How a mutual fund works
A mutual fund pools money from many investors and invests it in a portfolio run by a professional manager, under SEBI's rules.
The structure
When you invest, your money goes into a scheme run by an Asset Management Company (AMC). The fund manager buys shares, bonds or other securities according to the scheme's stated objective. A trustee and an independent custodian hold the assets on behalf of investors; the AMC can't simply take the money.
SEBI regulates every step: what each category can hold, how costs are charged, how often holdings are disclosed. That's why mutual funds are one of the most transparent ways for individuals to invest.
- 1
You invest
Money goes to the scheme; you receive units at that day's NAV.
- 2
AMC manages
The fund manager buys securities as the scheme's mandate allows.
- 3
Custodian holds
An independent custodian holds the assets for investors, overseen by trustees and SEBI.
Units and NAV
You don't own the shares directly; you own units of the fund. The price of one unit is the Net Asset Value (NAV): the fund's total assets minus liabilities, divided by the number of units, calculated at the end of every business day.
A high NAV doesn't make a fund expensive. A fund with NAV ₹500 and one with NAV ₹15 that hold the same shares will give the same percentage return. What matters is what the fund owns and what it charges.
Why people use them
Diversification from as little as ₹100 or ₹500. Professional management. Daily liquidity for most open-ended funds. Tax efficiency compared with FD interest for longer holdings. And simple automation through SIPs.
Key takeaways
- 1A mutual fund pools money under SEBI regulation.
- 2NAV is the per-unit value; a low NAV isn't “cheap”.
- 3Funds give diversification and automation at low minimums.
Try it with your own numbers
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Educational content, not investment advice. Figures are illustrative.