- Pooled Vehicle
A mutual fund is a pooled vehicle to pool money from investors, with a promise that the money would be invested in a particular manner, by professional managers.
- Professional Management
The idea behind a MF is that investors lack the time or the inclination or the skills to manage their own investments. Professional managers, acting on behalf of the MF, manage the investments for the benefit of investors, in return of a management fee. The organization that manages the investment is the Asset Management Company. Employees of the AMC who perform this role of managing investments are the fund managers.
Investors have their individual preferences on how they would like their money invested and how much risk they are willing to take. For ease of management and reporting, each group of investors is identified with a ‘mutual fund scheme’. A MF can, and typically does, have several schemes to cater to different investor preferences.
- Money in Trust
The MF manages investments of the scheme for the benefit of its investors. Every scheme has an:
- investment portfolio
- account of income and expenditure
- account of assets and liabilities
In order to ensure fairness to investors, the expenditure that can be charged to the scheme, whether as management fees or as other expenses, is regulated by regulator. The gains of any scheme would belong to its investors. Similarly losses, if any, would need to the borne by investors, up to the amount invested. Thus, the MF manages the money in trust for the benefit of investors.