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Mutual Funds and Bhelpuri

by | Mar 6, 2018 | Basics, Finance, Mutual Funds

If one stands near a Bhelpuriwallah, one will notice that every customer has a different taste and asks the guy to make the bhelpuri in a particular way. There are infinite variations – sweet, sour, spicy, soggy, crunchy and various combinations of them.

The counterpart of ‘taste’ in a Bhelpuri is ‘Risk’ in a  Mutual Fund. What I mean is that there are a number of funds to choose from and one can choose as per one’s risk appetite.

The choice of a fund could be from one that has almost no risk – at the same level of a bank savings account to one with the maximum risk – almost close to a lottery ticket!

Let us first understand the structure of a mutual fund. Let’s take, for example, the HDFC group. There are several companies under the label ‘HDFC’.

  • HDFC Bank.
  • HDFC Ltd for Home Loans.
  • HDFC Life Insurance.
  • HDFC Mutual Fund.
  • HDFC General Insurance.

It is necessary to understand that each of these companies are stand alone and have no connection to each other. Which means that if, say, HDFC bank were to close down, it will not have any effect on the Mutual Fund company’s finances. Each of these companies are not only separate, they are regulated by different government entities. HDFC MF is governed by SEBI, whereas HDFC Life is governed by IRDA whilst the HDFC bank is governed by the RBI.

So, it would be wrong to assume that HDFC Mutual Funds will be doing well because HDFC bank has very good results.

Also, if your relationship manager in HDFC Bank is selling you a HDFC Mutual Fund, they are doing it as brokers and get a commission from HDFC MF. It is nothing different from buying the fund from any other broker.

Now for something about the Mutual Fund companies themselves. Each of them are known as AMCs (Asset Management Companies). You will read HDFC AMC, SBI AMC or BOB AMC. Within every AMC, there are several entities doing different jobs – trustees, custodian, registrar, etc. Let’s not get too technical. Each AMC will have 20 – 40 different funds – ideally each fund should be of a different type, so that a buyer can choose where he wants to invest and the amount of risk he wants to take. Unfortunately, there are quite a few similar funds named differently to attract the ill informed customer.

Each of the funds will have a person in charge, known as the ‘fund manager’, who decides where that particular fund will invest. Generally, a fund manager will be in charge of 3 – 5 funds.

Each fund controlled by the Fund Manager who decides how the money in the fund will be invested. He is guided by the ‘Fund Objective and Strategy’. So, before putting your money in a fund, it is important to read and understand the objective of a fund.

 

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Written By: niranjan

Financially Stupid Niranjan

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