How Does a Mutual Fund Work?

Posted on: 26 Dec, 2023

Who Operates a Mutual Fund?

A mutual fund primarily has three entities in its operational framework in the Bangladesh market. They are the Asset Management Company (AMC), the Trustee, and the Custodian, where all three have to be authorized by the Bangladesh Securities and Exchange Commission (BSEC) and function together as per BSEC’s prescribed regulations.

The AMC, as the sponsor, brings in capital to form the mutual fund(s). AMCs play the role of an asset manager while also acting as the sponsor by arranging capital for the formation of mutual funds. The trustee oversees the AMC's administration of the mutual fund(s) to ensure compliance with BSEC regulations, and the custodian, appointed by the trustee, holds the mutual fund(s) assets for safekeeping and keeps records of all capital inflows and outflows from the funds. Simply put, the custodian has custody of all the shares and other securities bought by the AMC and records all transactions by the AMC.

In summary, these three entities—the AMC, the Trustee, and the Custodian—function together to operate mutual funds.

How Does a Mutual Fund Operate?

The AMC takes money from interested investors, who can be both general individuals and institutions, to invest the collected funds on its investors’ behalf with the aim of generating good returns. Once funds are collected in the AMC’s mutual fund(s), the AMC, acting as the asset manager, invests the collected funds in specific securities as particularly mandated by the fund(s). The asset manager (AMC) takes 0.5%–2% of the money or funds they manage on behalf of their investors as a management fee. Any return on the investments reaches the respective investors in two ways: i) either through redemption (selling) of their units at the current Net Asset Value (NAV), or ii) in the form of dividend income. When investors receive returns through selling their units at the NAV, they realize the returns as they’re able to sell their units at a NAV higher than the NAV at which they bought their units in the case of positive returns. On the other hand, receiving returns in the form of dividend income can be irregular, as dividend disbursal by the AMC is subject to the profitability of its funds. One can even choose to reinvest their returns in the fund(s) through a Cumulative Investment Plan (CIP).

You may read this post on the process of investing in mutual funds if you're looking to start your investing journey with mutual funds.

To learn more about mutual funds, you may read our guide on mutual fund investing.

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  • Mutual fund, investing, saving, NAV, fund manager, trustee, custodian, Bangladesh, DSE, regulator