Let me simplify it:
A mutual fund is a mediator that brings together a group of people and invests their money in stocks, bonds and other securities.
Each investor owns shares, which represent a portion of the holdings of the fund. Thus, a mutual fund is one of the great investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a very low cost.
How it Works :
Say I own a MF Company with no profit no loss basis (Not relevant for real world)
Ram have 100/- to Invest, Shyam is investing 200/- , Ramesh have 50/-, Sachin have only 20/- and Praveen have 70/- to Invest.
Total Value : 440/-
Say I hired a financial professional for my company say his total cost 40/-
So I have net 400/- to Invest.
Say I Issue 100 Units of my MF each costing 4 Rs. (This is called NAV)
So Now Ram own 22.5 Units (Current Value – 90/-, while invested 100/- , 10/- went to Prof Salary)
Shyam own 45 Units
Ramesh own 11.25 Unit
Sachin own 4.5 Units
Praveen own 15.75 Units
So Now Play Begin:
Smart guy invest in various shares/Debts and try to increase NAV to more than 4 which will increase your Current Value.
– Current Value of your Investment =No of Units X NAV
– NAV Changes on daily Basis.
– NAV – Net Assets Value
So I hope you understood concept of Mutual Funds in very very simple language.
Few More Q&A about MF’s:
How is investment in a mutual fund different from a bank deposit?
When you deposit money with the bank, the bank promises to pay you a certain rate of interest for the period you specify.
On the date of maturity, the bank is supposed to return the principal amount and interest to you.
Whereas, in a mutual fund, the fund manager invests your money as per the investment strategy specified for the scheme. The profit, if any, minus smart expert expense, is reflected in the NAV or distributed as income. Similarly, loss, if any, with the expenses, is to be borne by you
Does investing in mutual funds mean investing in equities only?
Mutual Funds, besides equities, can also invest in debt instruments such as bonds, debentures, commercial paper and government securities. Every mutual fund scheme is governed by the investment objectives that specify the class of securities it can invest in.
What should one keep in mind while choosing a good Mutual Fund?
Income, expenses, commitments, financial goals and many other factors vary from person to person.
What is a Systematic Investment Plan?
SIP is a method of investing a fixed/regular sum every month or every quarter. With the growing everyday expenses, it becomes difficult to accumulate a considerable sum which can be invested at one go.
Why is SIP a great investment option?
The biggest advantage of an SIP is the habit of regular, disciplined savings. Every month, like all other EMIs, this also gets deducted from the bank a/c through electronic clearing service, which is convenient. A SIP does not pinch the pocket much if started at an earlier stage
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