What Are Mutual Funds And How Does Mutual Fund Work?

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. A professional Fund Manager manages the pool of money under a Mutual Fund.

A Fund Manager who manages a particular mutual fund invests in securities which are spread across a gamut of cross-section of industries and sectors. This diversification reduces overall risk for an individual investor who opts for a mutual fund. The risk reduces as all stocks might not move in the same direction at a particular time in same proportion.

Investors are allotted units in a Mutual fund with regards to the quantum of money invested by them. Mutual fund investors are also known as unit holders. In this scheme of dealings, investors in proportion to their investments share the profits or losses.

The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI), which regulates securities markets before it can collect funds from the public.

Understanding NAV

Net Asset Value (NAV) signifies the performance of a particular scheme of a mutual fund. In generic terms, NAV is the market value of the securities held by the scheme. One has to remember that, market value of securities changes every day, thus NAV of a scheme also varies on a day-to-day basis.

The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date. For example, if the market value of securities of a mutual fund scheme is Rs 200 lakh and the mutual fund has issued 10 lakh units of Rs 10 each to the investors, then the NAV per unit of the fund is Rs 20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or weekly - depending on the type of scheme.

Mutual Fund schemes

Mutual Fund schemes can be categorised into open-ended scheme or close-ended scheme depending on its maturity period.

Different types of mutual funds