What is Mutual Fund? How Mutual Funds Work?

Mutual Funds

Mutual funds provide small investors with the opportunity to participate in portfolios managed by experts in equities, bonds and other securities. Therefore every investor is proportionately a participant in the profit or loss of the fund. Mutual funds invest in a large number of securities and their performance is usually tracked by them as a change in the total AMU of the investment.

How Mutual Funds Work?

Mutual funds are operated by professional fund managers, ie professional managers, who invest the assets of the fund in such a way as to generate capital gains or income for the investors of the fund. The portfolio of a mutual fund is made according to the investment objectives stated in its prospectus.

Difference Between Shares & Mutual Funds 

Investing in units of mutual funds is different from investing in shares. The rights of shareholders include the right to vote but in contrast mutual funds do not give any voting rights to their unit holders. A stock of a single company can be purchased to invest in shares, but a unit of a mutual fund is part of an investment in several different shares (or other securities). Shares can be sold or bought during market hours and their prices fluctuate during market hours, but their NAVs are fixed at the end of each trading day.

Advantages of Mutual Funds

Mutual Funds are a popular and easily understood investment tool for many investors. Investors who lack the knowledge of the stock market, lack of time or want to make small investments, it is easy for such investors to invest in Mutual Funds and can also get other benefits of mutual funds.

  • SIP
  • Sector Funds
  • Professional Management
  • Cost
  • Small Investment
  • Liquidity
  • Portfolio Diversification

Disadvantages of Mutual Funds

Liquidity, diversification and professional management attract a small and novice investor to mutual funds. However, no investment is without drawbacks and hence mutual funds also have their drawbacks. Like the share prices, the NAVs of their units also fluctuate. Although their investment is driven by professional managers and may be better than returns from ordinary investors and market returns, returns on investment in mutual funds are not guaranteed and can be influenced by market risk. Here is the detail of losses from mutual funds:

  • Charges
  • Returns are not Sure
  • Day2Day Control
  • Past performance is not Guaranteed

Why Mutual Fund is Investor's Choice ?

In recent times mutual funds have emerged as an investment option very quickly and more and more people are investing in it. The main reason for this is that it is easy to invest in these schemes and investing in these through SIP is becoming more and more people's choice. Mutual Fund is a very good option to invest in banks where interest is becoming less. If invested for a long time, it can become a means of getting the highest return on investment.

How to buy Mutual Fund?

You can buy mutual funds both offline and online. Before investing, you should do a thorough research and decide which asset management company you want to invest in. Also check different types of mutual funds, their investment objective, portfolio and past performance, although past performance can never guarantee that the scheme will perform in the future as it has performed before. Read here how to buy a mutual fund where we have explained the entire process in detail.


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