Mutual Fund Basics

MUTUAL-FUND-BASICS

Mutual Fund Definition.

It's a professionally managed asset which is handled by an asset management company, it includes money from a group of individuals and invested in assets as mandated by the fund.



Example- let’s say the cost of a land is Rupees 15  Lakhs and the owner is really pressed for money and needs it fast and has no other source. He is willing to sell it way below its market rate but needs instant money in cash. You come to know of it but you don’t have enough money with you, so you take in 04 friends along with you to contribute. Problem is, none of you is good with haggling or bargaining. So you hire a smarty pants neighbour to do the bidding for you guys, who agrees but for a fee. He manages to buy it for 4  Lakhs and adds his fees of 01  Lakh, so now its 01  Lakh for each of you. You sell it for 15  Lakhs and make a profit of 10 Lakhs, meaning an individual profit of 02  Lakhs for each of you.

Analysis- you managed to buy bigger property which otherwise you couldn’t have. The help of other friends made you do a killing and benefited them too.

Now let's relate this example with Mutual Fund. While the example was only for understanding and is not a true representation of mutual funds, but let us just relate for learning’s sake. 05 friends are the investors, the deal making neighbour is the fund manager, and his one Lakh is the fees charged by mutual fund also called expenses or mutual fund expense ratio. The Price at which each individual bought or sold the asset is NAV in case of Mutual Fund
Now above is a very simple example but then many conditions may arise, you may end up making losses too :).

TYPES OF MUTUAL FUNDS.


Mutual funds may be categorised in various ways depending on different criteria. Some of them are as follows


Size.

-According to the size of the shares of the companies that they manage in their asset, that they manage they may be called as micro cap, small cap, mid cap, large cap.


Types of companies

- As per types of companies that they manage they may be called sector Mutual funds and diversified mutual funds.

Place of investing 

-Whether they invest in the own country or outside- domestic mutual funds and international mutual funds.

Types of instruments.

Instruments if they invest in shares of companies they are called equity mutual funds if they invest in debentures, papers, bonds and deposits then they are called debt funds. The debt funds may further be subdivided into debt mutual funds, liquid mutual funds, dynamic debt funds, fixed maturity plans (FMP).


Commodity.


They invest in various commodities like oil, gold, mining. The gold mutual funds invest in ETFs of gold.


Equity Percentage

based on the percentage of equity that a Mutual Fund is invested in, it may be classified as Equity Mutual Fund and Balanced Mutual Fund

 

This is by no means an extensive list or description but it does give a basic idea of what Mutual Funds are all about.