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What is a mutual fund?

How does a mutual fund work and how can investors make money using mutual funds?

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Vaneet

Mutual fund is an investment tool which collects large amount of money from many investors and uses this money for investments in securities such as bonds, stocks, money market instruments and other assets. Mutual funds are managed by AMC (asset management companies). The characteristics of mutual funds are:

  • Good for people who have little knowledge of the stock market or other similar securities, or don't have sufficient time to keep continuous track of the market
  • These are managed by experienced fund managers appointed by the AMC. These fund managers have good knowledge of the market
  • Investors put money in different types of mutual funds depending on their risk appetite
  • There is operating fees charged from the investors by the AMC, for managing mutual funds
  • Mutual funds are registered with securities governing body SEBI, which keeps a watch on the functioning of these funds and thus aims protect the interests of the investors

The mutual funds work by using the investment in various securities, and the performance of these securities leads to the performance of mutual fund.

Various types of mutual funds are:

  1. Equity mutual funds-Money is invested in stock market. Returns are good but risk level is very high.
  2. Debt mutual funds- Investment is done in corporate bonds, government bonds, bonds issued by banks etc. Risk level of these funds is low.
  3.  Balanced mutual funds- Investment is done in a mix of equity and debt. These funds have moderate risk level and moderate returns.

Depending upon the investment objective of the mutual funds, AMC offer many different types of mutual funds. These funds allocate different percentage of investments into various securities in the market.

Investors make money from mutual funds as:

  • Mutual funds provide return to investors on the basis of performance of various securities in the portfolio
  • Mutual funds sell off securities (bought at lower price) in their portfolio at high price and pass the profit to the investors
  • Money made also depends on the where mutual funds invests. For eg: if mutual fund invests in bonds, then an investor make money through interest income. If the mutual fund invests in real estate, money is made from rents, property appreciation.
  • The investor can withdraw investment from the mutual fund and gain from if the mutual fund has performed well (grown) over time.

For more information on mutual funds, please click here


Mridul Agrawal

A mutual fund is an investment instrument, basically collection of stocks and/or bonds, managed by professionals of an asset management company. Investors will put their money in different types of mutual fund units depending on their risk appetite and duration of investment.

There are different 3 major types of mutual funds in India:

1. Equity mutual funds: Invest most of the money gather from investors into stock market. The risk level in equity mutual funds are quite high and investors are advice to invest in these funds as per their risk appetite.

2. Debt mutual funds: Invest most of the money gather from investors into debt instruments like corporate bonds, government bonds, bonds issued by banks etc. These mutual funds are best for investors who are risk averse.

3. Balanced mutual funds: Invest the money gather into both debt and equity. These are diversified mutual funds having perfect balance between risk and returns on investment, and are most popular mutual funds these days.

All the mutual funds are registered with securities governing body SEBI to protect the interests of the investors. As an investor, you can buy these mutual fund ‘units’ at fund’s current Net Asset Value (NAV), which is calculated at the end of every day, taking into account of closing market prices of the securities in its portfolio and keep on fluctuating as per the fund’s holdings.

Investors make money from a mutual fund in 3 ways:

1. Income received as interest on bonds and from dividends on equities held in the portfolio of a mutual fund. Over the year, Mutual fund pays out all income it receives to investors in form of a distribution.

2. When mutual fund sells off securities, from its portfolio, whose market price has increased. The fund has a capital gain here and pass on these gains to investors in distribution.

3. You can withdraw your investment in mutual fund any time you feel like.

Happy investing!!

Tanya

A mutual fund is a professionally managed investment vehicle made up of money collected from investors in order to invest on their behalf. Mutual funds invest this money in securities like stocks, bonds, money market instruments, etc. Mutual funds are perfect for those investors who wish to invest in such securities but do not enough knowledge or time to do so. These funds are managed by professionals who allocate the money strategically to produce capital gains and income for the investors.

As an investor, you can buy units of mutual funds which basically represent your holdings in the scheme. These units can be bought or sold, at the fund's current Net Asset Value (NAV), as per the preference of the investor. The change in this NAV is what leads to investor's gain or loss as per the fluctuation.

The biggest advantage of investing through a mutual fund is that it gives the opportunity to small investors to access diversified portfolios which would otherwise be difficult for them to invest in with a small amount of capital.

There are seven types of mutual funds-

1.   Money market funds

2.   Equity funds

3.   Balanced funds

4.   Fixed income funds

5.   Funds of funds

6.   Specialty funds

7.   Index funds

Pijush Kanti Biswas

A lot of people follow stock markets and wish to invest in the shares offered by various companies, but they fear that they don’t have enough knowledge or don’t have sufficient time to keep track on and follow the latest buzz about the dynamic market. Mutual fund is the perfect solution for them as investing directly in equity market is a risk, not everyone willing to take.

A mutual fund is an investment instrument, basically collection of stocks and/or bonds, managed by professionals of an asset management company. Investors will put their money in different types of mutual fund units depending on their risk appetite and duration of investment.

There are different 3 major types of mutual funds in India:

1. Equity mutual funds: Invest most of the money gather from investors into stock market. The risk level in equity mutual funds are quite high and investors are advice to invest in these funds as per their risk appetite.

2. Debt mutual funds: Invest most of the money gather from investors into debt instruments like corporate bonds, government bonds, bonds issued by banks etc. These mutual funds are best for investors who are risk averse.

3. Balanced mutual funds: Invest the money gather into both debt and equity. These are diversified mutual funds having perfect balance between risk and returns on investment, and are most popular mutual funds these days.

All the mutual funds are registered with securities governing body SEBI to protect the interests of the investors. As an investor, you can buy these mutual fund ‘units’ at fund’s current Net Asset Value (NAV), which is calculated at the end of every day, taking into account of closing market prices of the securities in its portfolio and keep on fluctuating as per the fund’s holdings.

Investors make money from a mutual fund in 3 ways:

1. Income received as interest on bonds and from dividends on equities held in the portfolio of a mutual fund. Over the year, Mutual fund pays out all income it receives to investors in form of a distribution.

2. When mutual fund sells off securities, from its portfolio, whose market price has increased. The fund has a capital gain here and pass on these gains to investors in distribution.

3. You can withdraw your investment in mutual fund any time you feel like.


Happy investing!!

Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.
Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, investment goal, time frame, risk and reward balance and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs.
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