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A mutual fund is a fund that collects money from a number of investors and professional fund managers after thorough analysis invests those funds in securities such as stocks and bonds. The mutual fund’s holdings are referred to as its portfolio. Mutual fund units are purchased by investors. Each unit represents an investor’s ownership of the fund and its earnings.
A lump sum investment involves investing the entire amount in a specific mutual fund scheme all at once, whereas a SIP involves investing a fixed sum of money in the mutual fund scheme at regular intervals.
A mutual fund may undergo changes from time to time. Mutual funds are required to notify their unit holders of any material changes. Aside from that, many mutual funds send their investor’s quarterly newsletters.
Currently, offer documents must be revised and updated at least once every two years. Meanwhile, new investors are informed of material changes through an appendix to the offer document until the offer document is revised and reprinted.
These are schemes that guarantee assured return to mutual funds holders regardless of the scheme’s performance. A scheme cannot promise returns unless the sponsor or AMC fully guarantees such returns, which must be disclosed in the offer document. Potential buyers should carefully read the offer document to determine whether the return is guaranteed for the duration of the scheme or only for a specific period. Some schemes guarantee returns for one year and then review and change them at the start of the next year.
The trust is established by one or more sponsor who acts as company promoter. The mutual fund’s assets are held by the trustees for the benefit of the unit holders. SEBI-approved Asset Management Companies (AMCs) manage the funds by investing in various types of securities. The securities of the various fund’s schemes are held in custody by a SEBI registered custodian. The trustees have general supervision and management authority over AMC. They monitor the mutual fund’s performance and compliance with SEBI regulations.
According to SEBI regulations, at least two-thirds of the trustee company’s or board of trustees’ directors must be independent. Furthermore, at least half of AMC’s directors must be independent. Before launching any scheme, all mutual funds must register with SEBI.
Mutual fund houses offer their schemes in two options- regular plan and direct plan.
Direct Mutual Funds are offered directly by the AMC or fund house with no involvement of third-party agents – brokers or distributors. There are no brokerage fees because there are no third-party agents involved. Resulting in a lower expense ratio of direct mutual funds and higher returns. These mutual funds can be purchased both online and offline.
Mutual fund schemes under regular plans are purchased through an intermediary like brokers, advisors, and distributors. For selling their mutual funds, the intermediaries charge the fund house a fee. This fee is typically recovered by AMCs through expense ratio. The expense ratio is slightly higher for regulars mutual funds than for direct mutual funds. As a result, direct plans tend to have slightly higher returns. A regular plan is suitable for investors who do not have market insights or the time to track their portfolio.
The Securities Exchange Board of India (SEBI) protects the interests of investors, develops policies, regulates, and supervises mutual funds.