Learning about Mutual Funds

What are Mutual Funds? Many people doesn't have financial literacy to understand Mutual Funds. For some, it's a gamble where some uncle has lost lots of money. For some, it is an investment tool but they don't understand them and therefore stay way from it. For some, it's risky and should be avoided. Similarly there are many more definitions. Here I will try to make you understand some basics of Mutual Funds and what is the risk associated with them.

Clearly, there are many Mutual Funds Houses and they offer thousands of Mutual Funds. It may be difficult to understand them and choose them. All the knowledge doesn't come in a single day, you need to patient about learning and trying it yourself. To get the top rated Mutual Funds in different categories you can check this link https://www.valueresearchonline.com/funds/.

What are Mutual Funds

Most of you might have heard about shares and the stock market. Mutual Funds is a financial instrument where investors pool their money and invest through a fund house. Fund house makes investment into shares, securities, bonds and gold. Every Mutual Fund has a Net Asset Value (NAV) which is the price of each unit of Mutual Fund. Investor gets units of Mutual Fund and not shares directly. For example, you invested Rs 1000 in ICICI Mutual Fund on 6th June. NAV at the end of 6th June is say Rs 10 then you will get 100 units of ICICI Mutual Fund. NAV of Mutual fund is never real time and is decided at the end of each day.

How Mutual Fund works

When investors pool their money they are allocated units of Mutual Fund. This pool of money is managed by a Fund Manager, who invests across different assets. When the value of underlying asset grows, profit increases. This profit is returned to investor.

For example, Ashish bought 100 units of ICICI Mutual Fund at NAV of 10.
Total investment = Rs 1000 ( 100 x 10 )

Fund Manager invests this money from Ashish and other such investors. After one month the NAV of ICICI Mutual Fund increased from 10 to 11. During this period there was no buy from Ashish.

Value of investment after one month  =  100 units x 11 ( NAV )  =  Rs 1100

Profit   =   Current Value - Investment cost   =  1100 - 1000   =   Rs 100

This is how Mutual Fund works.

What is the risk associated with Mutual Funds

"Where there is no risk, there is no gain".

There is no risk in investing, there is always a risk in investing without knowledge. Equity Funds are more risky than debt funds. If your time horizon is for a longer period then invest in Equity Funds else choose Debt funds. If you are sure about your time horizon and the return expectations than there is bright chance that your returns from Mutual Funds will beat returns from any other investment. Best part of investing in Mutual Funds is that the returns from Equity funds are tax free after one year. Choose the product carefully where you invest.

Classification of Mutual Funds

Investors have different financial positions, risk tolerance and return expectations. To cater these needs there are various types of Mutual funds. Detail of each scheme will be covered in different post.

Happy Investing!!!!