What Is Mutual Fund?

by Shakti Singh Dulawat on July 28, 2010

Are you aiming to have a better, money-free financially stable future?  Well, you must start making such a dream a reality by reading and enriching yourself with the following topics: mutual fund, SIP and NAV definition.

Definition of mutual fund: Let’s begin then with this first basic question: What is mutual fund? Mutual funds are investment companies that pool money from investors at large and offer to sell and buy back its shares on a continuous basis and use the capital thus raised to invest in securities of different companies. In this you amount is invested in different companies according to percentage ratio.

In addition, mutual funds can be either or both of open ended and closed ended investment companies depending on their fund management pattern.

  • An open-end fund offers to sell its shares (units) continuously to investors either in retail or in bulk without a limit on the number as opposed to a closed-end fund. Open end fund have no limit in number of shares.
  • Closed end funds have limited number of shares.

Advantages of mutual fund:

These are the advantages that you must bear in mind in view of mutual fund:

  • Lowest per unit investment in almost all the cases start for Rs 10 in INDIA
  • Your investment will be managed by professional money managers so you need not worry about your money.
  • You can merge from one fund to another fund.
  • Easy earning opportunity in share market.
  • For long term they will provide good result.
  • Your investment will be diversified

Disadvantage of mutual fund:

These are the advantages that you must bear in mind in view of mutual fund:

  • Simply one line show you that mutual fund investment is depend on market risk please read offer document carefully before investing means market down mutual fund down.
  • Mutual funds are like many other investments without a guaranteed return so it is not necessary you will get profit from mutual fund.

What is SIP?  Let us now define what is SIP.

SIP simply means Systematic Investment Plan. It is not a type of mutual fund. It is a method of investing in a mutual fund. SIP allows the investor to buy units on a given date every month. The investor decides the amount and also the mutual fund scheme. I want to say that save 1 rupee daily then after 30 days you will got 30 rupee. For saving money we need to follow some method and SIP is one of them.

Let us now take in to account the relationship between mutual fund and SIP

There are two ways in which you can invest in a mutual fund.

In my previous article I show the difference between mutual fund and post office fix deposit.

1.) A one-time outright payment

  • If you invest directly in the fund, you just hand over the cheque and you get your fund units depending on the value of the units on that particular day. Suppose you invest Rs 10000 and NAV on that date is Rs 10.
  • So you will get 1000 units (Rs 10000 / 10).
  • If after one year fund NAV is 11 then you value is 11,000 (Rs 11*1000)

2.) Monthly, daily, quarterly or yearly investments

  • This is referred to as a SIP. That means that, every month, you need to invest some money suppose you are investing Rs 1000 per month for three month and at the end of three month your total invests will 3000.
  • Let’s say the NAV on the day you invest in the first month is Rs 10, you will get 100 units (Rs. 1000/10).
  • The next month, the NAV is Rs 20. You will get 50 units (Rs. 1000/20).
  • The following month, the NAV is Rs 40. You will get 25 units (Rs. 1000/40).
  • Now total amount invested 3000, total unit you got 100+50+25=175 unit.
  • Current NAV of mutual fund is 41 then your current value is 175*41= Rs 7175.

Definition of NAV: What is NAV?

NAV: NAV is net asset value of a mutual fund. NAV, is the sum total of the market value of all the shares held in the portfolio including cash, less the liabilities, divided by the total number of units outstanding. Thus, NAV of a mutual fund unit is nothing but the ‘book value.’

Your fund value= Total Unit * current fund NAV

Above are just figure performances, actual value depend on mutual fund and its market performance.

This are some best fund in current market.

Note: Liquid funds, cash funds and floating rate debt funds do not offer an SIP. These are funds that invest in very short-term fixed-return investments. Floating rate debt funds invest in fixed return investments where the interest rate moves in tandem with interest rates in the economy (just like a floating rate home loan).

All types of equity funds (funds that invest in the shares of companies), debt funds (funds that invest in fixed-return investments) and balanced funds (funds that invest in both) offer a SIP.

Please read treading tips before investing.

Best Reading:

In conclusion, gaining more than enough information through our friends and experts in the field of investing such as mutual funds, will definitely make a great difference in your business investing pursuit.  It is very much advisable that as you become more knowledgeable with mutual funds and other details of investing then it is most likely that you can now be ready to risk your hard earned money.  Investing is a big risk but once you get to know the basics of which, everything will fall in its proper place and business perspective.  Happy investing and good luck!

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