What is a Mutual Fund?
When it comes to investing money, the most
important question on an investor's mind is, "How can I multiply my
money?" People are frequently perplexed about where to invest their money
due to the abundance of investment options available. If there is one answer to
both problems, it would be Mutual Funds.
A mutual fund is a collection of stocks or
bonds purchased on your behalf by a professional fund manager. The fund
management chooses which stocks or bonds to purchase and in what quantities.
The total investment money is subsequently
distributed in small pieces by a mutual fund (called units). Rather than buying
stocks directly, investors can purchase these units.
In simple words, It's a trust that gathers
funds from a group of participants with a common investing goal. The money is
then invested in equities, bonds, money market instruments, and/or other
securities. Units, which reflect a part of the fund's holdings, are owned by
each investor. By determining a scheme's "Net Asset Value or NAV,"
the income/gains earned from this collective investment are split
proportionately among the investors after deducting certain fees.
Directly investing in mutual funds Offer
several benefits. For example, if you lack the ability to comprehend market
trends or simply do not have the time to do so. In this scenario, mutual funds
are a fantastic option because they are professionally managed.
The most common misunderstanding regarding
Mutual Funds is that they exclusively invest in the stock markets. However,
this is not entirely accurate. If you are a cautious investor who does not want
to incur too much risk, you may invest in debt instruments via Debt Mutual
Funds, which have lower risk factors.
As a result, you may select Mutual Funds
based on your risk tolerance, investment horizon, or investment goals. There
are a plethora of Mutual Funds to select from, so you may choose one that best
matches your needs.
does Mutual Funds work?
The Mutual Fund's fund manager performs
review and study on equities and debt securities. And they invest your money
depending on that study. When you engage in a Mutual Fund scheme, the Asset Management
Company (AMC), allots you units based on the fund's NAV. Suppose that you have
invested Rs 5,000 in a Mutual Fund with a NAV of Rs 50. The AMC will then
allocate 100 units of that Mutual Fund plan to you.
To summaries, your money is being invested
indirectly in stock markets or in the instrument chosen by the fund management.
Let's say you've deposited Rs 5,000 in a
Mutual Fund scheme, and the AMC has assigned you 100 units at a NAV of Rs 50.
The Mutual Fund's NAV rises to Rs 55 in the second year. That implies you got a
10% return on your Mutual Investment activities in the previous year. As a
result, you can keep track of your investments and see what type of returns
The Fund Manager is entrusted with the
money in the Mutual Funds and is asked to invest as per the original investors
An equity funds, fund manager will purchase
company shares (called equity). A debt fund's manager will put money into
corporate and government deposits (called debt).
The fund's assets will fluctuate based on
how these investments perform, and the Net Asset Value (NAV) of each unit will
fluctuate as well. However, there will be no change in the quantity of units