Basics of Mutual Fund - Part 1

What is a Mutual Fund?
A mutual fund is just the connecting and a financial intermediary that allows a group of investors with similar risk profile to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is identified for investing the gathered money into specific securities (stocks or bonds). When one invest in a mutual fund, he/she is buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund. Mutual funds are considered as one of the best available investments as compare to others they are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification across asset calsses, industries and stocks, by minimizing risk & maximizing returns. Also with a minimal investment, Mutual funds allow a unit holder to take a position in a high priced stock which he/she would not be able to buy individually.
The article mentioned below, is for the investors who have not yet started investing in mutual funds, but willing to explore the opportunity and also for those who want to clear their basics for what is mutual fund and how best it can serve as an investment tool.

Getting Started
It’s very important to know the area in which mutual funds works, the basic understanding of stocks and bonds.
Stocks
Stocks represent shares of ownership in a public company. Examples of public companies include Reliance, ONGC and Infosys. Stocks are considered to be the most common owned investment traded on the market.
Bonds
Bonds are basically the money which you lend to the government or a company, and in return you can receive interest on your invested amount, which is back over predetermined amounts of time. Bonds are considered to be the most common lending investment traded on the market. There are many other types of investments other than stocks and bonds (including annuities, real estate, and precious metals), but the majority of mutual funds invest in stocks and/or bonds.
Regulatory Authorities
To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds. It notified regulations in 1993 (fully revised in 1996) and issues guidelines from time to time. MF either promoted by public or by private sector entities including one promoted by foreign entities is governed by these Regulations.
SEBI approved Asset Management Company (AMC) manages the funds by making investments in various types of securities. Custodian, registered with SEBI, holds the securities of various schemes of the fund in its custody.
According to SEBI Regulations, two thirds of the directors of Trustee Company or board of trustees must be independent. The Association of Mutual Funds in India (AMFI) reassures the investors in units of mutual funds that the mutual funds function within the strict regulatory framework. Its objective is to increase public awareness of the mutual fund industry.
AMFI also is engaged in upgrading professional standards and in promoting best industry practices in diverse areas such as valuation, disclosure, transparency etc.