How Your Money Grows in Mutual Fund?

Mutual funds have become a popular avenue when looking for investment options. Most importantly, they come with high return potential that helps investor grow their money. But how exactly does a mutual fund grow your money? Before we get to that, you need to understand a few basics first:

• Investing in a Mutual Fund When you invest in a mutual fund, you buy the fund units. These units have a NAV that stands for ' Net Asset Value' and defines a mutual fund's market value .For example, a mutual fund is divided into 2 lakh units that are being sold at Rs. 10 per unit on a particular day. So, when you invest Rs. 5000, you get 500 units of that mutual fund.{2D743194-97C2-43F9-BC28-AEC370801ECD}
• Investment Objective of a Mutual Fund The first word that comes into the mind when thinking about mutual funds is stocks or equities. Although equity mutual funds are among the most popular types, there are others, such as debt mutual funds that invest in debt instruments. Similarly, there are hybrid mutual funds that invest in both debt products and equities. The type of instrument that a mutual fund invests in is called its investment objective.
• Role of a Mutual Fund Manager A mutual fund manager is a professional who manages the fund. A mutual fund manager’s activity includes researching, analysing market trends, selecting stocks or other investment options, and then investing and managing the assets of a mutual fund. You, along with the other investors, entrust the manager with your money to make a lucrative investment decision on your behalf. Subsequently, a mutual fund manager charges a fee for their work.

Now that you have understood some of the basics of mutual funds, let’s get to how does the fund make money? As mentioned earlier, there are two types of mutual funds primarily - equity funds or debt funds. Let’s see how money grows in both these types of funds.

• Growth in Equity Funds Equity mutual fund makes monetary gain through an increase in the price of the stocks/equities/assets held by the mutual fund. Let's understand this with an example. Mutual fund A allocates 50% of its assets to shares of company X, which has a NAV of 100.Now over a period, the share price of company X rises by 10%. This means that the NAV of the mutual fund will increase by 5% (assuming rest all investments remain constant during the period). Thus, the NAV of the fund will not become 105 instead of 100.
• Growth in Debt Funds Debt funds invest majorly into bonds and other debt instruments. These bonds earn a fixed rate of interest for the investor.An increase or decrease in the interest rates in the economy can make these bonds to earn more money for the investors.

While a mutual fund is an excellent avenue of making money, most of it depends on selecting the right mutual fund. The investment objective, fund manager, rules and conditions of a fund, the investment strategy, and other associated factors play a key role in the mutual fund's performance. Therefore, thoroughly research and enquire before you finalise any mutual fund.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.