What is Mutual funds? Mutual Fund Guide for Beginners
Investing in mutual funds is a topic that many people are curious about but often hesitate due to various concerns.
This article aims to provide a clear understanding of mutual funds, how they work, and why they can be a beneficial investment options. By addressing common doubts and explaining the concept of mutual funds, readers will gain the knowledge and confidence to explore this investment avenue.
Overcoming Fear and Misconceptions
One of the primary fears associated with mutual funds is the potential for financial loss.
This apprehension is often fueled by the negative portrayal of the stock market in movies and popular culture.
However, it is important to understand that mutual funds offer a wide range of schemes, and even the worst-performing scheme has a high probability of providing better returns than fixed deposits in the long run.
In fact, selecting a good scheme can yield returns as high as 22-23%, surpassing the returns of traditional assets like gold or property.
Mutual Funds: An Overview
To truly comprehend mutual funds, it is essential to understand their diverse investment options beyond the stock market. Mutual funds allow investors to allocate their funds to various assets, including gold, real estate, debt funds, and equities.
While the risk associated with mutual funds can be slightly higher due to market volatility, the potential for higher returns makes them an attractive investment choice.
Mutual funds have gained immense popularity in recent years, but many people still struggle to understand what exactly they are and why they deserve attention. In this article, we will delve into the concept of mutual funds, explaining their meaning and significance.
What are Mutual Funds?
A mutual fund is a financial product that involves pooling money from multiple investors with a shared investment objective. It is managed by a professional fund manager who invests the pooled funds into various assets such as stocks, bonds, money market instruments, and other securities.
Investors in mutual funds own shares or units in the fund proportionate to their investment amount.
An example of a mutual fund is the “Vanguard 500 Index Fund,” which aims to track the performance of the S&P 500 index by investing in a diversified portfolio of large-cap U.S. stocks.
How to Make Money in mutual funds?
several ways to make money with mutual funds
Understanding Net Asset Value (NAV):
Net Asset Value, commonly known as NAV, refers to the price of one unit of a mutual fund. For instance, if you invest Rs. 10,000 in mutual fund A with a NAV of Rs. 100, you would own 100 units of the fund.
The NAV fluctuates based on the performance of the underlying shares.
NAV and Returns: As the prices of the majority shares within the fund increase, the NAV also rises.
Conversely, if share prices decline, the NAV decreases. Over time, the NAV can reflect significant returns on investments.
For example, if the NAV of mutual fund A increases to Rs. 120 after a year, the value of your 100 units would now be Rs. 12,000, indicating a 20% return on your initial investment.
- Partial Unit Investments:
One interesting aspect of mutual funds is the ability to buy partial units. Suppose a mutual fund has a NAV of Rs. 2,000, but you only have Rs. 1,000 to invest.
In such cases, you can purchase half a unit of the mutual fund, enabling smaller investments.
The Need for Mutual Funds Manager?
Consider a scenario where a group of people, including you and your friends, have a common goal of investing in shares and bonds.
However, none of you possess the necessary expertise, knowledge, or time to navigate the investment process.
This is where a fund manager, represented as FM, comes into play.
Importance of Mutual Fund Investment
Investing in mutual funds can lead to better returns compared to other asset classes.
This potential for higher returns makes mutual fund investment crucial for individuals seeking to grow their wealth. By dispelling fears and misconceptions, investors can harness the power of mutual funds and secure improved financial outcomes.
Exploring Mutual Funds: Concept and Functionality
Understanding the concept and functionality of mutual funds is vital for investors looking to embark on this investment journey.
By comprehending how mutual funds operate and how to invest in them, individuals can make informed decisions about their financial future.
Mutual Funds: Definition
Contrary to popular belief, mutual funds are not solely restricted to investing in the stock market.
They offer opportunities to invest in a diverse range of assets, including equities, gold, real estate, and debt funds. The inherent risk and return associated with mutual funds primarily revolve around the equity context.
Importance of Basic Share Market Knowledge
To fully grasp the concept of mutual funds, it is essential to have a fundamental understanding of the share market.
Acquiring knowledge about the basics of the share market provides a solid foundation for comprehending mutual funds and their investment strategies.
For a comprehensive understanding, it is recommended to explore introductory videos on the share market before delving further into mutual funds.
Investing in the Share Market: Different Approaches
Investors have three primary approaches to investing in the share market.
The first option involves conducting independent research to identify suitable shares for investment. While this approach provides independence and eliminates the need to pay fees to professionals, it requires a significant investment of time and expertise.
The second approach entails seeking the guidance of research analysts or investment advisors. While this method eliminates the need for personal research, it involves regular transactions and fees associated with buying and selling shares.
The third and most convenient approach is investing in mutual funds. Mutual funds allow investors to invest in the share market without the need for extensive tracking, low fees, and specialized stock-picking knowledge.
By selecting a suitable mutual fund, investors can leverage the expertise of fund managers.
How Mutual Funds Work
Mutual funds work by pooling together funds from multiple investors to create a large investment corpus.
This pool of funds is then managed by professional fund managers who have expertise in selecting and managing investments. The fund manager’s role is to make investment decisions on behalf of the investors, aiming to generate optimal returns while managing the associated risks.
When investors invest in a mutual fund, they purchase units or shares of the fund at the current net asset value (NAV) per share. The NAV represents the total value of the mutual fund’s assets minus its liabilities, divided by the number of outstanding shares.
The NAV is calculated at the end of each trading day and is used as a reference point for determining the value of the investor’s holdings.
Mutual funds offer different types of schemes based on the investment objective and asset allocation strategy.
For example, there are equity funds that primarily invest in stocks, debt funds that invest in fixed-income securities like bonds and government securities, balanced funds that have a mix of equity and debt, and sector-specific funds that focus on specific sectors or industries.
Investors can choose a mutual fund scheme based on their investment goals, risk tolerance, and investment horizon. Each scheme has its own investment strategy and risk profile, and it’s important for investors to assess their own financial goals and risk appetite before selecting a mutual fund.
Top 6 Advantages of Investing in Mutual Funds
There are several advantages to investing in mutual funds:
Professional Management:
Mutual funds are managed by experienced and qualified fund managers who have the expertise to make informed investment decisions on behalf of the investors.
Diversification:
Mutual funds provide diversification by investing in a wide range of assets. This diversification helps to reduce the risk associated with investing in a single stock or asset.
Accessibility:
Mutual funds are easily accessible to individual investors with various investment amounts. Investors can start with a small investment and gradually increase their holdings over time.
Liquidity:
Mutual funds are generally open-ended, which means investors can buy or sell units at any time. This provides liquidity and flexibility to investors who may need to access their investments quickly.
Transparency:
Mutual funds are regulated by regulatory authorities, and they are required to provide regular updates on their holdings, performance, and expenses. This transparency allows investors to make informed decisions.
Cost Efficiency:
Mutual funds pool funds from multiple investors, which allows for cost efficiencies in terms of transaction costs and diversification benefits. Additionally, mutual funds often have lower expense ratios compared to other investment options.
Summary
Mutual funds provide individuals with an opportunity to invest in a diversified portfolio managed by professionals. By understanding the concept and functionality of mutual funds, investors can make informed decisions and potentially achieve their financial goals.
Disclaimer: It is important to assess one’s investment objectives, risk tolerance, and investment horizon before selecting a mutual fund. Additionally, conducting research and seeking advice from financial professionals can further enhance the investment experience.
