How Mutual Funds Work in India – Basics Guide

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How Mutual Funds Work in India - Basics Guide

Mutual funds in India pools money from different investors. The money goes in a variety of securities and schemes. An Asset Management Company operates mutual funds. This gives an easy access to the professional portfolio manager.

The mutual funds offer diversification with low risk. Investors can invest in equity funds as well debt funds through a single platform.

Key Features of Mutual Funds in India

Let us know the key features of the mutual funds.

  • Investors can invest online or offline. You can manage MF through a fund manager. Investor scan also invest without the help of any fund manager.
  • The minimum investment amount is Rs. 500/-.
  • Mutual funds provide easy liquidity.Investors can withdraw if required.
  • It is regulated by the Stock Exchange Board of India and hence trustworthy.
  • The AMC shares a report with the investors every month.
  • The funds offer diversity in your portfolio. Equity MFs invest in stocks of different companies. The debt funds put money in bonds and government securities. They also cover fixed income securities and NCDs.
  • Mutual funds work on the basis of either load or no-load. A load fund charges on the specified transactions of buy or sell. No-load funds do not carry charges on buy or sale.

Mutual Funds Structure

An individual or a group of individuals or a corporate body can start Mutual Fund Company. It should first apply for SEBI registration. After approval from SEBI, form a trust and appoint a board of trustees. Select the asset management company. The trust company supervises the mutual funds. It ensures that the AMC operates to protect shareholders’ interest.

The AMC manages the portfolio of the funds. It also interacts with the shareholders. AMC obtains approval from the trust company for expanding the product portfolio. It also seeks approval while bringing a new scheme. The board of trustees must also appoint a depository participant and a custodian. They monitor the trading activity and ensure the safety of assets of the funds.

Mutual Funds Rules & Regulations

As said above, SEBI monitors the mutual funds in India. The mutual funds in India are liable to the regulations. A set of criteria for starting an MF firm is available. The funds operate in a prescribed way. The firm has to follow a limit on how much capital a fund can hold. The fund sponsor must have experience of at least 5 years in the financial industry. The sponsor should also have positive net worth for 5 years. Following are the SEBI’s regulations to start MF.

  • 500 million start-up capital for open ended schemes.
  • 200 million start-up capital for close ended schemes.

To meet the short-term requirements, funds can borrow 20% of their value. This is the highest limit. The period should not exceed 6 months.

We can segment mutual funds on the basis of several points. Equity funds invest in stocks of different companies. Some funds are to generate stable dividend income. Others are for long-term gains. The fund ensures best benefits to the investors through the right mix of diverse tools.

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