Mutual Fund Investments

September 25, 2014 Posted by admin

It is usually observed that an investor, investing capital in mutual funds (MF) for the first time, is apprehensive about the investment all together and more so about the safety of his capital. The disclaimer that haunts the investor is ‘Mutual funds are subject to market risk, please read all scheme related documents carefully before investing’. However, the risks when compared to other market investments are substantially low. But what is a mutual fund really?

MF is a kind of trust that stands primarily on five pillars. They are: unit holders, trustees, sponsors, a custodian and an Asset Management Company (AMC). In simple words, it is an indirect investment plan. It is an investment where the primary investor does not have a clue as to where his capital has been invested. However, he is assured of a fixed amount of interest. It is a collective scheme where a big investor collects different amounts of capital from smaller investors and invests them in some bigger opportunities. It is from these big investments that big returns are received and later distributed to the smaller primary investors. The sum that is passed on to the primary level is a pre-assured one. The big investor assures the smaller investors of the minimum amount of interest or profit they would be getting, thus minimising the risks for the smaller investors. Some MFs are ‘open – ended’. It means that the investors can buy or sell the shares of the fund at any given time.

The next most important part in understanding what is a mutual fund, is to understand how it is different than the other market investments. MFs invest in securities like; bonds, convertible bonds, debentures, shares etc; depending on what is the expected result of the investment scheme. Such a fund has two clear benefits: one, the profit earned; and second, any capital appreciation realised by the sale in the process. In India, the investments in mutual funds are in consonance with the regulations of the Securities and Exchange Board of India (SEBI). Mutual funds are different from other kinds of investments as they are not individual investments.
After understanding the components of the mutual funds investments, it is necessary to understand what NAV or Net Asset Value of a scheme is. It is basically, the performance indicator of the scheme. It is the market value of the securities held by the scheme. The Net Asset Value changes each day, with the changing value of the security invested in by the scheme. The per unit value of the NAV is the market value of the securities invested in for the scheme, divided by the total number of units of the scheme at any particular point in time.

The main purpose of investing in the MF is the traditional investment idea. Collective investments always run a lesser risk, as compared to individual investments in the market. Individual investments might be able to give higher returns, but when the markets are volatile, it may result in catastrophic loss, unlike mutual funds, which always assure the primary capital to be safe.

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