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How Does a Mutual Fund Work?

By Fateen Tahseen Alam

Analyst

EDGE AMC Limited

Posted on: 26 Dec, 2023

Last Updated: 13 August, 2026

Mutual funds are one of the most accessible ways to participate in Bangladesh's capital market, yet many investors put money into them without fully understanding what happens behind the scenes. Who actually manages your money? Who makes sure it's safe? And how do you actually earn a return? At EDGE Asset Management Limited (EDGE AMC), we believe understanding the mechanics of a mutual fund is just as important as understanding its performance — so here's a simple breakdown.

Who Operates a Mutual Fund?

A mutual fund in the Bangladesh market primarily involves three entities in its operational framework: the Asset Management Company (AMC), the Trustee, and the Custodian. All three must be authorized by the Bangladesh Securities and Exchange Commission (BSEC) and function together according to BSEC's prescribed regulations. This three-party structure exists precisely so that no single entity has unchecked control over investors' money.

The Asset Management Company (AMC)

The AMC first acts as the sponsor by bringing in the capital needed to form the mutual fund and then as the professional asset manager who decides what the fund buys, holds, and sells, based on the fund's stated mandate — balanced, growth, fixed income, or Shariah-compliant. If you are interested in comparing funds with different investment strategies, check out this article. 

The Trustee

The trustee's job is oversight. It monitors the AMC's administration of the mutual fund to ensure everything is being done in compliance with BSEC regulations. The trustee acts as a safeguard for investors, holding the AMC accountable to its obligations under the fund's trust deed and regulatory requirements.

The Custodian

The custodian is appointed by the trustee and holds the mutual fund's assets for safekeeping. It keeps records of all capital inflows and outflows from the fund. In practical terms, the custodian has custody of all the shares and other securities purchased by the AMC, and it records every transaction the AMC makes. The AMC never has custody of investor assets itself and can only instruct the custodian to execute trades.

This separation of "who manages the money" from "who physically holds it" is a key investor protection built into the system. Together, the AMC, the Trustee, and the Custodian function as a system of checks and balances that allows mutual funds to operate safely and transparently.

To learn more about the safeguards built into mutual funds, see this article. 

Why the Three-Party Structure Matters

The three-party structure — AMC, Trustee, Custodian — isn't just regulatory box-ticking. It reflects a broader principle in fund management: investment decision-making, oversight, and asset safekeeping should never rest with a single party. This separation of duties is part of what makes mutual funds a more structured and regulated way to invest compared to, say, informal investment schemes, and it's a big part of why mutual funds have become a trusted vehicle for both retail and institutional investors in Bangladesh.

How Does a Mutual Fund Operate?

At its core, a mutual fund pools money from many investors — both individuals and institutions — so the AMC can invest those combined funds on their behalf, with the goal of generating good returns.

Once money is collected into the AMC's mutual fund, the AMC, acting as asset manager, invests the pooled funds into specific securities as mandated by the fund's investment objective. This could mean equities, fixed income instruments, or a mix of both, depending on the fund's mandate. In exchange for managing these investments, the AMC charges a management fee, typically ranging from 0.5% to 2% of the assets it manages on behalf of investors.

How Do Investors Earn Returns From a Mutual Fund?

Any return generated on the fund's investments reaches investors in one of two ways:

1. Redemption (selling) of units at the current NAV. Investors can sell their units back at the fund's prevailing Net Asset Value (NAV). If the NAV at the time of selling is higher than the NAV at which the units were originally purchased, the investor realizes a gain. You can find EDGE's current fund NAVs, updated regularly, on our live NAV page.
2. Dividend income. Funds may also distribute returns in the form of dividends. However, dividend income can be irregular, since disbursal depends on the profitability of the fund in a given period — a fund isn't obligated to pay a dividend if it hasn't generated distributable profit.

Investors who prefer not to withdraw their returns can also choose to reinvest them back into the fund through a Cumulative Investment Plan (CIP), allowing their investment to compound over time rather than being paid out.

Frequently Asked Questions About How Mutual Funds Work

Q: Is my money safe with the AMC if it holds all the investment decisions?

A: The AMC does not hold your fund's assets directly — the custodian does, and the trustee independently oversees the AMC's activities. This separation of roles is designed specifically to protect investors from any single entity having full control.

Q: Can I lose money in a mutual fund?

A: Yes. Mutual funds invest in market-linked securities, so their NAV — and therefore your investment's value — can go down as well as up, depending on market performance. To better understand what NAV is and why it matters to investors, please check out this article. 

Q: How is the AMC's management fee charged?

A: The AMC typically charges a fee of 0.5% to 2% of the assets under management, deducted from the fund rather than billed to investors separately. This fee is disclosed in the fund's prospectus. You can find the prospectuses, among other fund related documents, on each of the EDGE funds' respective pages. 

Q: What's the difference between earning through redemption and earning through dividends?

A: Redemption gains come from selling your units at a NAV higher than your purchase NAV. Dividend income is a distribution paid out of the fund's profits, and unlike redemption gains, it isn't guaranteed or regular — it depends on the fund's performance and profitability. 

Q: What is a Cumulative Investment Plan (CIP)?

A: A CIP allows investors to reinvest their dividend income back into the fund instead of receiving it as cash, letting their investment continue to grow through compounding.

Q: Who regulates mutual funds in Bangladesh?

A: The Bangladesh Securities and Exchange Commission (BSEC) regulates AMCs, trustees, and custodians, and sets the rules under which mutual funds must operate. To learn more about the safeguards built into mutual funds, see this article. 

Q: Can the AMC access or withdraw fund assets on its own?

A: No. Fund assets are held by the custodian, not the AMC, and every transaction is independently recorded. This structure prevents the AMC from having direct, unchecked access to investors' pooled money.

Q: Does the trustee get involved in day-to-day investment decisions?

A: No. The trustee's role is oversight and compliance monitoring, not portfolio management. Investment decisions are made by the AMC, while the trustee checks that those decisions and the AMC's administration stay within BSEC regulations and the fund's trust deed.

Links

• What is NAV?
• What is a Mutual Fund?
• EDGE AMC Mutual Fund Guide
  
• How to invest in a mutual fund
• EDGE AMC FAQ page