You have heard of mutual funds and you have heard that they are the right investments for almost any investor (Mutual Fund Sahi Hai). But what exactly are mutual funds and how do they work?
To many people, Mutual Funds can seem complicated or intimidating. However, we are going to try and simplify it for you at its very basic level. “A mutual fund is an investment security that enables investors to pool their money together into one professionally managed investment. Mutual funds can invest in stocks, bonds, cash or a combination of those assets. It is a trust that collects money from a number of investors who share a common investment objective, For e.g. (Investors who invest in Small Cap schemes of a given AMC generally have a common objective of wealth creation over a long term horizon by assuming higher risk).
The money thus pooled in by scores of investors is then invested in equities, bonds, money market instruments and/or other securities. Each investor owns units, which represent a portion of the holdings of the fund. The income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value or NAV”.
Mutual funds are the most popular investment types for the everyday investor. Why? Because they are simple investments to understand.