A mutual fund is a collection of investments that are professionally managed by a Fund Manager.
It is a trust that accumulates funds from a group of people who have similar financial goals and invests them in stocks, bonds, money market instruments, and/or other securities. The income / profits created by this collective investment are distributed proportionately among the participants after deducting relevant expenses and taxes by estimating a scheme’s “Net Asset Value” or NAV. A Mutual Fund is just a collection of money given by a big number of people.
Here’s an easy way to grasp the notion of a Mutual Fund Unit.
Let us suppose a box of 12 chocolates costs $40. Four friends decide to purchase the same item, but they only have ten dollars each, and the shopkeeper only sells by the box. So the pals decide to pool their money and buy the box of 12 chocolates for $10. They now receive three chocolates or three mutual fund units for their participation.
And how can you figure out how much one unit costs? Simply multiply the total sum by the number of chocolates: 40/12 = 3.33.
So, multiplying the number of units (3) by the cost per unit (3.33), you obtain a total initial investment of $10.
As a result, each friend is a unit holder in the box of chocolates that they collectively own, and each person is a part owner of the box.
Next, let us define “Net Asset Value” or NAV. A mutual fund unit has a Net Asset Value per Unit, much like an equity share. The NAV is the combined market value of a fund’s shares, bonds, and securities on any given day (as lowered by allowable expenses and charges). NAV per Unit is the market worth of all Units in a mutual fund scheme on a particular day, net of all expenses and liabilities plus income accrued, divided by the scheme’s outstanding number of Units.
Mutual funds are suitable for people who do not have significant quantities to invest or do not have the interest or time to research the market but want to develop their money. Professional fund managers invest the money collected in mutual funds in accordance with the scheme’s declared aim. In exchange, the fund company takes a small cut of the investment. Mutual fund fees are regulated and subject to certain limits set by the Securities and Exchange Board of India (SEBI).
India has one of the highest rates of worldwide saving. Because of this proclivity for wealth development, Indian investors must go beyond the traditionally recommended bank FDs and gold to mutual funds. Mutual funds are now a less popular investing option due to ignorance, nevertheless.
Mutual funds offer a wide range of investment possibilities across the financial spectrum. The items needed to reach these goals vary, just as investing goals do—post-retirement expenses, funds for children’s education or marriage, house purchase, etc. The Indian mutual fund industry offers a diverse range of plans to fulfill the needs of various investors.
Through mutual funds, retail investors have a wonderful potential to profit from the capital markets’ increasing trends. Mutual fund investing can be beneficial, but selecting the right fund can be tricky. As a result, investors should undertake extensive due diligence on the fund, analyze the risk-return trade-off, and consider their time horizon before investing, or seek the assistance of a professional investment adviser. Diversification across different fund types, such as equity, debt, and gold, is also essential for investors to get the most out of mutual fund investments.
While investors of all types can invest in the securities market on their own, a mutual fund is a preferable option simply because all advantages are included in one price.