Mutual funds are created when several people who wish to earn wealth (investors) combine their resources to create a huge investable amount (corpus). This large corpus is then invested into various companies across industries, operating in different sectors of the economy – depending on the type of fund chosen. All the investors of a mutual fund share in its profits, losses, incomes, and expenses in direct proportion to their level of investment.
Companies that create mutual fund schemes are called Fund Houses or Asset Management Companies (AMCs). The professionals who study the markets and pick companies to invest in are called Fund Managers. Fund managers spend a great deal of time analysing markets and studying different sectors of the economy to figure out which companies are most likely to turn a profit – in different time frames – and choose the best option.
There are thousands of mutual funds in India, under different categories, offered by hundreds of AMCs and Fund Houses. For fairness and transparency, global agencies exist that analyse and rate the performance of funds over time and make sure that investors are well informed before investing. It is mandatory for AMCs to declare a standard against which the performance of any given fund can be measured – this is called a benchmark. There are also regulatory bodies like AMFI and SEBI that ensure no investor ever gets scammed.
Some mutual funds focus on a single asset class, such as stocks or bonds, while others invest in a variety. These are the main types of mutual funds:
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