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.

How 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 you're getting.

The Fund Manager is entrusted with the money in the Mutual Funds and is asked to invest as per the original investors were told.

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 available.