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What are Mutual Funds?

A Mutual Fund is an investment, just like a Fixed Deposit or Post Office Term Deposit. Let us assume you are an investor who does not have experience in managing money and taking investment decisions, but you are looking for better returns. You need professional help to manage your money and receive good returns. So, all you need to do is invest in Mutual Funds. If you invest in Mutual Funds on a monthly basis it is called SIP (Systematic Investment Plan).

How does it work?

A Mutual Fund starts by collecting money from investors. Let us say 10000 investors have each invested Rs. 10000 in the fund. So the total amount collected is Rs. 10 crores. This amount is then managed by a professional fund manager who invests it by purchasing shares and bonds depending on the type of Mutual Fund. The profits from the investments are shared by all the investors.

Advantages of Mutual Funds

The major benefits of a mutual fund are –

  • Expert Money Management Many investors might not have the time or knowledge to invest in stock markets. A professional fund manager from the mutual fund company will have better knowledge of how to invest the money for best returns.
  • Easy Investment Process One can start investing in any Mutual Fund in less than few minutes without the need of any paperwork. All the transactions can be done online as well.
  • Liquidity Most Mutual Funds can be redeemed anytime and the investor will receive the amount in his bank account within few days. There is no lock in period like in Insurance and Post Office Deposits. This makes sure that the money is available in case of emergencies.
  • Wide variety of options There are different types of Mutual Funds available to suit any investor. Safe funds (Debt funds) meant for short term to High Risk funds for long term, and Tax Saving (ELSS) funds. Investor can choose from any of the funds depending on his needs.

How are returns calculated?

When an investor buys a Mutual Fund, they are provided with units. The cost price for each unit is called NAV (or Net Asset Value). For example, if you have purchased a Mutual Fund for Rs. 10000 at a price (NAV) of 100, then you will receive 100 units. One year later, the shares invested by the mutual funds have increased in value so the NAV increases to say 105. You can now sell your units at NAV of 105 for a total value of 100 x 105 = Rs. 10500. So your profit is Rs. 500.