What is Mutual Fund?

Before we understand what is a mutual fund, it’s very important to know the area in which mutual funds work, the basic understanding of stocks and bonds.

Stocks

Stocks represent shares of ownership in a public company. Examples of public companies include State Bank Of India, Reliance, ONGC, and Infosys etc. Stocks are considered to be the most commonly owned investment traded on the market.

Bonds

Bonds are basically the money which you lend to the government or a company, and in return, you can receive interest on your invested amount, which is back over predetermined amounts of time. Bonds are considered to be the most common lending investment traded on the market.

There are many other types of investments other than stocks and bonds (including annuities, real estate, and precious metals), but the majority of mutual funds invest in stocks and/or bonds.

Mutual Funds

A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective.

Various investors have different investment preferences. In order to accommodate these preferences, mutual funds gathers different pool of money. Each such pool of money is called a mutual fund scheme.

The mutual fund scheme will have a fund manager who is responsible for investing the money in specific securities (stocks or bonds) adhering to the investment objective. One fund manager may manage different schemes of the same AMC (Asset Management Company).

When investors invest in a mutual fund scheme, they are effectively buying into its investment objective. When you invest in a mutual fund, you are buying units or portions of the mutual fund.

Mutual funds are considered as one of the best available investments as compared to others.

The price of mutual fund units is referred as NAV (Net Asset Value).

For example: If some mutual fund scheme has an investment objective of Diversification across different sectors. Then interested investors will invest their money in the scheme. If the invested money grows over a period of time, the NAV will also increase, so investor gets profits on his investment over a period of time.