Mutual Funds pool in investments from investors and invest in a range of securities – such as stocks, government bonds - depending upon the fund’s objective. The reason why Mutual Funds are one of the more popular investment vehicles is because they provide the benefits of diversification along with being professionally managed by experts.Basis the investor’s investment objective (and recent regulations passed by SEBI concerning rationalization and categorization of fund schemes), Mutual Funds can be categorized into:
- Equity Funds
- Debt Funds
- Hybrid Funds
- Solution-oriented Funds
- Other Funds
Remember that when you invest in a Mutual Fund scheme, your money would be pooled in along with that of other investors. The investment is made by way of purchasing units of a Mutual Fund. The Fund issues newer units as more investments start coming in. All Mutual Fund investments are managed by a fund manager who takes the final call concerning investment strategies, depending upon the fund’s objective.
Example illustrating how Mutual Funds work
Consider a Mutual Fund scheme with an intended corpus of Rs. 1 crore, being collected from 100 investors who are investing Rs.1 lakh each. Now, considering the AMC issuing Mutual Fund units at a Net Asset Value (market price of each unit) of Rs. 10 each, every investor would purchase 10,000 units each. This follows that the house would issue 10 lakh units in total.
Now, the Mutual Fund house decides to invest in equities, spread across 20 stocks. The Fund Manager takes a call on allocating the same amount to each stock. In such a scenario, with the intended corpus of Rs.1 crore, it would go on to invest Rs.5 lakh in each stock. What happens here is that the Fund Manager decides to invest predominantly in stocks that are likely to generate superior inflation-beating returns over the long term.
Now, considering the portfolio hasn’t changed after a month, and the value of stocks has gone up to Rs.1.2 crore. Since the number of units has remained the same (10,000 to every investor), the NAV (of every unit) is now a revised Rs. 12. Therefore, each investment will become Rs.1.2 lakh, from the past figure of Rs. 1 lakh.
Types of plans
- Regular plan
Under this, you invest in Mutual Funds via intermediaries that can be a distributor such as banks, other private distributors (both corporate and individual) and stock brokers.
- Direct plan
With this plan, you can eliminate services rendered by intermediaries. That being said, it is imperative that you are familiar with the market before moving ahead with investing.
Now that you know how Mutual Funds work, it’s time to invest in them right away!
Explore different Mutual Funds here.
* Terms & conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.
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