Mutual Funds

How Do Mutual Funds Work?

How Funds are sold

Mutual Funds primarily depend upon individual agents and distribution companies to market their schemes to the investors. Nowadays, they also market their schemes directly.

The individual agents who sell schemes of various Mutual Funds also act as financial advisors to many investors. Hence they are required to clear various examinations before acting as an agent. Many Mutual Funds prefer to deal with distribution agency than individual agents as it is easier to manage. These distribution agencies, with their highly qualified executives, will be able to offer better financial advice than individual agents to the investors.

Nowadays, the sales officers and other employees of the investment companies directly approach the investors (particularly the high net worth individuals and corporate clients) to sell different schemes. However, most of the sales of Mutual Funds happen through other distribution route than from marketing directly.

Investment Policies

Every Mutual Fund has a specified investment policy which will be described in the Mutual Fund's prospectus. A family of Mutual Funds will be managed by an Asset Management Company. This Asset Management Company will collect funds from investors and charge a management fee for operating them. They enable investors to invest across different market sectors and switch assets across funds while still benefiting from centralized record keeping.

The investment policies of different types of funds are as follows:

o Equity Funds. They invest in stock. However, they will hold 4% to 5% of their assets in money market securities to offer liquidity. Income funds will hold shares of firms giving high dividend yield and Growth funds will hold shares of firms that enable faster capital appreciation. Sector funds focus on a particular industry.

o Debt Funds. These funds invest in fixed-income securities. Different funds will concentrate on Treasury bills, corporate bonds, Mortgage-backed securities and other kinds of bonds. Some of the funds also specialize on maturity.

o Index Funds. Index funds buy shares that are included in a particular index in proportion to each share's representation in that index. Investing in index funds is a passive strategy because the investors need not do any security analysis.

o Money Market Funds. These funds invest in short-term low-risk instruments of the money market. Since the liquidity is high, some of the funds even offer check writing facilities to their investors.

Apart from these funds there are many different varieties of funds with unique investment policies like the international funds which invest in different securities across the world, the balanced funds which minimize risk without compromising heavily on growth opportunities and the flexible funds which depend on market timing.

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