Wednesday, April 24

What is a Mutual Fund and How Does It Work?

Money is one thing that everyone wants to grab hold of but seems to slip away with every passing moment. While earning is significant for sustenance, investment is important for the future. No one stays employed or in working condition for the entire life. This makes investments a must during the working years of one’s life.

Mutual funds surely make for one of the best laterals to put your hard-earned money in. However, being one of the financial market essentials, not everyone comprehends all about it. Here is a brief about what mutual funds are and how they work to secure your future. Read on to know what is a mutual fund, SIP, NAV all about.

Mutual Funds-An Overview

Mutual funds are a special way of investment that offers substantial returns after a certain time. According to the market rules, the longer the period of investment, the higher becomes the amount. However, the market speculations and hazards are also other determinants of the maturity value of the mutual funds. Since mutual fund investments rely on market volatility, one must know in detail before investing to be sure of the returns.

Understanding Mutual Funds

If growing your money is what you are looking at, the stock market is the best place for you to invest. However, mutual funds are the easiest avenues to invest your money in the stock market. Most people possess little to no knowledge of the stock market. It is an integral part of the financial domain and operates based on market speculation forces.

Once you decide to opt for a mutual fund to invest your money, a speculative market expert becomes your fund manager. Your manager remains responsible for handling all your investments that make your portfolio. With the right guidance of the expert, your investment funds generally get invested meticulously. With a market expert by your side, most of your investments yield higher returns in the future, which make mutual funds one of the most popular choices amongst the stock market channels.

SIP & NAV

SIP and NAV are the two most widely used terms in the mutual fund domain. If you want to know about mutual funds, knowledge about these terms is essential. While SIP stands for Systematic Investment Plan, NAV stands for Net Asset Value.

  • SIP: SIP keeps the investment planning streamlined. It offers a strategic plan for regular mutual fund investment. With SIP, your investment portfolio remains safe, secure, and return yielding.
  • NAV: NAV refers to the price at which an investor can buy or sell a mutual fund. In short, NAV is the current value of the mutual fund.

Mutual Fund Investment-Types Of Funds

Mutual funds can be of several types. Here are some of the commonly used varieties of mutual funds you need to know about. It is the underlying asset that classifies mutual funds into the following categories.

Equity Mutual Funds

This is a typical variety of mutual fund that utilizes all the investment funds in the stock market. Based on the size of the enterprises or industries, there are three types of equity mutual funds in the market. Large Cap Mutual Funds focus on investing in large scale operators.

Some investments also focus on mid-range players in the market. These are the Mid Cap Mutual Funds. And, the Small Cap Mutual Funds invest the funds in small companies and enterprises.

You can surely choose which one you would like to opt for. Your fund manager will arrange your investments accordingly. It is your risk appetite and market analysis that often influence your choice of mutual fund investments. However, your fund manager can also offer you useful tips while choosing the best options.

The equity mutual funds can also be of a sectoral or thematic pattern. Suppose you wish to invest your hard-earned money in a specific industry like the pharmaceutical, IT, or automobile. In this case, you pick a specific sector for investment. The choice of the sector surely varies from investor to investor, depending on their ability to take a risk.

The risk averters prefer industries least responsive to market fluctuations. On the flip side, the risk-takers choose industries with a high response rate to market speculations to reap the higher-end curve benefits.

No matter what the types of funds are, returns primarily depend on the investor’s choice and the dynamism of the market that determines the profit shares.

Debt Mutual Funds

The quality of the borrower and the lending tenure are the two aspects on which the market defines Debt Mutual Funds. Short-duration Mutual Finds and the Gilt Mutual Funds are the two examples of this variety of investment funds. If a short-term investment in a debt instrument is on your mind, the former option is the best.

For security and low risk, the latter variety is surely a more suitable one. Liquid funds, credit risk fund, and fixed maturity plans are some of the other Debt Mutual Funds varieties. For short-term investments, ultra-short duration funds and overnight funds can be ideal choices. For long term investments, long-duration funds, dynamic bond funds are a better pick.

The choice depends completely on the investor. The finance market has all the possible varieties available for you. You just have to pick the one that best fits your requirements.

Hybrid Mutual Funds

The term hybrid suggests a combination of two or more varieties. Similarly, both equity and debt mutual funds constitute the Hybrid Mutual Funds. However, the proportion of the two in the Hybrid Mutual Fund leads to further classification.

An equity-oriented hybrid fund involves more of the equity mutual fund share than the other component. For debt oriented mutual funds, the share of debt mutual funds in the hybrid mutual fund remains higher. A balanced mutual fund has both the components in equal proportion. Monthly income plans and arbitrage funds are two more varieties of Hybrid Mutual Funds available in the market.

Insights on Mutual Funds

Types of funds are available in abundance in the market. The investor and often the experts decide the particular variety of mutual funds to invest in. Some of the mutual fund investments also offer tax benefits that add to the usefulness of these.

Mutual Funds-A Beneficial Investment Fund

Mutual funds are one of the most popular investment choices. The following are some of the benefits you can look forward to by investing your savings in mutual funds.

  • Mutual funds offer a portfolio investment diversion opportunity that minimizes the risk
  • Dividend earning from the mutual fund creates further capital for reinvestment
  • Easy trading and minimum price fluctuation is what mutual fund investments offer
  • Mutual funds are an excellent investment choice for managing investment portfolio as it balances the net risk with net returns
  • Mutual funds are available in multiple varieties which meets the different investment requirements of the investors

How Mutual Funds Work To Offer Returns

There is no doubt regarding the fact that mutual funds offer substantial returns. No matter the amount of investment funds, returns remain one of the most important motivators for future investment.

Investors invest their savings to buy stocks in the form of mutual funds. After the investment, fund managers invest the money in the market in different domains. If your fund manager is an equity fund manager, he/she will purchase company shares. On the other hand, debt mutual fund managers opt for company deposits or government bonds.

If the investments work in the desired way, the NAV of the mutual funds changes while the number of the unit remains the same. Hence, the total value realized after selling those units becomes higher than their purchase price. Higher selling value concerning the purchase value is nothing but a straight profit in your pocket.

For example, if the NAV of a mutual fund is Rs. 30, for 100 units your investment amount would be Rs. 3000. If the market responds as par to the speculation of the fund manager, the NAV would appreciate a little. If the new enhanced NAV is Rs. 32, you get Rs. 3200 for 100 units. Therefore by selling 100 units of the mutual fund, you gain Rs. 200.

However, this revaluation of the mutual fund value depends on several market factors that keep changing. Since mutual funds are subject to market risk, portfolio management is a must for realizing steady profits. Also, risks are an integral factor for mutual funds. Higher risks often attract more profits.

Mutual funds can be a strong instrument for securing the future if the fund manager undergoes the necessary market research. With plenty of laterals and schemes available for mutual funds, investors can choose their investment options freely. Use the mutual fund investment tool carefully to grow your money multi-folds.

The investment horizon and objective should be clear while choosing any investment plan. Keep track of the market fluctuations and trends to ensure minimum risk. Any investment is subject to risk, and mutual funds are no exception. But, focusing on the returns might offer you a better and holistic investment decision at any time. Now that you know what is a mutual fund, SIP, NAV, feel free to plan your portfolio.

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