What are mutual funds?
I will tell you the secret to getting rich on Wall Street. You try to be greedy when others are fearful. And you try to be fearful when others are greedy.
On your journey to riches, if you are looking for a safe, secure and convenient method, then I have a suggestion. Investing in mutual funds is a good option. If yes, you may have some concerns; here are the top concerns:
- You should know the basics and have enough information so that you can invest on your own or by seeking the assistance of financial planner or investment advisor.
- You may want this information to be plain and straightforward. If these are your foremost concerns, then this chapter is for you.
Let us begin with understanding what mutual funds
A mutual fund is a collection of money from investors to buy stocks or bonds.
- It’s a pool of When many individuals (investors) come together for a common cause (to benefit from the capital market) and pool their money, it is called a mutual fund.
- Each mutual fund should have an investment An Asset Management Company or AMC is appointed to manage these resources.
- The AMC then selects “fund managers” and then the Trustees of the Mutual funds to monitor the fund’s The AMC takes your money and invests in Stocks or Bonds.
- Mutual funds issue units to its investors in accordance with the money invested.
- When you invest in a mutual fund, the value of each unit is called NAV (Net Asset Value), which reflects the current market value of one unit of the fund’s holdings.
- The NAV of each unit and the total investment is If the NAV is Rupees 20 and you invest Rupees 1,00,000/-, then you would be allocated 5000 units on day one. This NAV varies on day to day basis.
- As the NAV rises or falls, you either make a profit or loss.
- The NAV is also equal to the market value of securities of a scheme less than the total recurring expenses, divided by the total number of units.NAV = Value of securities – Total Recurring Expenses / Total Number of Units
- To reduce your future losses, these AMCs don’t invest just in one stock or industry or just a few They invest in several industries like investing in FMCG, Power, Telecom, IT, Pharma, Steel, Housing.
- This process ensures that if one industry or few stocks are not performing, the other well-performing industries bring you the profit.
- When you purchase a mutual fund, you invest in those stocks or bonds and have now a stake.
- Mutual funds can become your basket of They can thus benefit you as they are an essential way to make diversified investments. Financial professionals called fund managers manage mutual funds in a systematic and organised manner.
- The fund managers continuously scan various investment Instead of buying stocks directly, you invest in mutual funds through AMCs, which on your behalf buy shares.
Types of Mutual Funds
- Equity, Debt, Balanced: From Equity to Government bonds to a mix of both, are the particular type of mutual funds.
- Open-Ended, Closed-Ended: Open-ended are the ones wherein you can enter and exit anytime; while close-ended are that type of mutual fund does not allow such exits, usually before three years.
- ELSS: Known popularly as Equity Linked Savings Scheme is meant for taking benefits under 80 C of the Indian Income Tax Act and have a lock-in period of minimum three years.
- Sectorial Funds: These funds invest in specific sectors like banking, infrastructure, and so on.
Use these secret to mutual funds and make plans to start your investments.
Now since you have gained insight into what mutual funds are, let’s know about the benefits of investing in mutual funds.
Taressh Bhatia is a CFPCM CERTIFIED FINANCIAL PLANNER CM and is the founder/partner of Advantage Financial Planner LLP – A firm Registered with SEBI (Securities and Exchange Board of India) as RIA (Registered Investment Advisor).
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