Investors pool in money to form a mutual fund (collectively pooled investment). An Asset Management Company (AMC) is appointed to manage the money according to various goals. The AMC’s have Professional people who have good knowledge about the market and understand how it functions. They manage the mutual fund on behalf of the investors. They charge a certain percentage of the fee for it. There are trustee’s of mutual funds who keep monitoring the AMC’s activities , ensuring that the investor’s interests are protected.
The AMC’s take investors money and invest in stocks and fixed income investments. They diversify the investment into Equity fund, debt fund, and hybrid funds. The stock market and bond market have ups and downs, thus involving risk. To reduce this risk, the AMC for equity investment they just don’t invest in one but several industries. (For example FMCG, Pharma, IT, power, steel) This ensures if even one stock doesn’t perform well, the better performing stock balances the loss. In debt investments, they invest in various debt securities to spread the risk. Debt fund when teamed with equity investing in a diverse industry makes a great investment combo. It has the growth of equity investment and stability of debt funds. All these factors make mutual fund less risky for a common man instead of investing in equity and debt directly and more beneficial.
What happens after you invest in mutual funds?
Once the money is invested in mutual funds, investors are then given units which represent the money invested in the fund. These units are easily redeemable that is investors can get back their money and they are generally mentioned along with the NAV (Net Asset Value). NAV of a mutual fund represents the value of one unit of investment after all fund expenses and management fees is paid. So if the investor needs to check the market value of your investment, he can do so by multiplying the NAV * Number of units an investor holds.
Investment can be made in a mutual fund in a lump sum manner or through smaller bits, by making Systematic investment Plans. This makes mutual fund accessible for anyone that is salaried, entrepreneurs, businessman, etc..
How to measure the performance of your investment?
Every fund has a fixed benchmark to measure their performance. This benchmark could be part of nifty or Sensex. To judge the performance of a fund, check how the fund is performing against the benchmark set for its measurement. The fund manager’s task is to analyze the market and cross the set benchmark for the fund. They get paid a particular amount of fee for this service provided by them. As whole mutual funds can offer many benefits like:
- Professional management
- Low charges
Mutual funds have exit loads. If an investor leaves within a certain period, he will have to pay a certain percentage of his investment, because, the investor intends to leave before the stipulated period. This is done to stop churning. That is, people investing and taking out often. It changes according to the period. Suppose the investor exits before one month, then 1%, if he exists before 1 year 2% etc.
Some amount of commission is also paid to the distributors who help the investors in facilitating the transaction like filling up the form and taking it to the registrars etc. This commission is included in the management fees in the recent times.
Mutual funds are subjected to market risk read all the offer documents properly before accepting but the most beneficial for risk- averse investors.