How do Mutual Funds work
Hemlata Khandelwal / 2021-10-07 06:42:18

Have you thought that the value of your money keeps on deteriorating over time? The reason for this decline is inflation. To get rid of this inflation, people invest their money somewhere like gold, savings account, real estate, mutual fund etc. Currently mutual funds are considered popular among all these. Hardly any other investment plan can give you the money that you give by making a mutual fund.

What are Mutual Funds and how do Mutual Funds work?

Before that let us know a little bit about the history of mutual funds. India's first mutual fund was brought in by UTI (established in 1963). India's first mutual fund scheme was launched by UTI in 1964. After that many companies came in this investment plan, which is currently giving an opportunity to invest in mutual funds.

What are Mutual Funds?

Mutual fund simply means collective investment. In mutual funds, not only you invest alone, but many people invest. The money of many investors is deposited in the mutual fund scheme, whose main objective is to give good returns to its investors.

Simply put, a mutual fund is a bucket made up of money collected from many different investors. This lot of money gives the option to the fund manager to invest the money in different places and use it properly. The money collected in this bucket is invested in stock market, bonds, money market instruments etc.

Who Manages Mutual Funds?

A mutual fund scheme is operated by a money manager or fund managers. Different mutual fund houses hire fund managers according to their needs.

As you know, a mutual fund is a bucket in which investors' money is kept. The money in this bucket is invested by the fund manager in different places like stock market, bonds, money market instruments etc. Fund Managers are responsible for managing the money deposited in Mutual Funds.

As per the goal of mutual fund money managers try to get profit for its investors. A mutual fund scheme is designed in such a way that it helps in achieving its objectives.

How do Mutual Funds work?

Mutual funds are also a part of the stock market. Not all of us can directly invest in stocks within the stock market. Investing in the stock market requires a lot of research and a lot of time. If you can neither do research nor take the time, then you cannot earn money by investing in the stock market.

Alternatively, some of us are attracted to such investments in which someone else will manage their money for them. Mutual funds are considered the best in such investment plans.

In Mutual funds, the professional money manager who looks after your portfolio is the fund manager who tries to increase your money by putting your money in the right place. Mutual Funds provide the services of a professional fund manager to small and individual investors that too at very low cost.

In any mutual fund scheme, each shareholder is equally sharing profit and loss according to his investment. Mutual fund invests a large amount in different types of securities, thereby reducing the risk by dividing it into different sectors.

The quantum of investment in mutual funds is determined on a unit-wise basis. The unit base is the NAV (Net Asset Value) on the basis of which mutual funds are bought and sold. The amount of money you invest is credited to your account (folio) based on the current NAV.

Who are the regulators of Mutual Funds?

All mutual funds are regulated by SEBI (Securities Exchange Board of India). SEBI keeps its control over all the fund houses so that fraud with investors can be prevented. Thus investing in mutual funds is considered safe.

What are the charges of Mutual Fund House?

Before going into any investment plan, we must get information about its fees and expenses. In mutual funds also you must be aware of its expenses and charges.

Mutual fund house charges you Expenses Ratio in return for its services. This Expenses Ratio goes as the fund manager's salary in lieu of handling your mutual fund. These expense ratios can be around 0.25 to 2%. The NAV of the Mutual Fund is calculated only after deducting the expense ratio.

Investment Options in Mutual Fund Schemes

Generally, there are two types of plans in mutual fund schemes, one is the direct plan and the other is the regular plan. A direct plan is one in which there is no agent between the investor and the mutual fund house. If you invest through direct plan then the expense ratio is less in it.

If you invest in a mutual fund scheme through an agent, which is a regular plan, you will have to pay a higher expense ratio than a direct plan. This high expense ratio seems trivial in percentage terms but makes a huge difference in long-term investments.

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