Mutual funds are registered under the Indian trust act 1882. They are private
trusts that are publicly traded on the stock exchange.
To understand what a mutual fund is it is important to understand what a trust
is as they are both the same thing.
Like a trust has a settlor a mutual fund has a sponsor or promoters or
establishers or creators of the fund or Trust. The initial trust property is
transferred by this person to the trustee for management.
A mutual fund is basically a pool of a large number of shares of various
companies brought together to give the investor or in this case the unit holder
who is also called a beneficiary under the Indian trust act the benefit of
diversification of capital. This benefit is akin to the benefit received by a
farmer who grows wheat, sugar cane, and millets at the same time to ensure that
one of his crops is successful and does not lose his entire harvest because of
failure of the monsoon this is in essence what a mutual fund aims to do.
All persons may not understand what the equivalent of wheat sugarcane and
millets are in the share market to alleviate this problem. The SEBI has
permitted the introduction of asset management companies popularly known as AMCs.
Some well-known AMCs are HDFC AMC axis AMC etc. these AMCs or what we call
trustees under the Indian trust act of 1882 they are people with great knowledge
about shares or other financial instruments.
Now for a sponsor to collect more money or increase the pool of money to invest
in various securities they must register under SEBI and apply for an NFO (New
fund offering), very similar to the process of IPO also known as initial public
offering. Once SEBI grants approval to this trust to become a mutual fund the
unit holders or subscribers or considered the beneficiaries and the trustee or
the AMC must manage the trust money for the benefit of these unit holders.
Here SEBI plays the role of a regulator enabling people to trade their
beneficial interest on the stock exchanges of our country like the Bombay Stock
exchange at Mumbai and the national Stock exchange at Delhi.
It must be noted here that the essence of the Indian trust act still remains the
same, in the traditional act and in the traditional studies of the act we learnt
that private trusts were created by people having some property or money for the
benefit of their minor children or illiterate or non-assertive dependents and to
protect their interest for such purposes a trustee was appointed and the trust
money was transferred to the trustee.
Under the scheme of mutual fund trust those without financial literacy or
knowledge of the financial markets are able to benefit from these by getting
professional management of industry leaders and the guarantee of our securities