Mutual Fund 101: Basics of Mutual Fund
Updated: Jul 12, 2020
The mutual fund industry in India has grown at a phenomenal rate during recent times.
But are you a part of this growing industry? The answer might be Yes or No. If the answer is Yes, then great. Best of luck with your investments. If your answer is No, then you should read this article so that you can get a basic understanding of the topic and start off your SIPs as soon as possible.
The article will be in question and answer format so that beginners get a better understanding of the topic.
Q1. What are Mutual Funds?
Ans. Mutual Fund is a financial tool used for investing in the capital market. To understand this.
Let’s take a trip down memory lane to the time, when you put small amounts of money in your piggy bank. Now, think the Piggybank as a Fund where a lot of people put their money. And, the money is then invested in the stock market by a professional who is referred to as a fund manager. When you invest money in a mutual fund scheme, you get units of the mutual fund as per its NAV i.e. net asset value.
Q2. What are units and NAV in mutual funds?
Ans: NAV or Net asset value is the difference between the total assets of the fund and the total liabilities divided by the total number of units of the mutual fund. Net Asset Value (NAV) is the market value of a mutual fund unit. NAV is simply the price per share of the fund. Just like shares have a share price; mutual funds have a net asset value.
Generally, mutual fund units begin with a unit-cost of ₹10 and it rises as the fund’s assets under the AMC grows. So, a popular fund will have a higher net asset value than a less popular one.
NAV = (Assets - Liabilities) / Total number of outstanding units
Secondly, a unit means a part of the mutual fund. When you invest in a mutual fund, you buy units of that mutual fund.
Q.3 What are SIPs?
Ans: Systematic Investment Plan, commonly referred to as a SIP, allows you to invest regularly a fixed sum in your selected mutual fund scheme/s. In SIP, a fixed amount is deducted from your savings account every month and directed towards the mutual fund you choose to invest in.
Think of SIPs as a small contribution to your piggy bank at regular intervals.
Benefits of SIP:
a. You can invest in a disciplined and phased manner using SIP. It allows you the convenience of starting your investment with as low as Rs 100.
b. You don’t have to time the market. You get more units when the markets are low and vice-versa. So, don’t stop your SIPs when the markets are low.
c. It gives better returns than all the deposit schemes of banks.
Q4. What are the risks associated with mutual funds?
Ans: Yes, it is very obvious that if you want a higher return in your investments it comes at a risk. Mutual funds are exposed to market risk (i.e. the ups and downs of the market). Moreover, there are different risks associated with different schemes of mutual funds. The detailed scheme-wise risk will be covered in a separate article.
I hope you got a basic understanding of the mutual funds. I will come up with more articles related to mutual funds in the coming time.
Thanks for your time. Hope you enjoyed it.