What is mutual funds? A investment company or financial instruments?

Updated: May 26

What is mutual fund?

There is no standard definition which is universally accepted. Underlying idea behind the functioning of the mutual funds are same across all the mutual funds across different countries. You can find many definitions.


Here I am going to provide you few definition and then explain you in a way that you should be able to understand clearly. Whenever you look for investing in any asset, try to look for the applicable regulations and who is the regulator.


SEBI (Securities and Exchange Board of India) is the regulator for Mutual Funds in India.

As per SEBI (Mutual Funds) regulations, 1996, Chapter 1 Definitions, “Mutual Fund means a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities including money market instruments or gold or gold related instruments or real estate assets.”


Source: https://www.sebi.gov.in/sebi_data/commondocs/mutualfundupdated06may2014.pdf


In a simplified way, 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. In this mechanism of trust, there are many parties involved. One of them is Asset Management Company (AMC).

AMC receives monies from the investors, pool them together to invest in securities as accordance with the objective of the fund scheme.


Mutual fund investments are subjected to market risk. Here you need to understand that rather you investing directly to buy securities, on your behalf, AMC will invest in buying & selling securities. All the applicable market risk will remain in your investment. There is no guarantee by the regulator that your money will be safe.

Mutual fund investment is not like investment in Government securities where in you can assume that your money will be safe. While buying mutual fund, it is responsibility of the investor to read the offer document, understand the scheme objective and associated risk.


Now look at the mutual fund definition by Securities and Exchange Commissions (SEC), Regulator for mutual funds in USA.

“A mutual fund is a company that brings together money from many people and invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings.”


Source: https://www.sec.gov/investor/tools/mfcc/mutual-fund-help.htm


Mutual fund definition from Investopedia.

“A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.”

Source: https://www.investopedia.com/terms/m/mutualfund.asp


Mutual fund definition from Wikipedia

“A mutual fund is an open-end professionally managed investment fund that pools the money from many investor to purchase securities. These investors may be in retail or institutional in nature. The term is typically used in the United States, while similar structures across the globe include the SICAV in Europe (‘Investment Company with variable capital’) and open ended investment company (OEIC) in the UK.”

Source: https://en.wikipedia.org/wiki/Mutual_fund


So all the definition describe the same thing however in definition of Wikipedia, it is mention of open-end fund. There is a reason behind it but it will be clear when I will explain open-end funds, close-end funds, exchange traded funds.


About the Author:

Deepak Kumar Mahobia is a seasoned professional in the IT industry. He holds MBA degree in Finance. His international assignments includes working with big clients in USA, Europe & Singapore. He regularly uploads videos in his YouTube channel “Deepak Mahobia" on topics related to finance, insurance, tax saving, Government schemes, investments, etc. He is author of book “Prepare Yourself with ABC.. of Mutual Funds

His website https://www.investmentgyan.com/ is for sharing financial information.

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