There are many small investors who are keen to invest their amount in stock but unable to do so, due to lack of knowledge or proper guidance. If all of such investor’s amount were gathered and invest wisely, it will give a positive result to everyone. But who will take the ownership and assure safety of the amounts.?
In 1963 UTI Act was carried out by then finance minister Mr. T. T Krishnamachari. He wanted money kept in people houses to be invested systematically. Which will benefit the market of India and also the general public of India. Under this act, the government takes all the responsibility. People may not trust any particular person, but people can trust the government and the various Government organization.
The task was given to the Reserve Bank of India and in 1964, India first mutual scheme came - US 64 was launched. This proved to be the most popular scheme in India. From 1963 to 1987, UTI was the single player in mutual funds in India. Then the government banks came, and other government financial institutions start bringing their scheme. Only government companies were coming with their mutual fund scheme.
SEBI Entry
In 1993 SEBI – Security & Exchange Board of India was established and after that private companies and banks too start entering the mutual fund market. This open up multiple options for the general public. These companies come up with new scheme and offers. By the time the competition had also started in the market which is still prevalent till today. Later on, many international players to join in the race. Like morgan stanley, mirae assets etc. all of them brought their mutual fund products in market. Everything in Mutual fund is strictly regulated by SEBI. Even today SEBI keeps its involvement in every activity of mutual funds. All funds have to prove, all their details, full expenses, and historical data by SEBI before advertising them to the public.
What is the complete process followed to start a Mutual Fund?
Five things are needed to start a Mutual Fund. First is trust, second is sponsors, third is fund manager, fourth is asset management company that we call AMC and Fifth, the custodian.
AS per SEBI rules, a mutual fund can be formed only like a Trust. It is not possible to sell mutual funds by establishing a private limited company. That is why to start a mutual fund, first a mutual fund trust is created. After that its sponsors are made, these sponsors play a very important role in mutual funds. These sponsors put in their money, apart from that they decide who will become the trustee in mutual fund, and also all the SEBI approval are taken by these sponsors. After that an Asset Management Company (AMC) is formed. Franklyin Mutual fund, Mirrae Asset Mutual Fund are few examples of an AMC. The AMC has to keep its net worth above INR 10 Crore. The main job of AMC is to launch different scheme of mutual fund.
It is responsibility of the trustee of the mutual fund, to ensure that all AMC systems works properly. In AMC the auditors, and registrar are appointed by all the trustees as per SEBI rules. The AMC has to disclose all the details to the public before launching any mutual fund scheme. Only after that people can buy units of that particular scheme.
What is meant by Unit in mutual fund?
Mutual Fund invest money in different sectors and divide them into units of 100 or 1000. Lets understand with an example: A share of #Tesla is $10000, one share of #pfizer is $43000 , a share of #X is more than $23000. If an individuals want to buy these shares alone then it requires a lot of money, but a Mutual Fund will buy these shares and will divide them into thousands of smaller units. So now when we buy a unit, its money will be very less and you will get all three shares for less money. What we could not do before, we can do it through Mutual fund. It may also happen that our $1000 is invested in 10-12 companies.
How the prices of Units are decided?
Units are like the Shares of a Company. When the mutual fund is started, these units are issued at a fixed price, for example, $10 or $100 this is called NAV – Net Asset Value. Once mutual fund invests in the market, their investment value keeps on increasing and decreasing. And in the case of some investments this value changes every day, as in the case of shares. It also changes the value of the units of the mutual fund.
A mutual fund can offer a variety of schemes, but every scheme has to be approved by the trustees. And a file called the offer documents has to be submitted to SEBI. The offer documents should contain all the details that a common people like us can make right decision, as to which mutual fund should be purchased.
If SEBI does not comment on the offer document within 21 days from the date of submission, so AMC by offering that document in the public, can start fund generation from public. After that AMC will assign a Fund Manager.
What is a Fund Manager?
Fund manager are the financials experts, and they have a research team, their full-time job is to analyze, investments, and buy the investments that fulfils the goals of mutual fund. Fund managers are important because, they analyse the financials statement of different companies, to find out their revenue, expenses, Profit and Loss. Fund manager talks directly to the managers and owners of big companies. Because these big companies know that these fund managers have huge funds. And if this fund manager will invest in their company, then it will be very beneficial for the company. Big companies talk to these fund managers and explain their plans ahead. And by analysing all this, the money is collected from the people, were invested accordingly by the fund manager.
The diversification of the funds for which a common investor have to spend huge amount, now can easily be done with minimal amount. And also, the investor are getting the expertise of a reputed fund manager. Which a investor cannot afford alone. Now you invest your money and do your work comfortably. The fund manager will invest and sell according to their own choices. We do not have any role, neither need to keep worrying about the amount. You can sell your unit whenever you want, the money will be back in your account in 1-2 days.
The first important things to understand MF is that, not all mutual fund are same, each fund is different, some of high risk, some have no risk, some invest in shares, some in debts etc. In every fund it is decided where and how much money it will invest. An individual can invest in lump sum or through smaller amount in monthly SIP form. That is Mutual fund is first option for many individual for wealth creation.
