Mutual Funds

What are Mutual Funds?
A mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested in different types of securities. The income earned through these investments and the capital appreciation realized by the scheme are shared by the unit holders in proportion to the number of units held by them.
Why do Mutual Funds come out with different schemes?
A Mutual Fund may not, through just one portfolio, be able to meet the investment objectives of all their Unit holders. Some Unit holders may want to invest in risk-bearing securities such as equity and some others may want to invest in safer securities such as bonds or government securities. Hence, the Mutual Fund comes out with different schemes, each with a different investment objective.
What are the benefits of investing in a mutual fund?
The benefits of investing in mutual funds are as follows -
Access to professional money managers. Buying units of a mutual fund gives you access to the trading decisions of a team of analysts and fund manager. The fund manager continuously takes care of investment to make sure that investment remains consistent with the funds investment objective Diversification. Mutual funds aim to reduce the volatility of returns through diversification by investing in a number of companies across a broad section of industries and sectors. This reduces the risk because of the spread. Thus with a small investible surplus also you can achieve a diversification which would not have been possible on your own.
How is investment in a Mutual Fund Different from a Bank Deposit?
When you deposit money with the bank, the bank promises to pay you a certain rate of interest for the period you specify. On the date of maturity, the bank is supposed to return the principal amount and interest to you. Whereas, in a mutual fund, the money you invest, is in turn invested by the manager, on your behalf, as per the investment strategy specified for the scheme. The profit, if any, less expenses of the manager, is reflected in the NAV or distributed as income. Likewise, loss, if any, with the expenses, is to be borne by you.
What is NAV and how is it calculated? Net Asset value is the actual value of units of the scheme on a given business day. NAV reflects the market value of the fund's investments on that day after accounting for all the expenses.
Does the NAV of Rs. 10 indicate that the fund units are cheaper? It is a wrong perception that if the mutual fund is offering units at Rs. 10 it is cheaper. Yes, you would at this price get more number of units than you would get if it were priced higher with the same investible surplus. But the number of units you get is a function of a scheme's NAV, and not an indicator of how cheap a scheme is. The scheme's NAV is the market value of its portfolio holdings at a given point of time and its performance is what determines your returns.
What should one keep in mind while choosing a good mutual fund? Each individual has different financial goals, based on lifestyle, financial independence, and family commitments, level of incomes and expenses and many other factors. Thus before investing your money you need to analyze the following factors:
Define the Investment objective.
Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments, and level of income and expenses among many other factors. Therefore, the first step should be to assess your needs. You can begin by defining the investment objectives, which could be regular income, buying a home or finance a wedding or educate your children or a combination of all these needs. Also your risk appetite of the investor and cash flow requirements need to be taken into account.