With all the financial huff -buff going on around the nation these days, from TV commercials to Social Media Advertisements, Mutual Funds are getting a lot of exposure. And while the financial gurus are gradually developing a fetish towards mutual funds in India, most commoners are yet to discover what the real concept as to how Mutual Funds work. So, here we are with this amazing article to educate you on all that you need to know about investing in Mutual Funds.
What’s a Mutual Fund?
A Mutual Fund basically implies to a complex procedure where an investment is made in securities such as stocks, bonds, money market instruments and other assets out of the accumulated money collected from several investors. The procedure is operated by professional money managers, who intelligently allocate the fund’s investments so as to togenerate capital gains and/or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.
How does a Mutual Fund Work?
Mutual funds are usually virtual companies that buy loads of stocks and/or bonds as on recommendation by a dedicated investment advisor, who is hired by the company’s board of directors and is legally obligated to work in the best interests of the respective mutual fund’s shareholders. Unlike usual shares, mutual funds invests the money accumulated from its investors in several securities simultaneously. Mutual fund units, or shares, can typically be purchased or redeemed in accordance to one’s requirement at the mutual fund’s current Net Asset Value (NAV) per share, which may also be expressed sometimes as NAVPS. A mutual fund’s NAV can easily be calculated by dividing the total value of the securities in its respective portfolio by the total amount of outstanding shares.
Is Investing In Mutual Funds A Smart Idea?
Of-course it is. Mutual funds usually permit small or individual investors access to several professionally managed portfolios of equities, bonds and other securities, which ensures that each shareholder participates proportionally in the gains and/or losses of the fund. Furthermore, an average mutual fund holds hundreds of different securities (if not more), which means that its shareholders gain important diversification even at a very low price. Take the example of two people. The first one makes an investment in the usual share just before a bad quarter of the concerning company, while the second makes an equal invest in a mutual fund. The first will face assured loss since all his investment was made into one company while the second will sustain the situation since the mutual fund redirected his investment partly into various financial sectors, thereby increasing the probability of sustained profit. Since, the mutual funds invest in many securities, therefore, their performance is tracked by aggregating performance of the underlying investments.
Stay tuned and keep an eye on our upcoming article for a deep insight on the best mutual funds in India to invest upon.