What is Mutual Fund?
In this edition of Minutia newsletter, let's understand what is a mutual fund.
Let’s say we decided to invest our money in equity.
While looking for a nice business to invest in, you noticed that Royal Enfield bikes are selling like anything. You think that it might sell even more in the future, with it launching bikes in each segment of the market. So you plan to invest in its business. But you look on the internet that the share price of Eicher Motors(Parent Company of Royal Enfield) and you see that the price is high for you. You can’t afford to buy its shares in bulk.
So you look for the next opportunity, you see that, most cars and bikes have MRF tyres. MRF tyre is a well established business, even if the petrol/diesel vehicles are going to be replaced by electric vehicles, MRF is going to sell tyres for both the type of vehicles, but you notice, share price of MRF is even higher than Eicher motors.
You continue your journey of finding good investments. You notice that in your house, most of the product you consume is from Hindustan Unilever (HUL). The same is the case with most the households in India. HUL sells its products in the remote locations of India. Since, fast moving consumer goods are consumed regularly and the demand is always there. So you look at the share price to invest, only to find that the share price is not affordable for buying it in bulk.
You wish if there is a way to invest in these great companies.
Demotivated of finding opportunities, you wonder if there is a company good enough for your investment at your buying price.
Somehow you find a company at your buying price, but it is not a well established company.
You might need to analyze the company, also not sure if investing in it will give the expected returns. You hope if someone can help you out with the research.
Some of us, might not have the time to research about companies.
And we also need to know what would be the right price to pay for a share of a company. Added to this, what if we don’t have a lump sum amount of money to invest. Most of us can only afford to invest two thousand per a month.
There might be many small investors who have these issues. What if there is a firm which takes care of this professionally, while we can afford to pay a fee for this service?
A solution for all of this is Mutual Fund. A mutual fund is where all small investors (called Retail investors) collect the money and invest in different companies and assets.
By this, as collective, we all can afford to buy the shares of big companies like Eicher motors, HUL, MRF in bulk amount, a fund manager who manages our fund will research for any such good investments in the market and actively look after our fund for any changes needed to it with the changing times. While, we pay a nominal fee to the fund manager for his service.
But what really is a mutual fund?
As the name indicates, a Mutual fund is when small investors’ money is pulled together and invested in the markets and this fund is managed by a fund manager.
A mutual fund contains a Sponsor (Businessman or a firm) which sets up the mutual fund, a trust and an asset management company (AMC).
Let’s look at each of these.
Sponsor - A sponsor can be a businessman or a firm who has interest to set up a mutual fund. The regulatory body SEBI (Securities and Exchange Board of India) has set up rules on who can sponsor. So the investors’ money is not put in the wrong hands. Sponsor makes money by setting up the mutual fund. We will look into how sponsor makes money later.
Trust - A trust is set up by the sponsor and appoints the trustees, who are the custodians of the investors’ money. All the money pulled together from the investor belongs to the trust.
AMC - An AMC or asset management company serve the trust by managing the money of the trust. For this service renders, AMC charges a fee called AMC fee. AMC will set all the plans and schemes before the trustees and when the trustees approve the plans and schemes of AMC, those are put up in the market. AMC puts up various plans and schemes to address the needs of different investors in the market.
Mutual fund is a safe and easy way to expose our investments to equity. We need not invest directly in the market. Mutual fund will do it for us.
Mutual fund not only invests in Equity, it invests in other asset classes as well, like Gold, Debt and soon Real Estate.
Mutual fund also facilitates the options of buying assets on a monthly basis on a nominal amount. Like investing two thousand every month rather than investing 5 lakhs at a time.
We will go into the details of Mutual funds, types of mutual funds and how to buy mutual funds, in the later editions of the Minutia.
Until next time,
Peace Out!