Investing can seem like a complex puzzle, especially if you are just starting. But there is a solution to this dilemma, and it is known as mutual funds! Mutual funds offer a simple and effective way for Indians to invest their hard-earned money without putting much effort into it.
What Is Mutual Fund
A mutual fund is a type of investment where a group of investors pool their money together to buy a variety of assets, such as stocks, bonds, and money market instruments. The assets are managed by professional investment managers, who aim to generate returns for the investors. Mutual funds are regulated by the Securities and Exchange Board of India (SEBI).
How does a mutual fund work?
The Net Asset Value (NAV), which represents the fund's per-unit value, is calculated by dividing the total value of all the fund's investments by the total number of units held by investors. As the underlying investments in the portfolio change in value, the NAV also changes, reflecting the fund's performance. Investors can buy or redeem units at the current NAV, allowing them to enter or exit the fund based on their investment needs and market conditions. Mutual funds offer several advantages to investors, including:
How are mutual funds returns calculated?
Returns for mutual funds are determined by various factors, and investors earn them through different channels:
- Mutual funds generate income from dividends on stocks and interest on bonds held within the fund's portfolio. This income is distributed to investors either in the form of cash payments or reinvested to purchase additional fund shares.
- If the mutual fund sells securities at a profit, it realizes capital gains. These gains are typically passed on to investors through distributions.
- When the market value of the mutual fund's shares increases, investors can sell their shares at a higher price than they purchased them, resulting in capital gains.
Investors often look at a fund’s "total return" over a specific period while calculating its returns. Which reflects the net change in value, accounting for any interest, dividends, or capital gains generated by the fund, along with changes in its market value over time. Total returns are commonly calculated for various periods, ranging from a year to since the fund's inception.