Understanding mutual funds
What if you could invest your money and have someone else professionally manage it for you? Services like these do exist, but they come with a requirement of high amounts of capital or money to be invested. What if you could avail such a service, even with a small investment and get the advantage of professional money management? Well, this is possible by investing in mutual funds
How do Mutual Fund work?
In Mutual Fund many investors contribute to form a common pool of money. This fund is invested in accordance with a stated objective. This fund belongs to all the members in the proportion of their investment or it can be said that the ownership of the fund is joint or mutual. Fund Manager uses the money collected from investors to buy those assets which are specifically permitted by its stated investment objective. Fund Managers carry out detailed research and market monitoring on regular basis. This may not be possible for every investor. The risk of the investor is limited to their investment. Risk is reduced when the fund is diversified.
Mutual Fund Units
Here is a simple way to understand the concept of a Mutual Fund Unit. Let’s say that there is a box of 12 Pencil costing Rs.30, three friends decide to buy the same, but they have only ₹10 each and the shopkeeper only sells by the box. So, the friends decide to pool in ₹10 each and buy the box of 12 pencils. Now based on their contribution, they each receive 4 pencils or 4 units, if equated with Mutual Funds.
And how do you calculate the cost of one unit. Simply divide the total amount with the total number of pencils: 30/12 = 2.5.
So, if you were to multiply the number of units (4) with the cost per unit (2.5), you get the initial investment of ₹10.
This result in each friend being a unit holder in the box of pencils that is collectively owned by all of them, with each person being a part owner of the box.
What is “Net Asset Value” or NAV.
Just like an equity share has a traded price, a mutual fund unit has Net Asset Value per unit. The NAV is the combined market value of the shares, bond and securities held by the fund on any particular day (as reduced by permitted expenses and charges). NAV per unit represents the market value of all the units in a mutual fund scheme on a given day, net of all expenses and liabilities plus income accrued, divided by the outstanding number of units in the scheme.
Mutual funds are ideal for the investors who either lack large sums for investment, or for those who neither have the inclination nor the time to research the market, yet want to grow their wealth. The money collected in mutual funds is invested by the professional fund managers in line with the scheme’s stated objective. In return, the fund house charges small fee which is deducted from the investment. The fees charged by mutual funds are regulated and are subject to certain limits specified by the Securities and Exchange Board of India (SEBI).
Mutual funds offer multiple product choices for investment across the financial spectrum. As investment goals vary post retirement expenses, money for children’s education or marriage, house purchase, etc. the products required to achieve these goals vary too. There is plethora of schemes to cater all types of investor needs. In order to reap maximum benefit from mutual fund investments, it is important for investors to diversify across different categories of funds such as equity, debt and gold.
One comment
Sunil
March 21, 2021 at 12:46 am
Good info