A mutual fund is a collection of stocks, bonds and other such investment funds owned by a group of investors that are managed by professional money managers. It depends upon the mutual fund’s investment objective as to what type of securities it would buy. A mutual fund in India focuses on specific types of investments. For example, a fund may invest in a variety of investments or it may invest in government bonds, stocks from certain countries or stocks from large companies.
What happens is when you buy a mutual fund, you are actually pooling your money along with other investors like you. By buying units or shares of the fund, you are putting money into a mutual fund. The fund issues new units or shares as more people invest.
Investments in mutual funds are generally managed by a portfolio manager. They do not just manage the funds on a day-to-day basis, they also decide when to buy and sell investments based on the investment objectives of the fund.
4 things to know
- Risk – The level of risk and return totally depend on what the fund invests in. Mutual funds are not guaranteed or insured by the government agency even if you buy through a bank and the fund carries the bank’s name. You can anytime lose money investing in mutual funds.
- Past performance –Though the past performance of a fund can’t tell you about its performance in the future, it can help you in determining how volatile or risky the fund’s returns may be.
- Price to buy and sell – While you can buy mutual funds at the net asset value (NAV) of the fund, you can sell your mutual funds at the current NAV less any fees and charges for redemption.
- Fees – All mutual funds will have fees and expenses that reduce your investment return.
2 ways to make money on a mutual fund
- Capital gains – If you happen to sell your mutual fund for more money than what you paid for it, then it is considered you will have a capital gain. Whereas if you sell your mutual fund for less money than what you paid for it, you will have a capital loss.
- Distributions – Based upon the type of fund you buy, you might also receive distributions of dividends, interest, or capital gains, and other income the fund earns on its investments. You can even choose to receive distributions in cash or can even have them reinvested in the fund. Unless you ask yourselves for the distributions to be paid in cash, a mutual fund usually reinvests the distributions for you.
Fees and expenses tend to reduce the return you get on your investment. While some of these fees are paid by you, others are paid by the fund. You must understand these costs before you plan to buy a mutual fund to invest.
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