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What is a Mutual Fund

Updated on May 24, 2014

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Disclaimer: - Mutual Funds are subject to Market Risks. Please consult your financial advisor before investing.

In our world today, we have various investment options available. Due to number of options available, we struggle to choose and learn the best investment option. Further to struggle, we learn and once learnt, we make an effort to expand our horizon of investments. When we try to expand our horizons we tend to shift towards risky products like Mutual Funds. The reason of the shift is greed of high returns. This greed however, is accompanied with the fear of losing money.

We should not be fearful, rather should make an effort to learn more about the investment product that we are interested in. This article will help you to get rid of your fears and will enhance your learning about the Mutual Funds. This learning however, should further be consulted with your financial advisor before you make a final investment decision.

Mutual Funds Definition

Mutual Funds is an investment type that uses consolidated funds of various investors to invest further in underlying investments like shares, debts (bonds), gold, cash etc. This is mainly done for the purpose of the generating high returns for the investors who have contributed to the consolidated fund pool. In simple terms, we can consider Mutual Funds as small pot and can think some people pooling money together in the pot. This money is then invested into underlying investments to achieve high returns.

The responsibility of investing the money and yielding the best returns from the Mutual Funds is assigned to an expert called Fund Manager. Fund Manager is an expert in the field of wealth management and works with the group of analysts to decide where the pooled funds will be invested. Mutual Funds are generally governed by government bodies / authorities, which enforces strict laws and procedures to ensure that the clients' money is in the safe hands.

To know and understand the technical definitions of the Mutual Funds, please see following links:

Check your Risk Profile

If one has to choose an Investment instrument, one has to check himself/herself for the risk potential and the expertise he/she holds. If one does not have the share markets experience at all and wants to invest in shares, then Mutual Funds can be a better route to enter share (capital) markets. This is because the Fund Managers has kind of expertise needed to invest in shares to yield better returns. We should always ensure to read the mutual fund offer document carefully and understand the risk profile completely before investing.

Your financial adviser may check your risk profile by asking few questions or he may request you to fill a Questionnaire. Some of these are questions are given below:

  • Are you familiar with Investing?
  • What is your Investment Objective?
  • If your investment outlook is long-term (more than five years), how long will you hold on to a poorly performing portfolio before cashing in?
  • If a few months after investing, the value of your investments declines by 20%, what would you do?

You may also check your risk profile and get real time scores by clicking on the link below:

The main objective to check you risk profile is to ensure that correct investment product is offered to you and the product offered to you should accomplish your investment objective and goals.

Risk Associated with the Mutual Funds

Before investing in Mutual Funds, we should understand that our capital is subject to market risks. In simple terms, this means that you may not even get your original investment back if markets remained negative and your original amount invested can erode with the declining stock markets. This risk mainly applies on the Mutual Funds investing in stocks. Below are some links that talks about risks associated with Mutual Funds Investing in India:

Diversify your investment within the Mutual Funds Range

There are various types of Mutual Funds available. Many financial advisors insist on diversifying the investments within the Mutual Funds range. Below are types of the Mutual Funds available:

  • Equities Fund - Underlying Investments are Shares (High Risk & High Returns Potential)
  • Debt Funds (Bond Funds) - Underlying Investments are Bonds (Moderate Returns and Moderate Risk)
  • Hybrid Funds - Underlying Investments are mix of Shares and Bonds (High Risk and High Returns Potential)
  • Money Market - Underlying Investments are Cash and Cash Instruments (Low Risk and Low Returns Potential)

Expense on Investing

The value of the investment in the Mutual Funds is determined by the Net Asset Value (NAV), which is generally published in the newspapers or the Mutual Fund's company website. In simple terms, this is the current pricing of a mutual fund, which is used to evaluate your current valuation of total investments. For example, if you invested X amount in the Mutual Fund, your investment will be allocated the number of units as per the current NAV, after the deducting the entry load. Simple formula to understand this is as following:

Assuming entry load (Intial Commisssion) has been deducted, number of units allocated to you will be done as per formula (Investment - Entry Load) / current NAV = No Of Units allocated to you. These units may fluctuate everday on the basis of the NAV declared every.

If you wish to understand how NAV is calculated and how units are allocated, you may see the information available on the link below:

The charges like entry load (initial charges), annual management charges or exit (surrender) charges can be levied on the fund depending on the fund type. It is always advisable to check the percentage of the expense that is going to be deducted from your investment. These expenses are generally called as Entry Load (Charges at the time of investment) and Exit Loan (Charges at the time of Redemption).

Fund Manager Profile

Further, it is advised to invest in a Mutual Fund that is managed by a Fund Manager, who has shown good returns historically. Past returns do not necessarily guarantee future returns, it can however, boost the confidence to go ahead with the investment. To know the best funds managers in India, please see the link below:

How to Invest?

Now a days, it has become easy to invest in a Mutual Fund Online. Below are some links, where you can choose to invest online

ICICI Prudential Mutual Funds

L&T Mutual Funds-

Sundaram Mutual Funds

HDFC Mutual Funds

Reliance Mutual Funds

SBI Mutual Funds

Finally, below is a link that can help you to plan your Mutual Funds investments in India. This link provide the complete details of different funds and provides a clear comparison on the basis of returns of these funds.

Quick Checkpoints for investing in Mutual Funds

1) Understand your risk profile by consulting a financial advisor

2) Choose the Mutual Fund Type (Equities, Bond or Cash) as per your risk profile.

3) Consider the past returns (past returns are not indicator of future returns but can be helpful to analyze the performance of fund), Fund Manager's profile, Investment Objective.

4) Consider the charges applicable on the fund. Take your Financial Adviser's help if not sure.

5) Read the Mutual Fund's offer document carefully before investing

Please remember investing wisely is the only trick to gain good returns from the Mutual Funds.


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