A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
Do Indian mutual funds invest only in India?
While most Indian mutual funds only invest in India, there are some schemes that invest in overseas securities.
All mutual fund schemes must obtain approval from the Securities and Exchange Board of India (SEBI) before offering units to investors in India. SEBI gives an approval after reviewing the Schedule Information Document (SID), which clearly specifies the investment objectives of the scheme, the type of securities to be invested, the countries and regions and the unique risks for each security.
There are in fact two ways for a scheme to obtain such exposure to foreign securities. Schemes may purchase such securities listed or traded on overseas stock exchanges, or they may invest in other overseas mutual fund schemes that have such securities in their portfolio after obtaining separate SEBI approval for investments in foreign securities. In any case, the scheme has a foreign flavor in the wallet.
Even after investing in overseas securities, Indian mutual funds must provide daily net assets, ensure portfolio disclosure, provide liquidity, etc. Such schemes should have a separate fund manager dedicated only to the foreign securities investment component.