How Do Mutual Funds Work?
Mutual funds follow a structured process to manage and grow investors’ money. Here’s how they work:
Step 1: Pooling of Investments
When you invest in a mutual fund, your money is combined with funds from multiple investors to create a large investment pool.
Step 2: Fund Management by AMC
The Asset Management Company (AMC) appoints a professional fund manager who is responsible for managing this pooled money.
Step 3: Investment in Securities
The fund manager invests the pooled funds in a portfolio of securities based on the fund’s objective.
In equity funds, investments are made in stocks
In debt funds, investments are made in bonds and fixed-income instruments
Step 4: Performance of the Portfolio
The returns generated depend on how the underlying securities perform in the market. Gains or losses are reflected in the fund’s value.
Step 5: Unit Allocation and Ownership
Investors are allotted units based on the amount invested. Each unit represents a proportionate share in the fund.
Step 6: Participation in Gains and Losses
As a unit holder, you share the profits or losses in proportion to the number of units you hold.
Step 7: Redemption of Units
When you choose to exit, you can redeem your units at the prevailing Net Asset Value (NAV), and the amount is credited to your bank account, usually within 1 to 3 working days.
Step 8: Ongoing Monitoring and Rebalancing
The fund manager continuously tracks market movements and reviews the portfolio to ensure it remains aligned with the fund’s objective. Adjustments are made when required to manage risk and optimise returns.
Step 9: Expense Deduction and NAV Updates
The fund charges an expense ratio for managing the investments, which is deducted from the fund’s assets. The NAV is updated daily, reflecting both market performance and fund expenses.
