What are Mutual Funds

The most popular thing in the financial sector now a days are MF (mutual funds). But most people are confused of this instrument. To understand What are Mutual Funds , one needs to understand:

- Company : Company is a voluntary association of persons formed for the purpose of doing business having a distinct name and limited liability. These company needs to be registered under The Companies Act, 1956, However, company is not a citizen so as to claim fundamental rights granted to citizens.

- Shares : To put in simple terms , its a share in a company. So it can be a very minuscule part of ownership in some company, For Example, if some one has 100 shares of Rs. 100 each for Company XYZ , it means that he has invested that much money in that company and is owner for that much part. Commonly called "stocks" and "equities."

As we have got some understanding of what are these terms. we can proceed further.

Now anyone who has good knowledge of Stock markets, with good knowledge of analysing the company performance, buying and selling of shares , timing the market, etc can directly buy and sell shares and do the investment directly in stock market.

But there are people who have no good understanding of these things and they can't take good decisions themselves, For them MF comes into picture.

So MF is a financial instrument that allows a group of people to pool their money to build a huge corpus and then this money is invested by group of people (referred as FUND MANAGERS) who are investment experts, have deep understanding of investing in stock market and overall financial markets.

All the mutual Funds have there Units just like "shares" in Comapany . So if some one wants to invest Rs 10,000 in ABC MF and price for a unit is Rs. 10 , he gets 1000 units of ABC MF , and over a period of time as the MF investment grows, the unit price also grows with almost same ratio.

The price of these units are referred as NAV (Net Asset Value) .

When a new MF launches , its called NFO (New Fund Offer , just lilke IPO in-case of new Company's Share issue to public)

So for example the total corpus of the MF on 1/1/2007 was Rs 100,000,000 and per unit price was Rs 10 . and after an year on 1/1/2008 the total investment has grown to Rs. 134,000,000 , the unit price will be now Rs 13.40 (approx , it may be little less as there are some administrative cost and other expenses to be incurred).

A mutual funds can invest money in different type of instruments ranging from shares , debentures , gold , FD and some cash also.There are two categories of mutual funds.

1. Open-ended : Entry and Exit at anytime.

2. Close-Ended : Entry and Exit restricted for some time.

There are different kind of mutual funds to suit different kind of consumers.I feel its a good background for the Mutual fund to start with. To understand different catagories of Mutual funds, have a look at

Different catagories of mutual funds

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Some good Links:

- A 10-step guide to evaluating mutual funds