Have you ever heard of this Ad that MUTUAL FUND SAHI HAI? I can guess almost everyone of you have heard this line before in Ad whether you know what mutual fund is or not. But one thing I genuinely believe as a financial advisor that every citizen of India should know about mutual fund and why it is one the best investment option for many investors. And how they are growing their wealth by 10%-15% year on year. One thing is sure that after reading this blog atleast you would overcome your fear of investing and loosing money.
Definition of Mutual Fund
According to Association of Mutual Funds in India (AMFI), A mutual fund is a pool of money managed by a professional Fund Manager.
Understanding Mutual Fund
I can guess almost everyone of you did not get what it is written in definition of mutual fund. Don’t worry.
Let’s understand this famous term Mutual Fund by a story. So, Rahul who is our main character in this story. He is an employee. At the end of every month, he gets his salary. But what he notices is that he is spending his whole salary into the basic day-to-day things. So, he decides that he will save some amount of money from his salary and invest those money for his better future. He searches on internet where he can invest his money. He read many articles and watch many YouTube videos. And he comes to a conclusion that he needs two things to invest his money which is skill and time. But because he is an employee, he does not have time and because he does not have time, he can not learn the investing skill. So, now comes a fear in his mind that if he invests his money maybe he can loose his money.
Now, for every one of you who is in the same situation as in Jack. Mutual Fund is the solution to your problem. Investing in Mutual Fund is basically you are hiring a fund manager (a group of individuals) who have the knowledge and experience of investing field to invest your money into the best possible investment options (like in Real estate, gold, stocks etc).
How does Mutual Fund system work
Understanding Mutual Fund system is very easy. If you just look at the words of this term you will get an idea what it is. What mutual means is shared and what fund means is pool of money or collection of money collected from different individuals. And after collecting, invest those money. And after getting profit from that investment after a certain period of time, distribute those money into every individuals as per their contribution to that fund.
Let’s see in more simplistic way how does Mutual Fund system works. Suppose there are standing four friends in a market. One of them says to others bro let’s buy some chocolates. They go to a nearby shop. The shopkeeper says that he sells chocolates only by boxes. And in every box there is 15 chocolates of costing 50 rupee. That group of friends agree to buy the box but they all have only 10 rupee each. So, everyone of them contributed 10 rupee and buy the box of chocolates. And as per their contribution they all get 3 chocolate each or 3 units, if equated with Mutual Fund.
It is simple mathematics that how to calculate the price of one unit. Simply divide the total amount with the total number of chocolates 50/15 = 3.33. So, if you just multiply the number of units (3) with the cost per unit (3.33), you get the initial investment of rupee 10.
In this whole story every one of them is a unit holder. They all own some units of that box.
Now you understood this story but still comes a question. And the question is, in a mutual fund how to calculate your owned unit. In Mutual Fund all this unit distribution game works on the basis of Net Asset Value (NAV) and a simple mathematics term ratio. What is NAV? Suppose a mutual fund invests in equity, bond and gold. So, in any given day the combined market value of all these investment (as reduced by permitted expenses and charges) is called Net Asset Value. So, suppose you invest in a Mutual Fund and the NAV of that mutual fund on any particular day is X rupee. So, you will get the number of units according to the amount you have invested in that mutual fund. And NAV per unit means is the market value of all the units in a mutual fund scheme on a given day. So, any given day the NAV describes that how much your money grows.
As it is described early in the blog that mutual fund is one of the best investment option for those who neither have time or proper knowledge of investment but still want to grow their wealth. The money collected in mutual funds is invested by professional fund manager. In return, these fund house charges a small fee which is deducted from the investment. The fees charged by the mutual funds are regulated and are subject to certain limits specified by the Securities and Exchange Board of India (SEBI).
And on the day of maturity after paying charges and taxes, you receive your money.
Types of Mutual Fund
There are many types of mutual funds in market. And not everyone should know about every type of mutual fund. You should only know about those type of mutual fund which are incline to your investment goals. Let’s say you want X amount at the date of your retirement. So, you should know only about that type of mutual fund which can full fill that goal. If this article explains you all the mutual fund then it will be very boring to you. So, at the end of this section there is a link where you can learn mutual fund type in detail.
Why should anyone invest in Mutual Fund ?– Pros of MF
I know this question sounds very illogical to a pro-investor but it is a very important question for those who do not invest or who are beginners in this investing game. According to many big investors mutual fund is one of the best options for beginner investors as well as for a pro-investor to grow their wealth. In this section, you will know the pros of a mutual fund.
a) You need not to give your time into the market.
b) A professional fund manager will do market research and manage your money.
c) With low money, you can invest in many big companies in different industries.
d) You can choose a mutual fund to invest in according to your future investment goal. For example – Retirement, child marriage, to buy a house, growing your wealth, etc.
e) Have stress-free sleep every day because of very low risk as compared to other investment options.
Cons of Mutual Fund
Have you heard of a coin which have only one side? ofcourse not. Just like that there is no such thing in this world who have only good qualities. Mutual fund has also some negative points which can make you think twice before investing. So, consider these points while investing.
a) Mutual fund company can be greedy
b) Everything depends on fund manager and research analyst
c) Fund manager can manipulate your money
d) Sometimes charges and taxes can be high
But today in this world of internet these problems are easily solvable. Don’t worry. You will know in the next section how to invest in mutual fund which will automatically cover how to avoid these negative points of mutual fund.
How to invest in Mutual Fund?
Now, I hope you have understood what mutual fund is. No doubt mutual fund is one of the safest and bestest investment option. But then comes a question how can you invest? What are the things to keep in mind while investing? So, this section is dedicated to answer all these questions and give you step by step process to invest in mutual fund.
1st Step:- The very first step is choose some of mutual funds which is matching your investment goal.
2nd Step:- The second step is do a research on those mutual fund. Is they (Mutual fund companies) are registered in Securities and Exchange Board of India (SEBI). This can save your from fraud companies. If you check this step then go to third step.
3rd Step:- Do a research on fund mangers of that mutual fund. Is they are well qualified in their profession. If you get a green signal then move to the fourth step.
4th Step:- Lastly get the information about charges and taxes related to that mutual fund. And if you are comfortable with all the charges and decided to invest then go to the next step.
5th step:- This is the last step. In this step you just need to select a broker. There are many brokers in the market. If you already know any broker then you can invest with them. But if you do not know about any broker then you can read our dedicated article on that topic.
Select a broker and start investing.
- Who can invest in mutual fund?
- Anyone above 18 year old.
- Can I be a millionaire or billionaire by investing in mutual funds?
- Yes, you can. But you have to invest a huge amount for the longer time period. One thing is important if you want to be a millionaire or billionaire then there are many other investment options where you will get the higher return than mutual fund. So, consciously choose the investment option according to your investment goal.
- Is investing in mutual fund is better than investing directly in stock market?
- If you have not enough time to analyse the market then Yes mutual fund is better.
- What is the average return on mutual fund?
- In a time period of 3 years, the average return on mutual fund is between 7% to 12%.
- Are mutual funds risky?
- There is no such thing as risk free investment in the world. So, yes mutual funds are risky too. But in comparison with other investment option, it is one of the lowest risky investment.
Investing is like seeding a hope for the better future for yourself as well as for your upcoming generation. It is a thing everyone should do in their life. Team vedaon tried to explain you a tiny part that is mutual fund of the larger ocean of investing. We hope, you learned something new today and you will implement this knowledge to grow your wealth. If you think that we have missed something in this article or we should add something then please give us your feedback in the comment section below.