Mutual fund is device for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the initial offer document.
Investments in securities are widespread through industries and sectors and hence the risk is reduced. Diversification reduces the risk because all stocks may not be unidirectional or move in the same proportion at the same time. Mutual funds issue units to the investors in proportion with quantum of money invested by them. The investors of mutual funds are known as unit holders.
The investors in proportion to their investments share the profits or losses. The mutual funds generally come out with a number of schemes with different investment aims, which are launched from time to time. A mutual fund is registered with Securities and Exchange Board of India (SEBI), which controls securities markets before it starts to collect funds from the public.
Unit Trust of India is the first mutual fund established in India in the year 1963. In the nineties, Government allowed public sector banks and institutions to set up mutual funds.
A mutual fund scheme is grouped into open-ended scheme or close-ended scheme depending on its maturity period.
An open-ended mutual fund is available for subscription and repurchase on a continuous basis. These funds do not have a fixed maturity period. Investors can buy and sell units at their convenience.
A close-ended fund or scheme has a specific maturity period. The fund is open for subscription only during a specified period at the time of launch of the scheme.
Non-resident Indians can also permitted to invest in mutual funds. Necessary details in this respect are given in the offer documents of the relevant schemes.