What is a mutual fund? Here's all you need to know about this investment scheme
Mutual funds often generate a lot of curiosity among professionals who are seeking to invest their hard-earned money for saving purposes. But what exactly is a mutual fund?
Mutual fund…Equity fund…SIP & Lumpsum scheme…'Imma bounce' is what you would feel if someone asks you about these and you don't know what these words actually mean.
Mutual funds often generate a lot of curiosity among professionals who are seeking to invest their hard-earned money for saving purposes. But what exactly is a mutual fund? How do they work?
What is a mutual fund?
In simple words, a mutual fund refers to pooling of money from a number of people who have a common investment goal. The amount collected from the investors is then invested in stock market instruments like shares, debentures and other securities.
The income earned through these instruments are shared by its unit holders (investors) as per the units held by them.
“Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is diversified because all stocks may not move in the same direction in the same proportion at the same time. Mutual funds issue units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unitholders,” Securities Exchange Board of India (SEBI) says.
What is an asset management company (AMC)?
An asset management company is the firm which manages the money pooled in from the investors and then invests the amount in various instruments. The AMCs are also known as money managers or money management firms. The funds are either actively or passively managed by a fund manager. The fund manager takes all decisions pertaining to the sale and purchase of securities.
What is a net asset value (NAV)?
According to Securities Exchange Board of India (NAV), the performance of a particular mutual fund scheme is denoted by its net asset value.
In simple words, mutual funds invest money collected from the investors in securities markets. The NAV is actually the market value of these securities held by the scheme. The NAV changes on a day to day basis.
The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date.
What are different types of mutual fund schemes?
There are different types of mutual fund schemes based on maturity period and investment objectives. Here we discuss few of them.
Open-ended schemes: As the word suggests, open-ended mutual fund schemes are the ones which are available for subscription and repurchase on a continuous basis and don't have a fixed maturity period. The investors can conveniently buy and sell units at the NAV which is declared on a daily basis.
Close-ended schemes: These mutual fund schemes have a maturity period, i.e 3-5 years. They are open for subscription only during a specific period at the launch of the scheme. The investors can invest in the scheme at the time of the new fund offer and can buy or sell the units on the stock exchanges.
Growth/Equity oriented schemes: The growth fund schemes are meant to ensure capital appreciation over the medium to long-term. Such schemes invest a major part of their money in equities. They have higher risks and provide different options to the investors like dividend option, growth etc.
Debt schemes: These mutual fund schemes usually invest in fixed income securities like bonds, corporate debentures, government securities and other money instruments. They are considered less risky than equity schemes. The NAVs are affected due to change in interest rates in the country.
Hybrid schemes: They are a combination of debt and equity schemes which are meant to meet the investment requirements. They usually invest 40-60 per cent in equity and debt instruments.