Introduction to Mutual Fund :
What is Fund?
It is a collection of money for a specific purpose by the user itself. It is managed by each individual for his specified purpose. Eg. Accumulation of money for, Higher education of children, children marriage, foreign trips, retirement funds etc..
Mutual Fund :
It is a fund created out of the collection of money from several persons. We can call it also a pool of Money collected from numerous investors. There are lot many Mutual Funds operating in India.
Who collects the money in Mutual Fund?
There must be someone who should be trusted, authorized & collect Money legally based on the Laws & Regulations of that country. These are called Asset Management Companies (AMCs), which collect money to invest in the schemes already specified.
In which Asset Class this Money is getting invested?
Usually, money is invested in the below Asset Class..
(I) Equity (Shares & Derivatives)
- Investments are made according to the Market Capitalization of the company viz.
- Large Cap Funds
- Small-Cap Funds
- Multi Cal Funds etc.
- Investments are made according to Sectors of the company viz.
- IT (Information Technology) Sectorial
- Infrastructure Sector
- Banking Sector
- Pharma Sector etc.
(II) Debt (Company Deposits, Commercial papers, Sovereign Bonds, etc.)
- Liquid Funds
- Ultra short-term Debt Funds etc.
(III) Gold
- Gold Fund invests primarily in Exchange Traded funds. One can buy this instead of buying Gold in physical form. Gold in physical form attracts the risk of Safe Storage & Wealth tax. Whereas holding Gold in D-mat form is very safe & will not attract Wealth Tax. Also, liquidate easily with a small brokerage charge.
(IV) Hybrid Fund : Uses a mix of Gold & Debt.
Investment in Debt & Gold is always less risky than in Equity.
Who are Fund Managers?
AMCs are investing the Money collected from numerous Investors in several schemes as explained above. To take care of this, the managers are appointed for each & every scheme. These managers of the scheme are called as Fund Managers. A Fund Manager can handle One or Multiple schemes. The funds they manage are multi-crores collected against the scheme.
Why invest in Mutual Fund?
One can invest in Equity, i.e. directly in Shares. But this involves a lot of study and the funds for investment in Shares. Eg. If someone wants to invest in a share of MRF, Eicher Motors which are trading around 53.5k and 17.5k respectively and require a lot of money to invest therein.
In Mutual Funds, Fund Managers invest the Money, collected in a Pool account to buy both the Shares.
The Fund is divided into the Units of small amounts & the Units are distributed to Fund investors. Also, the Fund Managers are having access to large market data, Analytical tools and also have qualified Research Analysts working for them for accurate decisions.
These are professional bodies (governed by SEBI) that manage funds in a professional way.
What is the Risk involved in Mutual Fund Investment?
Mutual Fund investment also is subject to market risk like of Equity market. Always it is not possible to time the market when you invest on your own. But, since Mutual Funds are the big corporate houses with all the latest tools, techniques & qualified staff available with them, they can time the market easily & minimize the risk. They keep their eye on what are the possible causes & concerns that make the market move up / down and invest accordingly, which is very difficult for an Individual.
What is Mutual Funds SIP?
It stands for Systematic Investment Plan (also called “Dollar Cost Averaging”).
An Investor invests money every month at a certain fixed amount. e.g. Rs. 1,000 or 3,000 or 5,000 per month in a Mutual Fund scheme selected by him. This always averages the investments by diluting the ups and downs in the market.
What is NAV?
NAV stands for Net Asset Value. The NAV is calculated by dividing the Market value of the Fund by the Number of Units in the Fund. The units allotted against the investment are based on NAV.
It is like a Share price in the Equity market.
If the NAV is of Rs. 10, for a SIP of Rs. 3,000/-, 300 units will get allotted to an investor.
If next month due to appreciation in the market the NAV increased to Rs. 12. Then the units allotted for a SIP of Rs. 3,000 will be of 250 units (i.e. 3000/12).
Therefore at the end of the 2nd month, an investor will be holding 300+250 = 550 units.
And to find out the value of the investment, the number of units will get multiplied by the then prevailing NAV. e.g. when the prevailing NAV is of Rs. 13.50 then the market value of the investment will be of Rs. 7,425 (550xRs.13.50).
