Financial literacy and more
All about mutual funds
The value of a mutual fund is nothing but how much it is worth.
This is what investors pay when they enter the fund.
It is also what investors get when they exit the fund.
A higher value will mean earning a return for the investor.
This is reflected in a term called the Net Asset Value (NAV).
Defining and understanding the risk element is important when it comes to mutual funds.
The basic risk in a mutual fund is that the investment might not perform as expected.
In an equity fund this could mean that there is a capital loss.
In a debt fund it could be that there is a lower return than what was expected.
Investors should understand that this means that lower returns than normal or even loss of capital.
Investors have to understand that risk is a part of the investment process.
Every mutual fund will have some element of risk present in it,
The risk element can be high or low depending on the nature of the fund.
Mutual funds also do not guarantee any return.
Investors should always ask what is the kind of risk that they will face in a mutual fund.
An assumption is that mutual funds just invest in equities but this is not correct.
Mutual funds can have access to any kind of asset class.
There are mutual funds that invest in debt too.
Mutual funds can also invest in gold so these give investors an exposure to a commodity.
There can be a mixture of various assets in a mutual fund portfolio too.
An investor gives their money to the mutual fund to manage.
The mutual fund then invests the money in a specific area or asset.
The investor thus has an exposure to this area or asset as their money is invested in it.
The returns generated from here less expenses are the returns for the investor,
So the performance of the investors money depends on how the portfolio of the fund performs.
Diversification requires the presence of different investments so that the risk is spread out.
A proper diversification of the portfolio requires a large amount of money when done by an individual on their own.
A mutual fund is a portfolio of investments.
This ensures that the benefit of diversification is automatic when a mutual fund is bought.
A mutual fund will only help in part diversification as a specific fund is focused on a specific area or asset.
Many investors have a small sum of money to invest.
This can be a few hundred or a few thousand rupees.
If invested on its own the investor might just get one or two holdings.
They also might not have the expertise of managing the funds.
The mutual fund structure takes care of all these aspects,
A mutual fund is an instrument that can be used by people to make an investment,
In a mutual fund many investor pool together their money.
This pooled money is then managed by investment professionals.
Expenses for the management and running of the fund are reduced from the return generated.
The remaining amount is for the investors of the fund.