The Key Functions & Objectives Of Mutual Funds

Objectives of mutual funds and its functions

Mutual funds provide investors with the array of options to invest in and not only that but also the different types of assets, plans, that helps to get maximum returns at minimum risk with different tenures. 

Objectives of mutual funds and its functions

Apart from that there are several key functions and objectives of mutual funds.

What are Mutual Funds?

Mutual funds are the investment vehicles that drive money from numerous investors or individuals at one place. After that invest that money in an array of portfolio that consists of stocks, bonds, plans, or other investment security.

What are mutual funds?

All these funds are managed and looked after by professional fund managers who make better investment decisions based on the funds objectives and market value. 

Investors can buy or sell their shares or assets at the Net Asset Value, i.e. NAV, that is available on the stock exchange. Mutual funds are the key to know and experience diversification of shares/funds, professional management, and accessibility for investors with verifying financial goals. 

The utmost classification includes debt oriented funds, hybrid funds, or equity oriented funds.

Objectives of Mutual Funds Functions of Mutual Funds 
Asset Portfolio Transparency 
Diversification Risk management 
Liquidity of investment Return of funds 
Safeguarding Capital
Investment management 
Convenience Expert tips 
Objectives of Mutual funds and its Functions

Objectives of Mutual Funds 

  • Asset Portfolio – The prime reason to invest in mutual funds is that it offers a diver range of investment types that provides investors to choose between the two. Mutual funds offer asset portfolios that include stocks, bonds, or other investment securities. 
  • Diversification – These funds offer investors the choice of choosing from the diverse investment options available with the mutual funds. This helps in reducing the overall risk of one investment portfolio as it helps investing in well-diversified options that can provide better returns.

mutual funds

  • Liquidity of Investment – These funds also come with the objective of providing liquidity in investment. These Mutual funds provide investors the flexibility to withdraw their investments at any time, which then provides liquidity to the investors. This makes it a pivotal benefit for the investors who allocate a part in their mutual funds as their emergency funds.
  • Safeguarding Capital Investment – One of the prime concerns to invest in mutual funds is to safeguard the capital. For that one to select one investment plan that has safeguarding capital. These types of mutual funds generally have a lower risk-to-return ratio. 
  • Convenience – Mutual funds also provide us with the ease and convenience of investing ways. Investors can buy or sell units of a mutual fund through online platforms, agents, or distributors, or directly from the mutual fund company. Also, investors can have the option to invest through the SIP mode or through the small investment mode as per the available capital with them. This turns out to be highly flexible for the investors ensuring maximum participation across investor categories. 

Functions of Mutual Funds 

  • Transparency – One of the best features of mutual funds is that it keeps the investors updated with its new policies, regular updates, terms & conditions, etc. Not only that it provides and keeps updated with the portfolio holdings, and other important information through regular reports and newsletters. This helps investors in making informed decisions about their investment portfolio. 
  • Risk Management – These funds are requested and subjected to manage the overall risk of the fund by diversifying the portfolio across different sectors and assets stages to the investors and using risk management techniques to align the risk of the funds with the expectations of the investor. 

Functions of mutual funds

  • Return of Funds – Mutual funds come with a wide range of portfolio, and along with that it generates good returns, the funds are either distributed among the investors or invested again into the fund’s holdings. 
  • Investment Management – This function includes collecting money from investors and using it to invest in a pool of options of securities like stocks, bonds, and money market instruments in various proportions and ratios based on their asset type. The professional managers are responsible for managing the portfolio in accordance with the investment objectives of the scheme.
  • Expert Tips – There are people or the managers that are specialized in providing the best expert tips and solutions to its customers. These mutual funds managers have in-depth and timely knowledge & research of different investment options. Along with that they do analysis of different asset classes and market movements to help them make informed investment decisions. These funds allocate professional fund managers who have the required and up-to scale experience and expertise in managing investments across different asset investment options. 

