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The Asset Management Company (AMC), i.e. the company which manages the mutual fund raises money from the public. The AMC then deploys the money by investing in different financial securities like stocks, bonds etc. The securities are selected keeping in mind the investment objective of the fund. For example, if the investment objective of the fund is capital appreciation, the fund will invest in shares of different companies. If the investment objective of the fund is to generate income, then the fund will invest in fixed income securities that pay interest. Each investor in a mutual fund owns units of the fund, which represents a portion of the holdings of the mutual fund. On an on-going basis, the fund managers will manage the fund to ensure that the investment objectives are met. For the services the AMCs provide to the investors, they incur expenses and charge a fee to the unit holders. These expenses are charged against proportionately against the assets of the fund and are adjusted in the price of the unit. Mutual funds are bought or sold on the basis of Net Asset Value (NAV). Unlike share prices which changes constantly depending on the activity in the share market, the NAV is determined on a daily basis, computed at the end of the day based on closing price of all the securities that the mutual fund holds in its portfolio.

Mutual fund is a financial instrument which pools the money of different people and invests them in different financial securities like stocks, bonds etc. The Asset Management Company (AMC), i.e. the company which manages the mutual fund raises money from the public. The AMC then deploys the money by investing in different financial securities like stocks, bonds etc. The securities are selected keeping in mind the investment objective of the fund.

There are essentially two kinds of mutual funds. Open Ended Schemes: Investors can buy units of open ended schemes at any time. Investors can also sell units of open ended schemes at any time, though some schemes (e.g. equity linked savings schemes) may have a lock in period during which the investor cannot sell the units. The percentage ownership of investors in the assets of open ended schemes changes whenever investors purchase or sell units. Since you can sell units of open ended schemes at any time, high liquidity is ensured to the investors. However, costs may apply if you sell units of open ended scheme before a certain period of time from the date of investment. We will discuss this in more details later. Close Ended Schemes: Close ended schemes are open for subscription only for a limited period of time, during the offer period. These schemes have fixed tenure and the investors can sell or redeem only after the maturity of the scheme. Upon maturity, depending on the scheme, the units get automatically redeemed or in some cases, the investors can switch to a different scheme. Close ended schemes are open for subscription only for a limited period of time, during the new fund offer (NFO) period. These schemes have fixed tenure and the investors can sell or redeem only after the maturity of the scheme. Upon maturity, depending on the scheme, the units get automatically redeemed or in some cases, the AMC gives option to unit holders to switch to a different scheme. The percentage ownership of investors in the assets of close ended schemes is unchanged throughout the tenure of the scheme as new investors cannot buy units post closure of the NFO. Some close ended schemes are listed on stock exchanges and you can buy or sell them through your share trading / demat account in the stock exchange, but the liquidity of these schemes listed on the exchanges is still quite low.

Expense ratio is the annual cost incurred by the AMC to operate a mutual fund scheme, expressed as a percentage of the total assets of the scheme. Mutual Fund Investment in India involves understanding such costs to make informed decisions. The cost includes fund manager expense, cost of the supporting infrastructure for the fund manager, transaction costs (for buying and selling securities), marketing and distribution costs (commissions paid to mutual fund distributors). If the total assets under management of a scheme is Rs 500 crores and the expense ratio is 2.5%, then it implies that Rs 12.5 crores (2.5% X 500 crores) is the operating expenses of the scheme. This expense is deducted from the asset value of the scheme on a pro-rata basis; units are priced after deducting expense ratio. Investors should note that the NAV of a scheme is net of the expense ratio. Mutual Fund Investment in India requires evaluating the expense ratios of different schemes, as they can vary across plans of the same AMC.

Every investment we make involves a risk, only its nature and degree varies. The same applies to Mutual Funds too. All Mutual Fund schemes do not carry the same risk when it comes to returns on investment.

The answer is a huge, resounding YES! It is important to note that experience in managing money/making investments plays a vital role in generating good performance. The more the experience, the better is the probability of making profitable investment decisions

Once an investor has decided to invest in Mutual Funds, he has to make a decision of which scheme to invest in– Fixed Income Fund, Equity Fund or Balanced and which Asset Management Company (AMC) to invest with.

There is a beautiful Chinese proverb, “The best time to plant a tree was 20 years ago. The second best time is now.”