What Are Mutual Funds And How Does Mutual Fund Work?
21 Apr 2017
Prasanth Menon
New Page 1
Mutual fund is a mechanism for pooling the resources by issuing units
to the investors and investing funds in securities in accordance with objectives as
disclosed in offer document. A professional Fund Manager manages the pool of money under a
Mutual Fund.
A Fund Manager who manages a particular mutual fund invests in
securities which are spread across a gamut of cross-section of industries and sectors.
This diversification reduces overall risk for an individual investor who opts for a mutual
fund. The risk reduces as all stocks might not move in the same direction at a particular
time in same proportion.
Investors are allotted units in a Mutual fund with regards to the
quantum of money invested by them. Mutual fund investors are also known as unit holders.
In this scheme of dealings, investors in proportion to their investments share the profits
or losses.
The mutual funds normally come out with a number of schemes with
different investment objectives which are launched from time to time. A mutual fund is
required to be registered with Securities and Exchange Board of India (SEBI), which
regulates securities markets before it can collect funds from the public.
Understanding NAV
Net Asset Value (NAV) signifies the performance of a particular scheme
of a mutual fund. In generic terms, NAV is the market value of the securities held by the
scheme. One has to remember that, market value of securities changes every day, thus NAV
of a scheme also varies on a day-to-day basis.
The NAV per unit is the market value of securities of a scheme divided
by the total number of units of the scheme on any particular date. For example, if the
market value of securities of a mutual fund scheme is Rs 200 lakh and the mutual fund has
issued 10 lakh units of Rs 10 each to the investors, then the NAV per unit of the fund is
Rs 20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or
weekly - depending on the type of scheme.
Mutual Fund schemes
Mutual Fund schemes can be categorised into open-ended scheme or
close-ended scheme depending on its maturity period.
Different types of mutual funds
