If you are looking for a simple answer to the question, What is a Mutual Fund? then to explain it in simple words. We can define it something like this. Mutual fund means the collective investment into the share market often done by the experienced investor called a fund manager.
Along with the many media and television programs on financial planning, public awareness has also increased regarding investment. This helps people to secure their future by smart saving, and it is more than conventional saving. However, not everyone can afford to take time in doing research and tracking their investments daily. As a result, they invest in the share market through mutual funds.
Investment is one of the passive-income channels for some people and some people do it actively. One type of investment that is getting momentum is mutual fund investment. Mutual funds meaning lies in the name itself, funds invested mutually are called mutual funds.
A mutual fund is a collection of funds. This collection is utilized to invest such as buying shares, bonds, and other financial instruments or securities.
A mutual fund is a popular investment type because it does not require considerable capital. Investment can be done individually or institutionally, and there are investment managers who help you.
What is a Mutual Fund NAV?
When you invest in a company you get a share in the profit. As a result, you become the owner of the company. However, in the case of mutual funds, many investors are coming together and investing in companies and other investment options. In this case, everyone should be the equal owner of all the investment. Hence, NAV – Net Asset Value comes into the picture. Instead of shares, the investor gets unit and the price of that unit is known as net asset value. You can buy and sell these units at net asset value.
What is a Mutual Fund Regulation?
SEBI (The Securities and Exchange Board of India) regulates the mutual funds. They control the market following SEBI Act 1992. So you do not need to worry about the credibility of any SEBI approved mutual fund investment scheme. However, do check the past track record and other details. As we all know, mutual funds investments are subject to market risks so read all scheme related documents carefully. Before investing in mutual funds, do maximum research.
How does a mutual fund work?
After approval of SEBI, the mutual fund manager can accept money from the investors. Then he can invest it in the market. The fund manager is equipped with the experience and his team. He does all the research about the market and invests collected money into multiple small investments. This is called diversifying the portfolio so investment will be diversified into several instruments or companies.
This safeguards your investment from sudden loss. For example, if the share price of the ABC Company falls by 50%. Even in that case, your investment will remain safe. Because the mutual fund portfolio still has other instruments that have been arranged by the investment manager. The required information regarding all the mutual funds is also easily accessible. So with some research, you can learn and explore opportunities for investment.
When the companies will pay the dividend to the mutual funds, the fund manager reinvests it. He can also pass it to the mutual fund unit holders depending on the type of that investment.
What is a Mutual Fund Investment Procedure? How to invest in mutual funds?
# 1. Goal Setting
The first step is determining the purpose of the investment you wish to make. Do you want to invest considering your children’s school fees, pension funds, future home, or others? The purpose of your investment will relate to the type of mutual fund and investment period. It will also help you to determine the amount of risk you can take while choosing a mutual fund. Therefore, to invest in mutual funds, you must have a clear goal in mind.
# 2. Research
Now you can compare the mutual funds considering the asset of funds. Considering, your risk-taking ability, past performance, tax benefits, lock-in period and multiple other factors. Make sure you are investing a high amount of time in doing the research. Getting the right information will help you in decision making.
# 3. Investment
You do not usually require a Demat account to invest in mutual funds. There are some benefits of having the Demat account. As we are heading towards digital India, it would be a secure option to hold funds in the Demat account. The physical certificates might not be maintained properly.
Zerodha offers a platform called Coin where you can do research as well as buy and sell mutual funds. You don’t have to pay even a single rupee as a commission.
Some brokers charge 1% to 3% commission on every purchase. However, you can do that free of cost with Zerodha, discount broker of India.
Let’s hope you have received the answer to the question, what is a mutual fund? We will be covering the concepts and other related information. Make sure you have subscribed to the newsletter to receive the updates. Do share this post and let us know what you have any doubts about it.