Mutual fund is an investment which collects money from multiple small investors and invests the corpus in various places for returns. Mutual funds invest into stocks, bonds, government securities, fixed deposits and various other avenues. Mutual Fund management companies are known as Asset Management Companies (AMCs), the corpus is known as Asset Under Management (AUM) and the experts who manage the pool of funds are known as Fund Manager (FM). As the funds are managed by experts, one need not worry on a day to day basis of their investments. By investing your small money in a particular mutual fund, you can hold fraction of a huge portfolio which reduces your risk. There are various types of Mutual Funds that you can select basis your investment need and risk appetite.
How it works in Mutual Funds?
Every mutual fund scheme has an objective of where they will invest and what they will do. Once objective and strategy is fixed, the scheme is launched in the market via NFO (New Fund Offer) for investor to buy/invest. The scheme sticks to the objective and cannot deviate from it. Post NFO, new investors may join or existing investors may exit basis their choice. The scheme/fund allots units at a particular NAV to each investor (that means the corpus is divided between investors at their purchase price, your investment = units that you hold X present NAV). The fund manager keeps some money as cash to meet redemptions of exiting investors.
Net Asset Value (NAV)
NAV is the unit price of a mutual fund scheme. Mutual funds are bought or sold on the basis of NAV. If the market goes up, the portfolio/corpus of the fund increases and hence NAV goes up and if market goes down the NAV goes down. Mutual Funds do not manage your funds for free, there are charges which are call fund management fees. NAV is calculated post debiting all the statutory fees and charges.
Returns
When the scheme make money from the investments, it either distributes or reinvests back into the fund. Dividend schemes distribute the returns by way of dividend whereas growth fund reinvested in the fund. People keep joining at various NAVs and also exit at different NAVs.
Redemption
You can sell/ redeem your investments basis the schemes terms and conditions. Your redemption value will be = (units that you hold X present NAV) – statutory charges.
How to invest?
You can apply via physically form or online. You can invest in Mutual Funds in physical format (thought any Mutual Fund distributor / Bank etc.) or invest using your DMAT via your broker. DMAT is not necessary for investing to Mutual Funds. The units will be allotted in T+2 working days.
Mutual funds are good investments for long term wealth creation as they give better returns over traditional investments. However, these are risk investments and perform basis market fluctuations.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully. The NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market including the fluctuations in the interest rates. The past performance of the mutual funds is not necessarily indicative of future performance of the schemes. The Mutual Fund is not guaranteeing or assuring any dividend under any of the schemes and the same is subject to the availability and adequacy of distributable surplus. Investors are requested to review the prospectus carefully and obtain expert professional advice with regard to specific legal, tax and financial implications of the investment/participation in the scheme.