency: Funds give investors access to the most recent market and investment-related information. Investors are informed of all relevant information following SEBI and AMFI regulations.
Flexibility: Mutual Funds give investors additional flexibility. Investors in open-ended schemes also can choose systematic withdrawal at predetermined intervals (SWP) or systematic investment through monthly/quarterly installments (SIP).
Safety: The mutual fund sector is governed by SEBI regulations, which protect investors’ interests.
Conclusion
By investing in mutual funds at Nuuu (short for dematerialization account), investors will derive the maximum benefits from the mutual funds.
