What is Mutual fund?

Wanna know the concept of mutual funds? You are on right page.In this article we will give you the rundown on Mutual Funds. We will try to understand this term in a very simple language and avoiding any Complex terminology.

Source-Economic Times

Intro

In this today's world everyone wants a little more,either by some extra income or  receiving quality returns by investing his savings in profitable schemes or Investments. That is why people either deposit the money in saving accounts,fixed accounts etc or invest in Real Estate,gold & jewellery,share market etch. There is another place to invest which is 'Mutual Fund'. Now mutual funds are in trend as are proving to be very fruitful for the investors to invest.But why? This is also type of platform where in investment is done to get more return on their money in comparison  to other platforms.

What is a mutual fund ??

For the ease of understanding mutual fund let's assume an example.Suppose a renowned company issues its shares in the market.You check the possibility of buying. The required amount for buying share is 5000(say) but you don't have that much money you have only 1000 rupees to invest. Then ,how the share is going to be purchased. 

Here comes the concept of mutual fund. Persons like you will come together with you and collect a huge amount proportionately. Now this money is enough to buy shares of the company. So the simple definition of mutual fund becomes  "A mutual fund is an investment vehicle formed when a fund house called {Asset Management Company(AMC)} pools the investments from several individuals (usually refers to investors) to accomplish the common objectives". Means,when you buy a mutual fund you are actually pooling your this Money along with other investors like you to achieve the objective that is same for you all.

How mutual funds work?

The entire process from Investment to Return completes in four stages which are given below

1.NFO stage

New Fund Offer, this is launched by Asset Management Company.The person seeking for investing in mutual funds contacts the company and completes the E-KYC formalities to become eligible for investing his money.The investor subscribes to this mutual fund scheme for a certain time and makes his money ready for further work.

2.Pooling stage

An interested investor invests his money in the chosen scheme. Such this investor many individuals also give their money to get profit on it. Means,investors invest their money from savings in this stage.Mutual funds allow small investors to invest money in large portfolios which solely they cannot.

3.Investment in different ways

Asset Management Company has a highly qualified,skilled Fund Manager(FM) who manages your money. Now the sole responsibility for this pooled money is of the fund manager.He checks the possibilities in the places like real estate,share market or any sectors like Pharma,FMCG, Infotech etc. of Investments and invest this money in any of the best options.

4.Fund Returns

Once the fund makes returns,these are distributed in the form of dividends among the investors.The fund manager takes only around 2%(may vary to some points) of the profit as his fees. Usually an investment in mutual funds give at least 10-14% of profit. Even in very worst scheme an investor gets usually 4% at least as profit. 

Source-Orowealth

Advantages and Disadvantages of Mutual Funds 

Mutual Funds offers both advantages and disadvantages which you should thoroughly analyse before choosing to buy. Some of these are described below

Advantages of mutual funds

1-Your money is safe-Fund houses are under the purview of statutory government bodies {in India these bodies are SEBI(Security and Exchange Board of India) and AMFI(Association of Mutual Funds in India)} .So fund houses can never make off with your money.

2.As easy as winking- It is very simple way to get more returns in comparison to other investment platforms like share market,real estate etc. which are full of hassles.

3.Liquidity-When you opt for open ended Mutual Fund it allows you to sell your open ended Mutual Fund units when the stock market is high and can earn profit. 

Disadvantages of mutual funds

1.Fluctuation in Returns-Mutual Funds do not promise you the fixed guaranteed returns that you will get this amount in every situation. So be prepared for any depreciation like eventualities in advance.

2.No control over your money-You cannot control your money as it is managed by the fund manager when once gets invested in the fund house.

4.Cost-Mutual Funds charge amount for managing the funds,distribution cost etc. Even when you exit from the mutual fund you are charged with a cost called exit load. 

Types of mutual funds.

There are many types of mutual funds but mainly are only four types,from which rest of the the types are born.

1.Equity funds or Growth Funds-These are for those who can take higher risk for higher return.In this, the investment for long time period is needed investments are done in major portions in stocks of Companies.

2.Debt funds- These are for those who do not want to take risk for their money and are fully satisfied with a little profit only. In these funds investments are required for both long term and short term period. investments are done in major portions in fund income such as Government Bonds Corporate bonds and fix deposits etc.

3.Hybrid funds or Balanced funds-These come in between equity fund and debt fund because these are for those who can take risk at moderate level and these give the return of moderate level also.These have both short term and long time investment factors.Investments in major portions are in mix of equity and debt of funds.example 60% of equity fund + 40% of debts or vice- Versa.

4.Money market funds-These are very low risk funds giving you low return obviously. Investment time provided is short. Investments done in major portions in various instruments like commercial papers, treasury bills and certificates of deposit etc.