A Mutual Fund is formed by the coming together of a number of investors who hand over their surplus funds to a professional organization to manage it through investments in capital market. (Mutual Funds are known as ‘Unit Trusts’ in England).
A Mutual Fund is basically a risk reducing tool. Risk reduction is achieved by diversification of the portfolio. Diversification means that a Mutual Fund invests in a large number of shares and financial instruments thereby lowering the overall risk.
Further the fund managers’ investment decisions are based on the basis of intensive research and are backed by informed judgement and experience.
Although Mutual Fund units are quoted on the market, a Mutual Fund unit is not same as a share. Each unit of a Mutual Fund represents a portion of the total corpus it manages under a scheme.
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For example, a mutual fund may float a scheme for collecting Rs.50 crore for investment in equity shares. Here the total corpus of the scheme is Rs.50 crore. The corpus may be divided into five crore units of Rs.10 each. Hence, the unit value of Fund is Rs.10 each.
The value of shares in which the investment has been made may have been doubled. If so, the market value of unit may also rise. Further, a Mutual Fund distributes everything that it earns to the investors. Expenses relating to the fund however are charged to the fund.
To sum up, a Mutual Fund collects money from investors and invests it for their. The fund however has to disclose the full details of the investment scheme in advance to the investors. The entire income/profit are distributed to the investors in proportion to their invest.