What are Mutual Funds? Introduction to Mutual Funds

ByChetan Wagh

I am sure most of you here are about to start your investing journey. Trust me, it is one of the best ways to put all that hard-earned money to use.

There are many ways by which one can invest, or in our case, start their investment journey, like investing in bank fixed deposits, post office, and several other products.

I am sure you must have heard people say, Stock market mai paisa daalo kaafi scope hai, but most of us fail to understand the risk involved in doing so. For all investors who don’t have time to be in the markets all the time, the only way to create wealth is through investing in mutual funds.

So, let us try to understand what mutual funds are from scratch!

What are mutual funds?

A mutual fund is an investment vehicle that pools money from various investors to invest that collected money in assets like equity, bonds, gold, etc.

Let’s understand this with the help of a story.

A journey down memory lane.

Remember when we were kids, and we all got a little money from our loved ones? Now we all decided to play cricket and wanted to buy a cricket bat. The bat’s price was ₹500, and no individual had ₹500.

We all decided to contribute the money we had and buy that bat as we collectively could afford it. All five of us decided to contribute ₹100 each to be able to buy that bat.

Think of a mutual fund as something like this. Investors come together and pool their money, which goes to the AMC (asset management company), where the fund manager’s job is to analyse the market and invest our money.

How do mutual funds work?

To understand how mutual funds work, we need to first understand the concept of NAV, or Net Asset Value

NAV, or Net Asset Value, tells us how well a mutual fund is doing. It’s the price of buying a unit of mutual funds.

Investors in mutual funds are allotted units proportional to their investments.

For example, if you invest ₹ 1000 in a mutual fund with an NAV of ₹ 10, you will get (1000/10), 100 units of the mutual fund.

Once invested in the mutual fund, our money goes into the stocks, and we all know that the price of the stock changes every day. Due to this reason, even the NAV of the mutual fund scheme changes every day.

I hope this blog helped you understand what mutual funds are going through.

We will keep diving deeper into the world of mutual funds in the coming days.