A mutual fund is an investment pool that is professionally managed by a fund manager.
It is a trust that pools funds from several individuals with similar investing goals and uses those funds to purchase stocks, bonds, money market instruments, and/or other securities. And by computing a scheme’s “Net Asset Value,” or NAV, the income / profits from this collective investment are dispersed proportionately among the investors following the deduction of any appropriate costs and taxes. A mutual fund is, in essence, the money that many people have contributed together.
Here’s a quick explanation of what a mutual fund unit is.
Assume that a box of twelve chocolates costs ₹40. Four friends choose to purchase the same item, but the merchant only sells by the box, and they only have ₹10 between them. The pals then resolve to purchase the box of 12 chocolates by pooling their ₹10 each. They now each get three chocolates, or three units, if you were to compare it to mutual funds, based on their participation.
And how is the price of a single unit determined? Just divide the entire sum by the total quantity of chocolates: 40/12 is 3.33.
Thus, the first investment of ₹10 would result from multiplying the number of units (3) by the cost per unit (3.33).
As a result, every friend becomes a unit holder in the chocolate box that they all jointly own, making each individual a partial owner of the box.
Let’s now explore the meaning of “Net Asset Value,” or NAV. A mutual fund unit has Net Asset Value per Unit, just like an equity share does. The net asset value (NAV) is the total market worth, less allowable fees and charges, of all the bonds, shares, and other assets that a fund holds on any given day. The market value of every Unit in a mutual fund scheme on a particular day, net of all costs and liabilities plus income received, is expressed as NAV per Unit and is calculated by dividing the total number of outstanding Units in the scheme.
Mutual funds are the best option for investors who wish to increase their wealth but lack the capital to do it or the time or desire to do market research. Professional fund managers invest the money received in mutual funds in accordance with the declared goal of the programme. The fund house takes a tiny fee in exchange, which is subtracted from the investment. The Securities and Exchange Board of India (SEBI) has set limits on the fees that mutual funds are allowed to charge.
India boasts one of the highest rates of savings in the world. Indian investors must now consider mutual funds instead of the conventionally preferred bank FDs and gold due to their inclination for wealth growth. Nevertheless, mutual funds are becoming a less popular investing option due to ignorance.
Mutual funds provide a variety of investing options for a range of financial situations. The goods needed to accomplish different investing goals—such as paying for post-retirement expenses, funding a child’s education or marriage, buying a home, etc.—also differ. The mutual fund sector in India provides a wide range of plans to suit the demands of different kinds of investors.
A great way for regular investors to take advantage of the capital market uptrends is through mutual funds. Mutual fund investing has advantages, but choosing the correct fund can be difficult. As a result, investors should thoroughly investigate the fund, weigh the risk-return trade-off, and evaluate their time horizon before making a decision. They can also speak with a qualified financial adviser. Furthermore, investors should diversify among a variety of fund categories, such as equities, debt, and gold, to optimise their returns on mutual fund investments.
All types of investors can make individual investments in the securities market, but mutual funds are preferable since they offer a bundle of benefits.
A PLETHORA OF SCHEMES TO CHOOSE FROM
Because they provide a wide range of investing alternatives, mutual funds are popular all around the world. Every profile and preference is catered to.
Chart 1: Risk/Return trade-off by mutual fund category
FORM OF COMPANY FUND SCHEMES
Mutual fund schemes may be managed actively or passively, and they may be “open ended” or “close ended.”
FUNDS, BOTH CLOSED-END AND OPEN-END
Open-end funds are mutual fund schemes that are accessible for subscription and redemption on a daily basis throughout the year. They are similar to savings bank accounts, where deposits and withdrawals can be made at any time of the day. An open-ended scheme has no maturity date and is eternal.
Similar to a fixed term deposit, a closed-end fund has a defined tenor and fixed maturity date and is only available for subscription during the first offer period. Closed-end fund units may only be redeemed at maturity; early redemption is not allowed. Therefore, following the new fund offer, the Units of a closed-end fund are required to be listed on a stock exchange and traded similarly to other equities. This allows investors who wish to exit the scheme prior to its maturity to sell their Units on the exchange.
FUNDS THAT ARE ACTIVELY AND PASSIVELY MANAGED
An actively managed fund is a mutual fund scheme where the fund manager uses analytical research to support his or her professional judgement in making decisions about which stocks to buy, sell, or hold. This involves “actively” managing the fund’s portfolio and regularly monitoring it. The goal of an active fund manager is to outperform the scheme’s benchmark and provide maximum returns.
In contrast, a passively managed fund replicates or tracks the scheme’s benchmark index exactly in the same proportion as a market index. In other words, the fund manager in a passive fund remains inactive or passive because they do not use their judgement or discretion to choose which stocks to buy, sell, or hold. All exchange-traded funds and index funds are examples of index funds. The goal of a passive fund management is not to outperform the scheme’s benchmark index, but rather to duplicate the scheme’s benchmark index and produce returns that are equal to or greater than the index.
