We all have, once in our life, seen an advertisement on our television regarding mutual funds with the tagline “Mutual Funds Sahi Hai”. After the advertisement, one would get several sorts of questions in their mind about mutual funds. This piece of writing will answer all your queries.
To start with, the first question would be what are mutual funds? So to define the term mutual funds let’s break down the words mutual & funds. Mutual means shared by two or more people and funds is defined as an amount of money that has been saved or has been made available for a particular purpose. Therefore a mutual fund is a mechanism where funds from investors are combined and are utilized in buying stocks and bonds of different types. Mutual funds regulate the money obtained by several investors and invest that pooled money into shares & securities. The last step in working Mutual Funds is that they divide the profit or loss among the investors who pooled their money proportionately.
As the investment in a mutual fund is spread across different industries and sectors so the chances of risk are very low as compared to a classic investment. Investors of a mutual fund are known as unitholders. A Mutual fund needs to be registered with SEBI before it pools investment from the public.
Mutual funds investments were initiated in 1964, in continuation with the setting up of Unit Trust of India by the government. Basically, the main purpose of setting up UTI was to mobilise the public savings and invest them across different securities & assets to earn a good return. Until 1987 UTI remained a monopoly but after that public banks and insurance companies also came entered the field and established Mutual funds. Nowadays mutual fund market is very competitive and people get a large range of schemes to invest in. In addition to that, there are proper regulations and laws made for mutual funds. The most important set of rules that regulate mutual funds is the SEBI (Mutual Funds) Regulation 1993.
If a mutual fund is constructed as a virtual company then the CEO of that company will be the fund manager also known as an investment advisor. There is a legal obligation on the fund manager to work in the best interest of the investors. There is an accountant who calculates the daily value of the portfolio to determine whether the share prices are up or down.
ADVANTAGES OF MUTUAL FUNDS
The next question is likely to be what are the benefits of a mutual fund? There are several advantages of mutual funds which make mutual funds stand out from any type of investment in the share market.
- Simplicity– Mutual fund is the easiest type of investment in stock market securities. Any person can easily invest in mutual funds with zero knowledge about the market, who does not want to give extra time to his investments or who do not like investing actively in the stock market. People need to just identify the financial aims and the rest is then managed by fund managers. These managers cost a reasonable fee for managing your funds and investments. This feature allows you to be tension free, you don’t need to study the market or check the shares or tune into business news.
- Professional management- In normal investment you need to take advice from the expert person for that investment and you pay a large chunk of your profit to him/her, but talking about mutual funds they employ professional expert managers to manage investors’ investments. Thus small investor gets the chance of availing the services of expert without paying a heavy cost.
- Diversification- For a small investor it is quite difficult to invest in different types of securities with limited savings. So they are not able to diversify the investment risks, but mutual funds invest in different types of securities, investments and bonds which also helps them to diversify risk during the investments.
- Transparency- People who invest in mutual funds gets all the facts & information of the funds, the fund manager’s strategy& outlook, the profit which eventually makes the investor feel safe and secure.
RISKS OF MF
The next question would be the risk associated with the mutual funds. There are several risks involved in mutual funds as they are stated below-
- Generally in mutual funds investment, the fund managers are not accountable for any poor results of the investment.
- The mutual fund requires several types of fees and brokerage which overall results in large payment of brokerage and commission.
- Excessive diversification of investments across the portfolio loses the focus on securities of key segments and investor misses higher profit available.
- Many a time the fund managers of rapid growing mutual funds make hasty decisions and risky decisions due to the large availability of funds but that is not advisable.
REGULATION OF MF
Mutual funds in India are mainly regulated through the SEBI (Mutual funds) Regulations, 1996. The Securities and Exchange Boards of India utilized its power to make regulations, under Section 30, to formulate this regulation for Mutual Funds.
Chapter 1 Regulation 2 defines several terms related to mutual funds and different procedures to be followed at different times. Terms like an advertisement, custodian, mutual funds, asset management Company etc. have been defined under regulation 2. Chapter 2 defines registration of mutual funds for the pooling of funds by the public; wherein there is a proper procedure defined for the registration of mutual funds, the criteria for eligibility & the terms and condition for the registration of the fund.
Chapter 3 defines the Constitution and management of mutual funds and operation of trustees etc. The first regulation under this chapter which is regulation 14 says “A mutual fund shall be constituted in the form of a trust and the instrument of trust shall be in the form of a deed, duly registered under the provisions of the Indian Registration Act, 1908 (16 of 1908), executed by the sponsor in favour of the trustees named in such an instrument.” Other regulations of the chapter talk about qualification, disqualifications of trustees & appointing the board of trustees.
Trustees are the person or the company who holds the property of mutual funds in trust for the benefit of unitholders.
- To provide a fixed returns scheme the particular mutual funds must be approved by the RBI.
- Under the SEBI Regulations, the finance ministry is appointed as a watchdog to keep checks upon SEBI & RBI.
- Apart from the above-stated regulations and rules, another body was constituted for maintaining professional and ethical conduct. The body is known as The Association of Mutual Funds in India which maintains standards in the Industry and protects the interest of the investors.
Mutual funds are a kind of financial innovation that helps small investors with small funds to invest with making money out of the stock market with low risk than the classical stock market. Mutual funds in India are still much underrated and people still hesitate in investing their hard-earned money into it. One thing an investor must do is to be more careful while choosing the plan. He must be clear with his goal with the finance in his hands, so he must read all schemes related documents carefully, past records of the funds, low expense ratio etc. It is preferable for small investors to invest in mutual funds that have manageable assets. So mutual funds have the potential to reach the bottom line of Indian investors and are well regulated by SEBI, RBI and the Ministry of finance. Also, we can conclude that “Mutual funds sahi hai”.
Author’s Name: Utkarsh Pandey (Chanakya National Law University, Patna)
 SEBI (MUTUAL FUNDS) REGULATIONS, 1996.