A Mutual Fund is an investment instrument that includes a portfolio of stocks, bonds, and other securities.
These days Mutual Funds are one of the most popular investment options available in the market. A Mutual Fund is an investment that occurs when several individuals and institutional investors come together to invest some amount of money, with common investment objectives, through an Asset Management Company (AMC) or Fund House Pools.
The amount of money invested in the pool is managed by a financial professional, who is also known as the ‘Fund Manager’. The Fund Manager buys some financial securities such as bonds and stocks, which are in line with the investment instruction. If an individual investor wants to get exposure to an expert managed portfolio, then Mutual Funds are the best investment option available in the financial market.
When you invest in a mutual fund scheme, the fund so collected is further invested in different financial instruments like shares and bonds, etc. Thus, ensuring diversification in the portfolio. The process of allocating the fund to the different financial instruments is known as Asset Allocation.
Asset allocation covers several financial instruments with higher returns, and an individual can diversify his/her portfolio by investing in mutual funds.
Now we need to know about an important concept while investing in mutual funds, which is “unit”.
When you invest in a Mutual Fund scheme, you are allocated units of that scheme.
E.g., suppose you have Rs. 100 and you went to buy eggs in the market now each piece of egg costs Rs. 5 so, how many units of eggs will you get?
If your answer is 20 then you are correct.
Thus, each investor has to experience some profits or losses that are directly equivalent to the amount they invested.
One of the major purposes of the fund manager is to grant optimum returns to investors by investing in securities that are similar to the fund’s objectives. The activities of mutual funds are dependent on the assets which are underlined.
Mutual Funds: Detailed Analysis
Mutual funds and stocks are two distinct types of investments. Stocks invest only in a particular share, but mutual funds invest in a wide range of investment options. The long-term strategy of a mutual fund is to invest in a variety of investment options to provide investors with a higher rate of return. Investors do not need to do their research to pick the best-performing stocks; they just need to have trust and faith in their fund manager. The fund manager and its team of analysts and researchers carry out the research and select the most high-performing instruments that can provide higher returns.
The investors of the mutual funds are allocated with fund units as per the amount they have invested. The rate of return which an investor would get will depend on the number of fund units held by them. All the securities chosen by the fund manager to include in the portfolio are publicly visible to each fund unit. Voting rights of any company are not provided to the investors holding fund units.
Investors do not have to worry about the concentration risk through investment in mutual funds, as the fund manager helps in reducing risk by investing through several instruments. Investing in mutual funds is, therefore, an excellent way of transforming your investment portfolio.
The fund unit’s price of a mutual fund truly depends on the Net Asset Value (NAV). NAV is a price at which you buy or sell fund units of a mutual fund scheme.
The Net Asset Value of a Mutual Fund is calculated by:
Total Assets Minus Total Liabilities and then Dividing the Net Value by the Total Outstanding Units.
NAV= [Assets- (Liabilities + Expenses)] / Number of Units Outstanding
All mutual fund units are purchased and sold at the current mutual fund NAV.
When should you withdraw from your Mutual Fund investments?
When you get to know that your money is growing, all of you feel joy, and the next thing you must feel is a desire to act to protect the growth. This desire to protect profits can be hence almost overwhelming for new investors.
But that doesn’t mean whenever you see your investment profits – you should withdraw them to protect the profit.
So, when is the time to withdraw your money?
1. When you need the money in an emergency: If the money is needed for an unpredictable event, such as a medical emergency, you can overlook everything else and withdraw what you need the most if your financial assets are proportional to the amount. In such a case, having a sufficient amount of money in your emergency fund will come in handy.
2. If you need the money for a pre-planned expense for which you were saving: If you’re saving for a holiday or a four-wheeler, take the money out just as soon as you’ve met your savings goal and are prepared to spend it. Even in this, don’t take it out and keep it in your bank account. As everybody knows, these things can get delayed by months, and your money is better staying invested.
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