Structure of Mutual Funds

Mutual funds in India consist of a three tier stage structure, i.e. on top there is Sponsors, following it at the second stage is Trust and Trustee, and at the last stage is the Asset Management Company (AMC), however there are other additional participants too in the structure of mutual funds. 

All the mutual funds are established under “The Indian Trust Act 1882” and its activities are governed under SEBI Mutual Funds Regulations. 

                            STRUCTURE OF MUTUAL FUNDS
Tier 1Sponsors
Tier 2Trust and Trustee
Tier 3Asset Management Company (AMC)
Additional ParticipantsCustodians, Registrar and Transfer Agent,
Auditor, Broker, Dealers, Distributors/Intermediaries.  
Structure of Mutual Funds


The fund sponsor acquires the first stage in the structure of mutual funds. The fund sponsors can be any company, financial institutions, or any individual, with the power and authority to start and own mutual funds. The fund’s execution can be done through an associate company that will be responsible for handling the fund’s investments.

Also, the sponsor can act as the promoter for the associate company. To start or establish mutual funds, the sponsor needs to have the approval from SEBI. 

According to the guidelines by SEBI for establishing a mutual fund is that a sponsor cannot alone operate mutual funds, it needs to be associated with another entity under the Indian Trust Act 1882. As the primary entity, the sponsor has the right to form a trust, appoint the board of trustees, and then appoint the AMC or a fund manager. 

Structure of mutual funds


This stage refers to the group of persons or entities whose board members look after the mutual funds and its proper execution. These are also known as the protectors of funds. Their work includes to look whether the mutual funds in working are legal or not, is it properly allocated, monitoring funds growth, etc.

The trustees are responsible to manage the trust and are accountable to the investors and individuals who started investing in funds, serving as the primary guards of the fund and its assets and providing good security.


The AMC serves as the investment manager or the fund operational manager, but for becoming the asset management company, it first should get registered with the government of India. 

A small amount of fee is paid to the asset management company for looking after and managing the funds. Its roles include introducing funds, initiating it, collaborating with founders and trustees, engaging with brokers, etc.

mutual fund structure

Other Participants 

Custodian – It is an entity that is responsible and accountable for safeguarding the securities of mutual funds. These Custodians are also registered under the umbrella of  SEBI. Along with that they also manage the investment accounts of mutual funds and ensure the efficient transfer & delivery of securities.

Apart from it they also serve their services such as bonus issues, interest, dividends, and other related services. 

Registrar and Transfer Agent – These serve as the bridge connecting investors with the fund managers. Its main and primary feature includes providing investors with the information in case they don’t get any dividend declared by the mutual funds. Its tasks also include processing mutual fund applications, assisting with investor KYC, updating investor records, etc.

mutual fund participants

Auditor – The auditor here keeps and verifies the AMC records and various annual reports. It ensures the proper and efficient use of collected funds and also states the absence of frauds. For this they should get registered with SEBI and acquire a license for operating.

Broker – The brokers that are authorized and licensed under SEBI are responsible for attracting new investors to invest in a mutual fund and manage accounts. They act as a bridge by connecting investors to the stock market.

mutual funds features

Dealers – The dealers provide their services to AMCs, by helping them to successfully lock the deal in the capital and money investment tools, and additionally they also have to fulfill all the formalities of purchase and sale through brokers.

Distributors/Intermediaries – Anyone can fall into this category, be it the agents, distributors, bankers, etc. They act as a connecting dot between the retail investors and the AMC. They earn their commission by recommending stocks to investors. 

Note: There are different shares that a company or individual uses to raise capital. To know more about it visit the article, Bonus Shares vs Right Shares.

Summing Up 

The mutual funds in the financial market has been the hallmark of safe and secure investment over the years and along with that provides good returns on it. The above objectives of mutual funds and its functions helps to know it better more, not just for the investors but also for the budding individuals who are looking upto invest in mutual funds. 

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Published By: Aashita Singh
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