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What is a Mutual Fund?

Introduction

A mutual fund is a professionally managed investment vehicle that pools money from multiple investors to buy a diversified portfolio of securities such as stocks, bonds, money market instruments, and other assets.

How Mutual Funds Work

When you invest in a mutual fund, you’re essentially buying units of that fund. Each unit represents a portion of the fund’s holdings. A fund manager oversees the fund’s portfolio, making investment decisions based on the fund’s stated objective. Returns are generated through capital gains (price increase of securities) and dividends or interest received from the assets.

Key Participants in a Mutual Fund

  • Sponsor: Promotes the fund and sets it up with SEBI.
  • Asset Management Company (AMC): Manages the fund professionally.
  • Fund Manager: Decides where to invest based on the fund’s goals.
  • Trustee: Ensures the fund is managed in compliance with SEBI rules.
  • Custodian: Holds and safeguards the fund’s assets.

Advantages of Mutual Funds

  • Diversification: Spreads investments across various assets, reducing risk.
  • Professional Management: Experts manage your money.
  • Liquidity: Easy to enter and exit.
  • Affordability: Start investing with as little as ₹500 via SIP.
  • Transparency: Regular NAV updates, fund factsheets, SEBI compliance.

Types of Mutual Funds (Overview)

Broadly, mutual funds are categorized based on:

  • Structure: Open-ended, Closed-ended, Interval funds.
  • Asset Class: Equity, Debt, Hybrid, Index Funds, etc.
  • Investment Objective: Growth, Income, Tax-saving (like ELSS).

NAV (Net Asset Value)

NAV is the per-unit value of a mutual fund. It is calculated as: NAV = (Total Assets - Total Liabilities) / Number of Units Outstanding NAV changes daily based on the market value of the underlying assets.

Real-Life Example

Suppose 1,000 investors each invest ₹1,000 into a mutual fund. The total pool of ₹10,00,000 is used to buy a mix of 20 stocks. You own units proportional to your investment. When these stocks perform well, the fund’s value increases, and so does your NAV and investment value.

Key Terms to Remember

  • AMC (Asset Management Company)
  • NAV (Net Asset Value)
  • AUM (Assets Under Management)
  • SIP (Systematic Investment Plan)
  • ELSS (Equity Linked Savings Scheme)

Conclusion

Mutual funds are a great tool for retail investors to gain access to professionally managed, diversified portfolios without requiring deep market knowledge. As you explore deeper lessons, you’ll learn how to select, analyze, and manage mutual fund investments.