A company – ABC Limited – wants additional funds to expand its operations. It has two
choices:
It chooses the second option and offers ‘shares’ through an Initial Public Offering
(IPO). Once
these shares are issued by the company, the shareholders have a stake in the profits which is
received by
them in the form of dividends.
Ram is an IT executive who wants to invest in the shares of ABC Limited. However, when he has
funds
available for investment, the IPO is already over. He approaches Viren who already owns
50 shares of the
company and asks him to sell the shares. Viren agrees to sell them at a price higher
than his purchase
price in order to book profits. Ram feels that ABC Limited will do great business in the
future and
agrees to buy at the price quoted by Viren.
This cycle continues and the shares keep changing hands. As the perception of the company
doing good
business - increases, the demand for its shares goes up and so does the price.
As mandated by SEBI, each AMC needs to provide three important documents to inform investors
about every
scheme:
a. Scheme Information Document (SID)
b. Key Information Memorandum
(KIM)
c.
Statement of Additional Information (SAI)
In the market, the stock exchanges facilitate such transactions, commonly known as secondary
market
transactions.
Mutual Funds
Vikram is a doctor who decides to start investing and building a corpus for his retirement.
He starts
looking at investment options available and the stock exchanges look promising. However,
he lacks the
knowledge and expertise required to choose the right companies to invest in.
On the other hand, Parth, who is a Customer care manager has immense knowledge and
understanding of the
stock market. He knows which companies are doing well and which ones have a better
chance of doing well
in the future. His friends and colleagues trust his understanding of the market and
often ask him for
tips on investment.
Parth decides to organize this sporadic investment guidance and make some money in the
bargain. He asks
his friends and colleagues to give him their funds so that he can invest and manage the
investment on
their behalf. He would charge a small administrative fee for these services. Vikram is
Parth’s
friend and gives him his funds for investment too.
This is what a Mutual Funds does. A Fund
Manager
manages funds invested by various people with common investment objectives across
various investment
options like shares or stocks.