What are mutual funds?

What are mutual funds?

When you were a school going kid or a college going youngster you would have probably spent a lot of time hanging out with your friends. Who can forget the group movie outings and then the usual fast food meals?

Most of us used to fund these with our pocket money and often a group of friends would pool their money when the time came to pay the bill. In fact, how much money the group of friends could pool together often decided which restaurant they could afford.

Most of the places we would have fun at were thanks to the purchasing power of the group rather than each of us individually. It was an unwritten rule of partying. A group can afford much more than one person individually.


Mutual Funds are like that group

When many of us think about investing what we save at the end of the month we often think in terms of the small amounts we have saved. In our early years, our saving each month is barely a couple of thousand, if that.

Investing, though, is something we think needs tens of thousands or lakhs of rupees. After all what can just a few hundred or thousand rupees do?

The answer is, a lot!

Mutual funds are like that group of friends which allowed you to afford places to eat at which individually none of us could.


So what is a Mutual Fund exactly?

Rs 1000 might not be a lot, but when thousands of people with Rs. 1000 get together, that becomes some serious money. Mutual Funds work on this basic idea.

They are a kind of investment fund that collects money from many investors, just like you, and uses that money to invest in different kinds of investments like stocks of companies, bonds, and even units of other mutual funds.

Most mutual funds invest in either shares of other companies which is normally known as equity or they invest in interest generating investments such as bonds, debentures, and deposits - these mutual funds are called debt mutual funds and are similar to fixed deposits in some ways. Certain kinds of mutual funds invest in both kinds of investments.


Who runs Mutual Funds?

Mutual funds are generally started by institutions who understand investing and which is why banks and financial firms start most mutual funds. While banks sponsor mutual funds, they themselves cannot manage it due to regulations. The day to day management of mutual funds is done by something called an asset management company or AMC.

The funds themselves are managed by experienced and qualified individuals, called fund managers, from the AMC who really understand the particular asset the mutual fund invests in and the different aspects of managing investments.


When you invest in Mutual Funds what do you get exactly?

When you invest in a mutual fund, you get something called a unit. A unit is like a share of the total amount of investments made by the mutual fund. The value of a unit is called “Net Asset Value” or NAV. The NAV decides how many units you get for the amount you are investing.


Are mutual fund companies governed by anyone?

One reason why mutual funds make sense for most us is that they are some of the best governed financial tools for investment. SEBI or Securities and Exchange Board of India governs mutual fund companies in India.


Takeaways

  • Mutual Funds don’t just invest in stocks but also fixed income instruments - somewhat like fixed deposits
  • Mutual Funds are managed by professionals who know what they are doing and take care of your money.
  • Asset management companies which manage mutual funds are governed by SEBI
  • When you invest in mutual funds, you get units in exchange for your money
  • The value of a unit of a mutual fund is called NAV or Net Asset Value
  • Your money grows when the NAV goes up


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Read up more on Mutual Funds here

Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing.