What Is Mutual Fund?

- August 10, 2020

A mutual fund is a type of financial tool made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.

Mutual funds are operated by professional managers appointed by Asset Management Company (AMC), who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors.

What Does Mutual Fund means

Mutual funds pool money from the investing public and use that money to buy other securities, usually stocks and bonds. The value of the mutual fund company depends on the performance of the securities it decides to buy. So, when you buy a unit or share of a mutual fund, you are buying a part of the portfolio's value.

Investing in a share of a mutual fund is different from investing in shares of stock. Unlike stock, mutual fund shares do not give its holders any voting rights. A share of a mutual fund represents investments in many different stocks (or other securities) instead of just one holding.

That's why the price of a mutual fund share is referred to as the net asset value (NAV) per share, sometimes expressed as NAVPS. A fund's NAV is ontained by dividing the total value of the securities in the portfolio by the total amount of shares outstanding.

Outstanding shares are those held by all shareholders, institutional investors, and company officers or insiders. Mutual fund shares can typically be purchased or redeemed as needed at the fund's current NAV, which—unlike a stock price—doesn't fluctuate during market hours, but it is settled at the end of each trading day. the price of a mutual fund is also updated when the NAVPS is settled.

The average mutual fund holds over a hundred different securities, which means mutual fund shareholders gain important diversification at a low price. Consider an investor who buys only Google stock before the company has a bad quarter. He stands to lose a great deal of value because all of his money is tied to one company. On the other hand, a different investor may buy shares of a mutual fund that happens to own some Google stock. When Google has a bad quarter, she loses significantly less because Google is just a small part of the fund's portfolio.

How Mutual Funds Work

A mutual fund is both an investment and an actual company. This dual nature may seem strange, but it is no different from how a share of INFY is a representation of Infosys Limited. When an investor buys Infosys stock, it means he/she wons a part of that company and itd assets. in the same way, a mutual fund investor is buying part of (ownership) of the mutual fund company and its assets. The difference is that Infosys limited is in the business of making technological innovative softwares, while a mutual fund company is in the business of making investments.

Investors typically earn a return from a mutual fund in three ways:

Income is earned from dividends on stocks and interest on bonds held in the fund's portfolio.
If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.
If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit in the market.

What is NAV (Net asset Value)

The net asset value or NAV of a mutual fund is the price you pay for a unit of a scheme.

For example, if the NAV of a scheme is Rs 15, you will have to pay Rs 15 to buy a unit of the scheme.The NAV of the scheme is the total value of its investments minus liabilities

There are many mutual fund AMC’s available in india, some of the top AMC’s are listed below