A Beginner’s Guide to Mutual Funds: What Are They and Why Should You Care?
Mutual funds are creating quite a buzz these days. However, many people still aren’t sure about what a mutual fund is or why it deserves their attention. Let’s take a few minutes to explore these two critical questions.
What Is a Mutual Fund?
To understand mutual funds, let’s break down the term:
Mutual:
Shared or held collectively by multiple individuals.
Fund:
A pool of resources, in this case, money.
So, a mutual fund is essentially a collection of money contributed by various individuals, collectively invested to achieve financial growth.
How Does a Mutual Fund Work?
You, your friends, and their families all want to invest in stocks or bonds.
However, no one knows how to proceed, lacks the technical knowledge, or simply doesn’t have the time to manage investments.
Enter a financial expert—let’s call him FM.
FM, or Fund Manager, specializes in investments. He understands market trends, knows when and where to invest, and has the expertise to manage your pooled money.
In exchange for a small fee, he invests your money wisely. Any profits or losses are distributed among investors proportionally.
The Fund Manager plays a pivotal role in mutual funds, making critical decisions to ensure steady growth of the pooled investments.
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Varieties of Fund Managers and Funds
Not all fund managers are the same:
Some excel at picking high-growth stocks.
Others specialize in bonds or debt instruments.
Some identify arbitrage opportunities in the market.
Because of this diversity, mutual funds are categorized into various types, each catering to different investment goals and risk appetites. Stay tuned for our upcoming video on mutual fund categories.
Understanding NAV (Net Asset Value)
One of the most important terms in mutual fund investments is NAV, or Net Asset Value.
Think of NAV as the price of a single mutual fund unit.
For example, if you invest ₹10,000 in Mutual Fund A with an NAV of ₹100, you purchase 100 units.
As the value of the fund's underlying stocks or bonds increases or decreases, the NAV fluctuates.
Example:
Suppose the NAV rises to ₹120 after a year. Your 100 units are now worth ₹12,000, giving you a 20% return on your investment.
Fun fact: You can also buy partial units. For instance, if the NAV of Mutual Fund B is ₹2,000 and you invest ₹1,000, you’ll own 0.5 units.
Why Should Mutual Funds Interest You?
Mutual funds have been among the top wealth creators since their popularity surged in the 1990s.
Here’s a real-world example:
Franklin India Prima Fund, launched in December 1993, has consistently delivered impressive returns.
If someone had invested ₹1,000 monthly in this fund for 25 years, their total investment of ₹3 lakh would now be worth an astonishing ₹75 lakh!
This demonstrates the power of mutual funds in building wealth over time, thanks to the principles of compounding and professional fund management.
- Key Benefits of Investing in Mutual Funds
- Diversification: Your money is spread across multiple investments, reducing risk.
- Professional Management: Expert fund managers handle your investments.
- Liquidity: Easy to buy and sell units as needed.
- Start Your Mutual Fund Journey Today
Mutual funds are a convenient and effective way to grow your wealth over time. Whether you're new to investing or a seasoned pro, they offer flexibility, diversification, and expert management to meet your financial goals.
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