What is mutual fund and how it works

Mutual funds: An Overview

First and foremost, Have you invested in mutual fund schemes without knowing it. In a layman’s language mutual fund is pool of fund created by the small investors. The purpose is to invest it in to financial market. For better understanding, See the table below.

 

INVESTORINVESTMENT AMOUNT
135000
Amit5000
Sumit10000
Ravi20000
Kumar Prashirsh50000
Puneet10000
Saurabh15000
Siddharth Bose25000

 

You can understand from the table above that how different investors have different amount to invest and how all funds put together collectively making mutual fund. Fund managers will manage these fund with their expertise.

How_mutual_fund_works

 

Objective of mutual fund:

First of all you must understand the types of Mutual Funds that are available which includes:

Equity: These are funds that invest exclusively in the stocks of domestic companies listed on stock exchanges. These are categorized as high-risk funds.
Money market: Investors looking for easy liquidity and returns in the short-term. These funds invest in money market instruments such as Treasury bills (T-Bills), Commercial Papers (CPs), and government securities.
Debt: These are funds that are considered as an alternative to Fixed Deposits. These funds invest in fixed-income securities. Debt funds are typically low-risk funds.
Hybrid or balanced: These funds invest in both fixed-income securities (debt) and stocks (equities), thereby offering a balanced portfolio to investors.

 

Mutual_fund_tree

 

Why you should invest in mutual fund? 

Being a retail investor you don’t have a professional expertise to choose from funds. I am explaining few reasons below:

Diversification:

Mutual Funds allow you to diversify your investment across assets and asset classes, something that is very difficult to do on your own.

Flexibility:

There will be an option to pick any type of fund as per your risk profile, and bundle all of them into a single portfolio. Data about the performance of the funds is easily available for you to take those buy and sell calls.

Professional managers:

The fund managers of Mutual Funds are usually highly experienced in their respective fields and will have years of experience handling different types of assets. So, you must know the profile of your fund manager so that you know who’s actually handling your hard-earned money.

Accessibility:

There’s nothing more convenient than a central database providing you with all the required information and even highlighting what’s best for you. This is possible through Mutual Funds.

Liquidity:

Your Fixed Deposit may be offering decent returns with little option for liquidity, or the stock market may give you decent returns with easy liquidity and a high probability of losses. A Mutual Fund is a fine balance between the two offering you good returns while providing you with decent liquidity. As a results you get flexibility.

Tax benefits:

You need to invest in Equity Linked Savings Schemes (ELSS) of Mutual Funds for the same. However few schemes offers tax rebate.

 

Net asset value

 Net asset value(NAV) is the value of a fund’s asset less the value of its liabilities per unit.

I think this generic definition confused you. In simpler terms you can understand; Suppose you have Rs 1000 with you and you have to purchase pastries and cost of 1 pastries is Rs 50. How many pastries you can purchase, of course 20 pastries. Consider cost of pastries is your  net asset value and total no. of pastries you bought is the units that you got.

Net asset value always fluctuates day to day and rates are different as per market condition. Assume if you are investing Rs 2000 per month, Net asset value will be different and the units which you will get will also fluctuate. Higher the NAV lesser units and Lower NAV higher units you will get.

example_of_NAV

 

Systematic investment plan

Systematic_investment_plan

I think you all must understood that what mutual fund is all about and why they are better way of investments. Now what about systematic investment plan(SIP). They allows retail investors to invest periodically in a systematic way. There is a flexibility to opt for monthly, quarterly, half yearly, or annually. They are better mode to invest in mutual funds.  A simple table below will clear all your doubts about SIP.

MONTHSIP AMOUNTNAVUNIT PURCHASED
24000920
JANUARY200020100
FEBRUARY20002580
MARCH20002580
APRIL200020100
MAY20004050
JUNE20002580
JULY200020100
AUGUST20002580
SEPTEMBER20004050
OCTOBER200020100
NOVEMBER20004050
DECEMBER20004050

What’s say it’s easy or hard to understand.

Next you can see how Rs 2000 invested every month where NAV was different and you tends to get different units every months and at the end your amount will mature with the total NAV you hold. The major benefits that you get is you are are investing systematically and at the end averaging of all units may gets good profit. All things considered but it does not guarantee that it will benefits and usually monthly/quarterly/half-yearly investments lowers the risk.

For this reason “Invest now and reap benefits later”.  Above all in investments there is a saying start early stay for long and meet your financial goals. 

Mutua_fund_A_better_way_of_investments

Hope this article helped you to enhance knowledge.

 

Kumar Prashirsh

An avid reader and blogger, Prashirsh is a digital marketer and also following his interest for blogging and turned blogger who writes contents for enhancement of knowledge for his reader. He truly believes in self which boosts his confidence towards life.

Kumar Prashirsh has 16 posts and counting. See all posts by Kumar Prashirsh

19 thoughts on “What is mutual fund and how it works

  • October 4, 2017 at 9:38 PM
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    Got clear understanding on how to invest in mutual fund. Thanks

    Reply
  • October 4, 2017 at 9:39 PM
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    Do returns are guaranted

    Reply
    • October 5, 2017 at 8:44 AM
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      Returns are not guaranted if you have chosen equity funds. If you need guaranted return you must go for debt funds.
      Remember “Higher the risk – Higher the return”

      Reply
  • October 4, 2017 at 11:11 PM
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    Content very helpful.
    Thanks

    Reply
  • October 4, 2017 at 11:12 PM
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    Very helpful.
    Thanks.

    Reply
  • October 4, 2017 at 11:13 PM
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    Very helpful Content
    Thanks.

    Reply
  • October 5, 2017 at 7:47 PM
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    Nice to read article. 🖒

    Reply
  • October 12, 2017 at 6:25 PM
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    I liked this topic a lot… As being unaware of this topic now I’m sure of getting some idea about MF..

    Reply
    • October 13, 2017 at 11:32 AM
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      Thanks and suggestions are always welcome. If you want any particular topic to be addressed, you may drop me an email. I have posted “What is mutual fund and what they do, on request.

      Reply
  • October 12, 2017 at 6:26 PM
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    I liked this topic a lot… As being unaware of this topic now I’m sure of getting some idea about MF.. Would seek more info about it

    Reply
    • October 13, 2017 at 11:33 AM
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      You will definitely get the updates, If I address any finance topic. Thanks for being subscriber of blogs4knowledge.

      Reply
  • May 25, 2018 at 7:28 AM
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    Is providing pan no. and date of birth to mutual fund companies safe?

    Reply
    • May 25, 2018 at 8:49 AM
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      There is no harm in providing that. More or fewer companies need a database for the sales&marketing purpose.

      Reply

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