Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders

The investors, in proportion to their investments, share the profits or losses. The mutual funds normally come out with a number of schemes with different investment objectives, which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI), which regulates securities markets before it can collect funds from the public.

Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s, Government allowed public sector banks and institutions to set up mutual funds.

In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI are - to protect the interest of investors in securities and to promote the development of and to regulate the securities market.

As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors.

All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type.

The AMC acts as the investment manager of the Trust. The Trustees, with the approval of SEBI, appoints the AMC. The AMC manages the different investment schemes of a mutual fund. An AMC may have several mutual fund schemes with similar or varied investment objectives. Besides its role as the Fund Manager, the AMC may undertake specified activities such as advisory services and financial consulting. The AMC also undertakes Customer Services, Accounting, Marketing and Sales functions for the schemes of the mutual fund.

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.

SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme.

For investors who have limited resources available in terms of capital and the ability to carry out detailed research and market monitoring, mutual funds offer the following major advantages :-

PORTFOLIO DIVERSIFICATION
This enables an investor to hold a diversified investment portfolio, even with a small amount of investment that would otherwise require big capital.

PROFESSIONAL MANAGEMENT
A team of professional fund managers manages them with in-depth research inputs from investment analysts.

REDUCTION / DIVERSIFICATION OF RISK
However small his investment, an investor in a mutual fund directly acquires a diversified portfolio, which reduces his risk of loss as compared to investing directly in a few instruments.

REDUCED TRANSACTION COSTS
An investor can reap the benefits of the 'Economies of Scale' as funds pay lesser costs on brokerage, custodian charges etc, because of larger volumes.

CONVENIENCE AND FLEXIBILITY
Investors can easily transfer their holdings from one scheme to another; get updated market information and so on.