What are Mutual Funds and how do they work?

What are Mutual Funds and how do they work

Friends, you must have heard the name of mutual fund. Mutual funds are the most popular way of investing nowadays. Many of you must know what are mutual funds. But many of my friends want to invest in Mutual Funds but they do not have the right information about what Mutual Funds are.

Have you thought that the value of your money keeps on deteriorating over time? The reason for this decline is inflation. To get rid of this inflation, people invest their money somewhere like gold, savings account, real estate, mutual fund etc. Currently mutual funds are considered popular among all these. Hardly any other investment plan can give you the money that you give by making a mutual fund.

So today through this article we will talk about what is Mutual Fund and how does Mutual Fund work.

Before that let us know a little bit about the history of mutual funds. India’s first mutual fund was brought in by UTI (established in 1963). India’s first mutual fund scheme was launched by UTI in 1964. After that many companies came to this investment plan, which is currently giving an opportunity to invest in mutual funds.

What is Mutual Fund?

Mutual fund simply means collective investment. Yes, mutual funds are not only invested by you alone, but many people invest. The money of many investors is deposited in the mutual fund scheme, whose main objective is to give good returns to its investors.

Simply put, a mutual fund is a bucket made up of money collected from many different investors. This lot of money gives the option to the fund manager to invest money in different places and use it properly. The money collected in this bucket is invested in stock market, bonds, money market instruments etc.

Who Manages Mutual Funds?

A mutual fund scheme is operated by a money manager or fund managers. Different mutual fund houses hire fund managers according to their needs.

As you know, a mutual fund is a bucket in which investors’ money is kept. The money in this bucket is invested by the fund manager at different places. Fund Managers are responsible for managing this bucket.

As per the goal of mutual fund money managers try to get profit for its investors. A mutual fund scheme is designed in such a way that it helps in achieving its objectives.

How does Mutual Fund work?

Mutual funds are also a part of the stock market. Not all of us can directly invest in stocks within the stock market. Investing in the stock market requires a lot of research and a lot of time. If you can neither do research nor take the time, then you cannot earn money by investing in the stock market.

Alternatively, some of us are attracted to such investments in which someone else will manage their money for them. Mutual funds are considered the best in such investment plans.

In Mutual funds, the professional money manager who looks after your portfolio is the fund manager who tries to increase your money by putting your money in the right place. Mutual Funds provide the services of a professional fund manager to small and individual investors that too at very low cost.

In any mutual fund scheme, each shareholder is equally sharing profit and loss according to his investment. Mutual fund invests a large amount in different types of securities, thereby reducing the risk by dividing it into different sectors.

The quantum of investment in mutual funds is determined on a unit-wise basis. The unit base is the NAV (Net Asset Value) on the basis of which mutual funds are bought and sold. The amount of money you invest is credited to your account (folio) based on the current NAV.

Who are the regulators of Mutual Funds?

All mutual funds are regulated by SEBI (Securities Exchange Board of India). SEBI keeps its control over all the fund houses so that fraud with investors can be prevented. Thus investing in mutual funds is considered safe.

What are the charges of Mutual Fund House?

Before going into any investment plan, we must get information about its fees and expenses. In mutual funds also you must be aware of its expenses and charges.

Mutual fund house charges you Expenses Ratio in return for its services. This Expenses Ratio goes as the fund manager’s salary in lieu of handling your mutual fund. These expense ratios can be around 0.25 to 2%. The NAV of the Mutual Fund is calculated only after deducting the expense ratio.

Investment Options in Mutual Fund Schemes

Generally, there are two types of plans in mutual fund schemes, one is the direct plan and the other is the regular plan. Direct plan is what you do without any agent. If you invest through direct plan then the expense ratio is less in it.

If you invest in a mutual fund scheme through an agent, which is a regular plan, you will have to pay a higher expense ratio than a direct plan. This high expense ratio seems trivial in percentage terms but makes a huge difference in long-term investments.

Concept of mutual fund

Friends, you have read above that mutual fund houses collect money from investors and use it to buy equity markets, securities and bonds. The value of a mutual fund scheme depends on the performance of these securities purchased by the mutual fund.

This means that whenever you buy a unit share of a mutual fund scheme, you are buying the overall performance of that mutual fund. In addition to performance, you can also consider the units in your account as a part of that portfolio.

Mutual fund value

The value of any mutual fund scheme is calculated on per unit basis on the basis of present NAV. The NAV is arrived at by dividing the current value of the securities in the entire portfolio by the total outstanding shares.

These outstanding shares may be held by many individuals such as share holders, institutional investors and company officials.

The value of mutual funds does not change during market hours like stocks. Its value is calculated on the basis of NAV only after the end of the trading day.

With how much money can a mutual fund be started?

Now this question must be in your mind that with minimum amount of Rs. investment can be started in Mutual Funds? Friends, the biggest advantage of investing in mutual funds is that it can be started with very little investment. In this you can start investing with just ₹ 500.

Even at present, any mutual fund house or AMC (Asset Management Company) offer the option to start investing from ₹ 100. The accessibility of mutual funds to every type of investor makes it an attractive investment option.

Methods of Mutual Fund Investing

Generally, Mutual fund investment we can invest in two ways.

  1. SIP
  2. lump sum

The first method is SIP (Systematic Investment Plan) in which you invest a fixed amount in a mutual fund scheme at a fixed interval. This time interval can be 15 days, a month or a quarter. This method is like a bank’s Recurring Deposit, in which you keep depositing money continuously to build wealth.

Mutual fund investment or another way to invest in mutual funds is Lump sum. In this you do not have to put money again and again like SIP. In this, you invest a huge amount all at once. You can also understand lump sum like a fixed deposit of a bank.

Conclusion- What are Mutual Funds ?

Mutual funds have become the most popular investment method these days among investment options. In India, it is in a very high growing stage. It is likely to grow more rapidly in the coming years.

Investing in Mutual Funds does not require any expertise. In this, your portfolio is handled by professional experts. These fund managers choose the best stocks and other securities for our portfolio which can give us good returns. Mutual funds invest in a wide variety of stocks and securities, which helps to diversify our portfolio.

That’s why you should start investing in Mutual Funds without any hesitation. The sooner you start, the more you will benefit.

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