Mutual funds, as per the acceptable definitions from various financial websites worldwide, are investment instruments created through small contributions made by a large group of investors. It is, therefore, in essence, a pool of capital with multiple investors making individual contributions. In order to track the extent of each individual contribution, the mutual fund’s corpus is divided into smaller portions with a face value similar to company shares, which are termed as units. The larger the number of units held by a mutual fund investor, the greater the contribution of that investor. For example, a person holding 10 units of the ICICI Prudential Mutual Fund AMC’s Equity Fund has a larger investment in the fund as compared to a person holding 5 units of the same.
The next step is to use this money in order to make it grow. This, after all, is the basic reason for the existence of any investment. This is where experts enter the fray. A mutual fund is managed by a fund manager who is an expert with years or even decades of experience in financial markets and products. He or she will be supported by a group of subject matter experts also known as a mutual fund management team that will help in efficient management of the fund ranging from stock selection strategy, funds allocation to risk management procedures. As of the current day, the requirements for managing a mutual fund have grown so complex that specialized fund houses such as ICICI Prudential Mutual Fund AMC have developed specialized teams and departments that handle specific areas of investments such as equity, debt, derivatives etc.
How Mutual Funds Make Money:
The investments that a mutual fund makes can either appreciate in value or depreciate. In case the value of the mutual fund’s investment increases, the pool of money available i.e. the AUM (assets under management) of the fund increases. An increase in AUM also impacts the price of each unit i.e. the per unit price increases as the mutual fund’s investments make a profit. In case an investor opts for the dividend option, the profits of the investment are paid out from time to time depending upon business conditions and the fund management team’s recommendations. On the other hand, in the case of the growth option, the profits of the fund lead to a continued increase in the NAV value of available units, which will provide capital gains benefits when the units are redeemed by the investor.
Investing in Mutual Funds
There are two common styles of investing in mutual funds – the online route and the offline route. The online route is possible through either the AMC website itself or through an online third party distributor such as Paisabazaar.com. For example, if you are investing in a mutual fund that is managed by ICICI Prudential Mutual Fund AMC, then you can make the investment through the AMC’s registered website. In either case, you will need to sign up for an investment account with either the mutual fund company or one of its distributors in order to invest. As per SEBI guidelines, you will have to complete the mandated KYC either through a registered KRA such as Karvy or the online Aadhar-based KYC which has gained quite a bit of traction in recent years. Once your investment account is up and running, you can search for and invest in a mutual fund as easily as shopping online at your favorite online shopping portal.
The offline route has been around since new age investments were first started. You have to visit the registered office of the mutual fund distributor or the mutual fund AMC in order to fill out an application form and submit all required documents along with the investment amount in the form of check or draft to complete to purchase process. Once units have been allocated, you will get a receipt showing your holdings as well as a certificate showing the number of units of the mutual fund you hold. This process is of course not as fast as the online process but still preferred by a small group of investors.
|