How Mutual Funds Work

When an investor puts money into a mutual fund, that money is pooled together with funds from other investors. This collective pool is managed by a professional fund manager and invested in various securities such as stocks, bonds, or money market instruments depending on the fund’s objective.

The AMC is the organization responsible for managing the mutual fund. It appoints fund managers, research analysts, and compliance teams to oversee investments and ensure regulatory alignment. Examples: HDFC AMC, SBI Mutual Fund, ICICI Prudential AMC.

The fund manager is responsible for deciding where to invest the pooled money. They study market trends, economic data, and individual securities to construct and manage the portfolio. Their goal is to generate returns while staying within the fund’s risk profile and strategy.

Investors receive units in exchange for the amount they invest. The number of units allocated depends on the NAV (Net Asset Value) on the day of purchase. For example, if you invest ₹5,000 and the NAV is ₹50, you receive 100 units.

• Capital Gains: When the securities held by the fund increase in value.
• Dividends/Interest: When stocks or bonds in the fund pay dividends or interest.
• NAV Appreciation: When the NAV of your units increases, indicating a rise in the fund’s value.

You can redeem your units anytime (in open-ended funds) by placing a redemption request. The money is usually credited within 1–3 working days. The amount you receive depends on the NAV on the day of redemption.

Mutual funds charge an expense ratio to cover management fees, distribution costs, and administrative charges. This is expressed as a percentage (e.g. 1.5% per year) and is automatically adjusted in the NAV. Lower expense ratios mean higher net returns for investors.

In India, mutual funds are regulated by SEBI (Securities and Exchange Board of India). SEBI ensures that funds follow fair practices, disclose relevant information, and protect investor interests.

Let’s say 1,000 investors invest ₹10,000 each into a fund — a total of ₹1 crore. The AMC uses this pool to buy 10 different stocks. A fund manager actively monitors the portfolio, replacing underperformers and rebalancing as needed. Each investor owns units based on their share of the pool, and earns returns from growth in stock prices or dividends received.

Mutual funds operate on a simple yet powerful idea: collective investing. By pooling money, hiring experts, and diversifying across asset classes, mutual funds offer access to professional wealth creation at a relatively low cost and low barrier to entry.