- Richard Chang 

• Will following a fund manager make me rich?

The entire media seems to be talking about mutual funds. It seems to be the way to go.

As an investor, my question concerns the laws that govern these mutual funds.

I understand that the fund houses cannot be held responsible for the ups and downs of the stock market. But my concern is, how are these Asset Management Companies held responsible by the government so that tomorrow they do not close shop and run away with the investors money?

After all, the investor is putting in his/her hard-earned money in these funds and they should be assured of the reliability of these AMCs.

- Shyam Sunder

• Mutual funds, simplified

We will answer both these questions together.

Returns from funds

At the very outset, please note that mutual funds do not provide any guarantee of returns or capital (initial amount you invested).

Hence, nobody can assure you of returns, or even not suffering losses. Going strictly by the book, the possibility of a fund performing exceptionally poorly and all your savings dwindling to nothing is quite real.

Having said that, please remember that over the long term, the possibility of such an extreme event is quite negligible. If the historical performance is to go by, then there are hardly any diversified equity funds which have delivered negative returns over the last 10 years, if one would have invested through the SIP.

Therefore, there is no need to be overly concerned. Mutual funds are a very convenient vehicle for individual investors.

Moreover, returns tend to be commensurate with the kind of risk you take. Mutual fund schemes are riskier than the assured return schemes like fixed deposits and bonds. But, they also have the potential to generate far superior returns.

It is upon the investor to strike a balance between the return he wants to earn and the risk he wants to take. Having done that, he can invest in an appropriate combination of assured return schemes (National Savings Certificate, Public Provident Fund, post office schemes, bonds from institutions) and mutual funds.

• How to invest in a mutual fund

Legal framework of mutual funds

Mutual Funds come under the regulation of the Securities and Exchange Board of India and have to meet stringent regulations. Therefore, they cannot just close shop and run away with investors' money.

In fact, India happens to have quite stringent rules and norms regarding the setting up of an AMC and making periodic portfolio disclosures (stating where their have invested their money).

Moreover, in the set-up of a mutual fund, there is a body of trustees who are supposed to look after the interest of investors whose money is being managed under different schemes.

The mutual fund itself is a trust registered under the Indian Trust Act, and is initiated by a sponsor. The sponsor is the person who acts alone or with another corporate to establish a mutual fund. The sponsor then appoints an AMC to manage the investment, marketing, accounting and other functions pertaining to the fund.

Therefore, while it may be possible for a mutual fund to inflict losses to the investors as a result of poor fund management, they just can't wind up their operations and run away with your money.

• 6 large cap equity funds to consider

The best performing funds

Richard, this is with reference to your other query. Franklin India Bluechip is a diversified equity fund. This fund invests in the shares of companies with a focus on well established large sized companies.

HDFC Prudence is a hybrid equity oriented fund, commonly referred to as a balanced fund. This fund invests partly in equity (shares) and partly in debt (fixed-return) instruments with a higher allocation to equity.

Both are good funds and figure among the best ones in their respective categories.

Read: How to compare mutual funds

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