Understanding Mutual Funds
Understanding Mutual Funds A mutual fund is a collective investment scheme managed by a professional fund manager. It gathers money from various investors who share a common investment objective. This pooled money is then invested in a diverse portfolio, including equities, bonds, money market instruments, and other securities. The income or gains from these investments are distributed proportionately among the investors after deducting applicable expenses and levies. The value of a mutual fund is measured by its Net Asset Value (NAV).
Breaking Down the Concept of Mutual Fund Units
Imagine a box of 12 chocolates costing ₹40. Four friends each have ₹10 and decide to pool their money to buy the box since the shopkeeper only sells by the box. Understanding Mutual Funds Each friend contributes ₹10, and they share the chocolates equally. This means each friend gets 3 chocolates or 3 units if we relate it to mutual funds.
Understanding Mutual Funds To find the cost per unit, divide the total cost by the total number of chocolates: 40/12 = 3.33. So, if you multiply the number of units (3) by the cost per unit (3.33), you get the initial investment of ₹10. This way, each friend becomes a unit holder in the box of chocolates, collectively owning it and sharing the benefits.
What is Net Asset Value (NAV)?
NAV is akin to the traded price of an equity share. It represents the combined market value of the securities held by the fund, minus the permitted expenses and charges. Understanding Mutual Funds NAV per unit is the market value of all the units in a mutual fund scheme on a given day, net of expenses and liabilities, plus any accrued income, divided by the outstanding number of units in the scheme.
Why Choose Mutual Funds?
Mutual funds are perfect for investors who either lack large sums for investment or do not have the time or inclination to research the market. Understanding Mutual Funds Professional fund managers handle the investments, aligning them with the scheme’s objectives. In return, the fund house charges a small fee, regulated by the Securities and Exchange Board of India (SEBI).
India boasts one of the highest savings rates globally. This tendency for wealth creation makes it essential for Indian investors to explore beyond traditional options like bank FDs and gold towards mutual funds. However, awareness remains a barrier, making mutual funds less preferred.
Diverse Investment Options
Mutual funds offer a variety of product choices across the financial spectrum to meet different investment goals, such as retirement, children’s education or marriage, and house purchase. The Indian mutual fund industry provides numerous schemes catering to all types of investor needs.
Benefits of Mutual Funds
Mutual funds provide an excellent avenue for retail investors to participate in capital markets and benefit from their growth. However, selecting the right fund can be challenging. Proper due diligence and consideration of the risk-return trade-off and time horizon are crucial. Consulting a professional investment adviser can also be beneficial. Diversifying investments across different categories such as equity, debt, and gold can help maximize benefits.
Conclusion
While individual investors can invest in the securities market on their own, mutual funds offer a comprehensive package of benefits. Managed by professionals and diversified across various securities, mutual funds provide a smart and efficient investment choice for those looking to grow their wealth without the hassle of direct market involvement.
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