Theme: Organizational aspects and procedure of mutual funds

There are different types of mutual funds in India depending on their structure, asset class, investment objective and specialty funds. Although equity fund is suitable for long term investment, short term debt funds are more suitable than fixed deposit.

Mutual funds pool money from different investors to invest in securities like shares, bonds, government securities, etc. Each mutual fund scheme has a strategy that is set at the time of the NFO (New Fund Offer). Once the strategy is decided, the fund must follow it. Starting from the launch of NFO to the distribution of returns, mutual fund investing is a cycle of 4 steps.

NFO Launch

In a New Fund Offer (NFO), investors get an opportunity to subscribe to a mutual fund scheme and say invested in it right from its inception. However, they can subscribe only for a limited time. Once the NFO closes, the investors will only be able to purchase the units. Moreover, the fund's strategy is disclosed at the time of the NFO launch. Once the fund manager fixes the fund strategy, it cannot be changed. It is because investors invest in the fund based on the strategy. NFO's are cheaper than existing funds as it's new to the market. However, mutual funds investors need to consider the fund houses' reputation, objectives of the fund, cost of investment, risk, minimum subscription amount, and the investment tenure before investing in an NFO.

Money is Pooled

Mutual funds pool money from many small investors to invest in securities. Investors invest small amounts of money from their savings. Mutual funds allow small investors to invest money in large portfolios, which they otherwise cannot. It can be due to the lack of money or lack of time to perform mutual fund research in detail. Thus, mutual funds are the solution to such investors.

Invest Money in Securities

The pooled money is invested in securities like shares, bonds, and government securities. The fund manager decides the portfolio of the fund based on the strategy of the fund. The portfolio manager has the expertise and time to do a thorough research of the securities. Also, they perform a company, industry, and economy level analysis. In order to find the securities that best fit the fund's strategy and maximize the return for the mutual funds investors. And at any point in time, if the selected securities are underperforming, they replace them with better-performing securities. They sometimes use multiple strategies to choose the securities for a fund. And sometimes, they also use a combination of investing and trading strategies to take advantage of the stock market situations. All these efforts put by the fund managers give investors access to large portfolios.