By Tensing Rodrigues
I am interested in knowing about mutual funds. Can you give me a detailed description of MFs? Anthony Pontes.

Mutual funds are collective investment schemes which pool funds from a number of individuals and invest them in different securities. Whatever the investment earns is distributed among the individuals who have contributed to the pool, after meeting the cost of managing the investment.
The total corpus of a mutual fund (that is, the total quantum of money that the fund has collected and invested) is divided into units, usually of denomination Rs 10 at the time of starting the fund. Any individual can buy units; what he pays to buy the units is his contribution to the collective investment pool; his share in the profits of the fund is proportionate to his share in the total number of units of the fund. In other words, each unit represents an investor’s proportionate ownership of the portfolio held by the fund. The unit holder has a right to the income those holdings generate; the unit holder also bears the erosion in the value of holdings, if any. When the investor wishes to liquidate his investment, he can redeem the units, that is sell them back.
Mutual funds in India have a three-tier structure: the Sponsor, the Asset Management Company (AMC) and the Board of Trustees. The Sponsor provides the initial capital to start the fund. The AMC manages the portfolio of the fund. The Board of Trustees supervises the fund on behalf of the unit holders. The Sponsor appoints both the AMC and the Board of Trustees. But there are strict regulations to ensure that the sponsor does not manipulate the working of the fund. The board of directors of an AMC has to have at least fifty per cent directors, who are not associated in any manner with, the sponsor or the trustees. Similarly two-thirds of the trustees have to be independent persons who are not associated with the sponsors in any manner. The purpose of these regulations is to keep an “arms length” distance between the different entities in the mutual fund structure, so that they do not collude to harm the investor’s interest.
Mutual funds invest in a variety of assets: equity, debt, money market securities, gold, etc. You can choose a fund as per your desire. If you want to invest in equities, you can choose an equity fund; if you wish to invest in the equity of companies in a particular sector, you can choose a sectoral fund. If you wish to invest in debt, you can choose a debt fund. And so on. You can also choose a fund which invests in a combination of these assets – these are called hybrid funds. Return and risk differ from fund to fund. You need to choose the fund as per your preference. But keep in mind that return and risk go together – higher the return, higher
the risk.
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