How does a mutual fund operate

Mutual fund is a professionally-managed trust that pools in money from various individuals to invest in securities like stocks, bonds, short-term money market instruments and commodities. The mutual fund is managed by professional fund managers, who buy and sell securities based on thorough market study and understanding.

Every scheme launched by the mutual fund has an investment objective comprising: long-term capital growth, regular monthly income or steady returns and more. The funds are, thus, invested as per the stated objective, risk profile and time horizon. For instance, an equity fund will invest in shares for long-term capital growth, while a debt mutual fund will invest in government securities and corporate bonds with an aim to deliver steady returns or less volatile returns.

In India, a mutual fund is set up in the form of a trust that has a Sponsor, Trustees, Asset Management Company (AMC) as per the stipulated legal structure under SEBI (Mutual Funds) Regulations, 1996. Under this structure, an Asset Management Company (AMC) is in charge of managing the investments and other day-to-day activities of the mutual fund.