The question echoes often in the investment circle: What is a mutual fund? It’s a term most of us have likely heard, but few outside the finance world truly understand. Fret not; this article will provide lucidity on the fundamental aspects of mutual funds, along with their associated jargon, to help you make informed decisions for your financial portfolio.
So what is a mutual fund? It is an investment vehicle managed by professionals, which pools money from multiple investors to invest in securities like bonds, stocks, and other assets. Each investor in the fund owns ‘units’, which represent a portion of the holdings of the fund. The value of these units is calculated daily and is known as the Net Asset Value (NAV). In Indian rupees, if a mutual fund has total assets of Rs 10 crores and there are 1 lakh units, the NAV would be Rs 1,000 (10 crores/1 lakh).
Several other terms related to mutual funds are critical to grasp. A ‘scheme’ is a particular category of a mutual fund targeted toward specific investment goals. The ‘fund manager’ is the investment professional responsible for making the buying and selling decisions for the fund.
Now, it’s about ‘repurchase’ and ‘redemption price’. Repurchase is the price at which a close-ended fund repurchases its units. The redemption price is the price at which open-ended funds repurchase their units. These prices are usually close to the NAV.
Apparently, it’s worth understanding ‘risk grade’. All investments are associated with some level of risk. The risk grade is an estimation of the degree of risk involved in a mutual fund scheme. A risk-rating firm or the fund manager usually determines this.
To break it down a bit more, mutual funds are categorised primarily into three types: equity or growth funds, income or debt funds, and hybrid or balanced funds. Equity funds invest primarily in shares, income funds emphasize bonds and fixed-return investments, while balanced funds are a mix of both equity and income funds.
While mutual funds present a kaleidoscope of investment opportunities, it is essential to acknowledge that trading in the stock market encapsulates inherent risks. The returns on the investment, while potentially high, can fluctuate depending on market conditions. Investors must carefully gauge the pros and cons, align them with their financial goals, and use professional advice when trading in the Indian financial market.
In closing, demystifying the investment jargon and understanding the nuances of terms like “what is a mutual fund” and “what is a mutual fund scheme” aids in making informed investment decisions.
Disclaimer: This article is for informational purposes only and is not meant to be construed as financial advice. Always seek the advice of a qualified financial advisor before making any financial decisions.
