Mutual funds are one of the most popular investing alternatives through which individual investors can obtain exposure to a professionally managed portfolio. Purchasing a mutual fund is like purchasing a little slice of a large pizza. The profits, losses, costs and income are distributed proportionally to the mutual fund’s owner.
In general terms, a mutual fund is a type of investment vehicle that is created when an asset management company (AMC) or fund house collects contributions from a number of individual and institutional investors that have similar financial goals. It combines their contributions and uses it to purchase other securities, most often stocks and bonds.
The company's worth is determined by the performance of the securities it purchases. As a result, when you purchase a unit or share of a mutual fund, you are purchasing the portfolio's performance, or more specifically, a portion of the portfolio's value.
Definition of Mutual fund
A mutual fund is a professionally managed investment plan, operated by an asset management company that joins together a group of individuals and invests their money in bonds, stocks and other securities.
Features of Mutual fund
For an investor, mutual fund 'units' represent his portion or holding in a mutual fund scheme. At the fund's current net asset value (NAV), these units can be acquired or redeemed as needed .The NAVs of these funds fluctuate based on the fund's holdings. As a result, each investor shares in the fund's profit or loss proportionately.
SEBI has a database of all mutual funds. Hence, mutual funds operate under the confines of tight regulations designed to safeguard the investor's interests.
It provides small investors with exposure to professionally managed and diversified portfolios of bonds, stocks, and other assets, which would be impossible to build with limited funds.
The usual mutual fund owns over a hundred different securities, allowing shareholders to benefit from significant diversification at a reasonable cost.
Shares in mutual funds are "redeemable," which means that investors can sell them back to the fund at any point. In most cases, the fund is required to deliver you the money before seven days.
How are mutual funds different from stocks?
Investing in mutual fund shares is not the same as investing in stock shares. Let us understand the differences between them.
- Unlike stock, mutual fund shares do not provide voting rights to their owners.
- Mutual fund shares are generally acquired or redeemed as needed at the fund's current NAV, which does not vary during market hours, but is settled at the conclusion of each trading day, unlike a stock price.
- Instead of a single holding, a mutual fund share reflects investments in a variety of stocks
Investing in mutual funds can be a great option to improve your objectives if it is done with extensive research and understanding. There are mutual fund options for every personality type, individuals invest their money in order to benefit.
However, no investment is without risk. Although mutual funds provide a greater level of diversity and value for money, there are a few risks connected with investing in them.
Before starting a mutual fund investment, investors are advised to evaluate their investment horizon, risk profile and goals precisely. It can be beneficial to think about investing in mutual funds if people have a certain financial objective in mind, whether it is short-term or long-term.