How Mutual Funds Work?

How Mutual funds work?

Chapter 2: How Mutual Funds work?

What comes to our mind when someone mentions the word Mutual Fund?

  • Boring
  • Complicated
  • Too much to handle

Not actually, Let us now understand, how Mutual funds work?

Small and large investors come together to pool in money, to form a mutual fund, and Asset management companies are appointed to manage this fund.The asset management companies have dedicated fund managers who monitor various portfolios and, make investments according to your goal. The trustees of Asset Management companies overlook this whole process to ensure that investor’s goals are protected.

Where do Asset management companies put in your money?

Asset management companies collect and put your money in Stocks, bonds, Government securities, fixed income securities, or money market instruments depending on your risk taking appetite. But, there is volatility in the prices of bonds and stocks which increase the risk of an investor. In order to reduce this risk, the investment in equity is diversified into various sectors like pharma, oil and gas, IT, banking, aviation, real estate, steel, etc. This ensures that if one sector does not perform well the other sectors compensate for it.

Debt funds when combined with equity investments make a great investment combination. This combination has the growth oriented with equity and the stability of the debt funds.

Hence, a mutual fund investment becomes much less riskier for an investor than investing directly in the market. Mutual Fund has a much better return as well.

What happens after you have made a mutual fund investment?

Once the money is invested in Mutual fund, you are allocated units of Mutual fund called ‘NAV or Net asset Value.’ The NAV is easily redeemable in the market. NAV represents the value of one unit of your investment, after all expense and management fees are paid. So, the value of your investment is NAV multiplied by the number of units you hold.

How can I make a mutual fund investment?

You can either make a lump sum investment in the mutual fund or you can invest smaller amounts periodically, called Systematic Investment Plan or SIP. This makes mutual funds accessible to everyone in spite of the investment size.

How do you know if the fund you have picked is performing well or not?

Every fund has a fixed benchmark to measure their performance, it can be a part Nifty or Sensex. To judge the fund performance, you need to check how it has performed against the benchmark set. The fund managers analyse the benchmarks and aim to perform, better than the benchmark.This is the reason we pay a management fee to the wealth managers.

So, Mutual fund thus follows the old saying ‘Do not put all your eggs in one basket.’ It provides many benefits like liquidity, diversification, low cost, time saving, and most of all professionally managed.

Be a wise investor and invest in Mutual fund!! 

Thesaurus:

NAV: Net Asset Value (Value of Assets-Value of Liabilities)/number of units outstanding). NAV helps the investor to determine the value of the fund. An investor can identify the current value of his investment by multiplying NAV with the number of units held

 

AMC: Asset Management Company invests its clients’ pooled funds into securities that match declared financial objectives. AMC’s manage hedge funds, Mutual funds, pension funds. Their main source of revenue is either commission or service fee on the investment

 

Back to Chapter 1 – What are Mutual Funds?                           Continue to Chapter 3 – Types of Mutual Funds

यह ब्लॉग हिंदी में पढ़े- How mutual funds work in Hindi

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