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What is a mutual fund?

A mutual fund manages the money of a large number of investors, so they can benefit from the skills of an experienced investment manager at low costs

Mutual funds combine the savings of a large number of investors and manage it as a single pool of money. Instead of the investors worrying about which stock or bond or commodity to invest in, professional analysts and investment managers decide what to invest in.

In a mutual fund, the money of a large number of investors is managed together, so the costs are low. This also means that the skill and expertise of a small number of experienced investment managers can benefit a large number of people.

Mutual funds are run by mutual fund companies, also known as Asset Management Companies (AMC). Each AMC operates a number of funds suited to different types of investment needs. The entire mutual fund business is regulated by a government entity called Securities and Exchange Board of India (SEBI). AMCs can be set up only with the permission of SEBI. All aspects of their work has to be done according to rules and regulations made by SEBI, which monitors AMCs very closely.

For the individual investor who doesn't have much time to study and research investments himself, mutual funds are the best option for reaping the benefits of different types of investments with a minimum of effort. Starting a mutual fund investment is easy and convenient and can be done even with a small amount of money, generally as little as ₹5,000.

Questions

  1. In a mutual fund, each investor manages his money himself.
    • True
    • False
  2. Who makes the investment decisions in a mutual fund?
    • The government
    • A professional investment manager
    • A chartered accountant hired by the mutual fund
  3. Mutual funds are run according to rules and regulations made by:
    • The Reserve Bank of India
    • Ministry of Commerce
    • Securities and Exchange Board of India
    • The World Bank
  4. How much money is generally needed to start investing in a mutual fund:
    • At least ₹1 lakh
    • Anything more than one rupee
    • ₹5,000
    • You need at least 1,000 dollars that have been remitted by a relative living abroad