What Are Mutual Funds?

Have been looking for one of the best investment options? Do you want to invest your hard-earned money at the right place? If you have been recommended mutual funds for investment purposes, you are at the right place. This post will help you understand what mutual funds are and whether you should invest in mutual funds or not. 

What Are Mutual Funds?

Mutual funds are one of the most popular investment options in today’s time. A mutual fund is an investment scheme, professionally managed usually by an asset management company (AMC). The primary objective of AMCs is to bring investors together and invest their money in bonds, stocks and other securities. 

How Do Mutual Funds Work?

Mutual funds are basically a pool of many financial instruments that generate returns over a time period. 

If a person invests in a mutual fund scheme, they buy units of that scheme on the basis of Net Asset Value(NAV) of that fund on the day of the transaction. Then, the fund manager invests the collected funds in different investment instruments like equity stocks, debt instruments, derivatives, arbitrage, and others to generate returns for the investor. The total capital gains from the allocation in investment instruments get added to the assets under management of the fund, on which the NAV of the fund depends. The investors are free to redeem the fund units as per their convenience. 

It must be noted that the units are redeemed on the current NAV of the fund, which is expected to be massively higher in comparison to the NAV at which the units were originally purchased. This increase sheds light on the total gains of the investor on the investment. 

In case the NAV at the time of redemption is not significantly higher than the NAV at the time of investment, it is advised to remain invested in the fund, and wait for the market sentiment to move in one's favor.

Benefits of Mutual Funds 

Some of the prime benefits of mutual funds include: 

• Help in achieving short-term as well as long-term financial goals. 
• Money is invested in different securities. Any losses in one asset type can be easily balanced out in other gains. 
• The investor earns an interest accumulated on principle which helps in the growth of the investment. 
• Additional income through capital gain (profits generated by selling securities at higher price) distribution can be redeemed or utilized to purchase more units.
• Dividends received in the form of mutual fund returns can be utilized to buy more mutual funds through automatic reinvestment.
• The investor can switch from one investment scheme to another without paying extra charges. 
• A wide array of options to invest in. 
• Mutual funds are transparent as investors are free to keep track of their funds’ performance. 

Ready to invest in mutual funds? Make sure you consider your financial goals, historic performance of the fund, asset under management, and risk tolerance of the investor in mind before going ahead.

Also read - Difference Between ULIPs, Mutual Funds and FDs

How To Choose The Right Investement Option In India?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.