Learn About Mutual Funds From Scratch

We all have heard of this  “Mutual Fund – Sahi Hain”. have you ever tried to understand Mutual fund Kyu Sahi Hai? i.e. Why is mutual fund good?. To know if Mutual Fund is good or bad first we must understand about mutual funds. Today we are going to discuss everything about the mutual funds.

We will keep it simple. So that everyone understands about Mutual Funds.

Mutual – Done by each of two or more parties towards the other / others.

Fund – A sum of money saved or made available for a particular purpose.

Combining the above two definitions we will get an idea of the Mutual fund in the simplest form.

Mutual Fund
 – A saved money invested for a purpose i.e. (to get returns) in which two or more than two peoples are involved.

Now let’s move towards the professional definition of the Mutual Fund. Mutual Fund is a professionally-managed investment scheme, usually run by an asset management company that brings investor & fund manager together for the investment of money in stocks, bonds, and other securities. Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI)

How the investment in Mutual Fund Works

  • Interested Investor look for the asset management company
  • Fund managers are the group of people working in Asset Management Company
  • Fund Managers pools the money from an investor
  • Amount of Money pooled is invested in different Equities / Debt Market
  • The Interest generated goes back to the investor with a little amount of deduction as a fees

What is NAV?

  • NAV is a Net Asset Value
  • It is similar to the stock price of a company
  • The value/price of 1 unit of Mutual Fund is called NAV
  • The value of NAV changes every working day as it depends on demand & supply of the markets
  • The NAV can be calculated by the formula below
    NAV = (Value of Assets-Value of Liabilities)/number of units outstanding

on the basis of Investment Objective Mutual Fund can be divided into 3 Type

  • Equities Mutual Fund – These are the funds which are invested in the Stock / Share of the Companies. These funds have a high market risk but still equities fund is popular due to its high returns.
  • Debt Mutual Fund  –  These are the funds which are invested in the Treasury Bills, Government Securities, Corporate Bonds, Money Market instruments. These funds have low risk as compare to the Equities Mutual Fund. With low risk, the profitability is also low in Debt Mutual Funds
  • Balanced Mutual Fund – Balanced Mutual Fund is also called as Hybrid Mutual Fund. It is called Balanced Mutual Fund Because the one part of the fund is invested in Equities and another part of the Debt Mutual Fund. So that the balanced should remain between risk and profitability

For example – The ABC company has invested 60% of its fund in Equities Market & the remaining 40% of the fund in Debt Mutual Fund.

On the Basis of Fund Structure, the mutual fund can be divided into 3 parts

  • Open-End Mutual Fund: Open-End Mutual fund are those mutual funds in which you can invest & redeem i.e. (Purchase & sell) at any point in time. If the investor feels that the performance of the mutual fund is not up to mark or If one is in need of money then he/she can sell their mutual fund. Open-End Mutual Fund gives flexibility to the user.
  • Closed-End Mutual Fund: Closed-End Mutual fund are those mutual funds in which you cannot invest & redeem i.e. (Purchase & sell) at any point in time. Here the investor has to remain time bound for a specific term for which he had applied. Similar to the fixed deposit in the normal bank account
  • Interval Funds: These are funds that have the characteristics of open-ended and close-ended funds in that they are opened for the repurchase of shares at different periods during the fund tenure. The fund management company offers to repurchase units from existing unitholders during these intervals. If unitholders wish to they can offload shares in favour of the fund.

Mutual Fund is for everyone whether his earning is less or more doesn’t matter.

  • SIP( Systematic Investment Plan): SIP allows the investor to invest the money in Mutual Fund monthly. Money can be invested right from 1000 ₹ to whatever amount he wants to invest. Due to this plan, an investor with less income can also invest money in the mutual fund.
  • An investor can also invest lump-sump money at a time, then he can. It totally depends on investor how he wants to invest the money in Mutual Fund

Things to ensure before when Money is invested in Mutuals Funds

  • Check the companies prospectus, you can ask about the goal in which funds are going to be invested.
  • You can inquire about the amount of risk one has to take before investment.
  • You can check the track record the funds in which you are going to invest
  • Know about your fund manager, his qualification, his experience & much more
  • Know about the fees & expenses while investing also inquire about the tax to be paid on the interest gain

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