What is a Mutual Fund?

A mutual fund is an investment vehicle that aggregates funds from multiple investors to buy a wide selection of stocks, bonds, or other securities. What are mutual funds — Mutual funds are professionally managed portfolios managed by a professional fund manager that allows individual investors to buy professionally managed portfolios and the potential for reduced risk through diversification.

How Does a Mutual Fund Work?

1. Fund Pooling: When an investor purchases units of a mutual fund, your cash is merged with the money of others, and a large pool of funds is formed. The combined funds are utilized to invest in a wide range of stocks, bonds, or other securities.
2. Investment: The fund manager invests the combined money in a spread of different stocks, bonds, or other securities, depending on the type of fund.
3. Management: Professional fund managers track the market constantly and invest accordingly to get maximum returns with minimum risk.
4. Returns: Investors experience returns in two forms:

• • Dividends: Money that comes from income the securities in the fund’s portfolio produce.
  • Investments or capital gains: A profit made, or money made by selling securities at a price higher than the purchase price.

5. NAV (Net Asset Value): In mutual fund, each share value is known as Net Asset Value (NAV). This is determined every day via the sum of the value of the unlisted fund’s shares less liabilities, divided by the total amount of investment units issued by the fund.

6. Distributions: Depend on whether mutual funds distribute income and capital gains to investors from time to time or reinvest that income and those gains back into the fund.

7. Management fees (and sometimes, sales loads): Investors pay a fee on the fund’s expense ratios for someone to manage the fund.

Types of Mutual Funds:

• Equity Funds: Focus on stock markets for growth.
• Bond Funds: A combination of fixed-income securities that provide steady returns.
• Index Funds: These track the market indexes such as Nifty 50.
• Sector funds: Invest in specialized sectors such as technology or healthcare.
• International/Global Funds: These funds involve investing in foreign markets, providing global exposure.
• Hybrid Funds: For balanced returns, Mix of equity and debt
• Thematic Funds: Focus on themes such as green energy or technology.

Refer to our blog titled, “Mutual Fund and Its Types” for an in-depth understanding of these types.

How to investment in Mutual Funds:

This simplifies the process of investing in mutual funds, here are the steps:

Do your homework: Decide where you want to land and what level of risk is right for you.

• Step 1: Fund Selection – Pick a Mutual Fund as per your Goals and Risk Profile.
• Step 2: Account opening – This is to be opened with a mutual fund house or through a brokerage platform

Invest: You can invest all at once or you can invest in a fixed amount via SIP.

Track: Ensure all your investments are correctly tracked and track the performance of the fund at regular intervals.

Advantages of Holding Investments in The Long Term

1. The Power of Compounding – One of the greatest advantages of investing over the long term is that of compounding. This happens when you reinvest because your earnings start earning and your investment grows exponentially.

2. Lower Volatility: The more time you must hold onto your investments, the better you can withstand the ups and downs of the markets. Markets don’t typically spike to heaven, with falling objects still resembling the laws of gravity, but long-term oscillation appears to be a growth story giving investors stability and insulating volatility.

3. Tax Benefits: For the long term, you will end up paying lower capital gains tax compared to the short term. This can lead to the preservation of taxable income over the years, thereby improving total returns.