Mutual funds are one of the most popular investment options these days. It is a trust that collects money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments, and/or other securities. Each investor owns units, which represent a portion of the holdings of the fund. The income/gains generated from this collective investment are distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value or NAV. Simply put, a Mutual Fund is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
Mutual funds, unlike stocks, does not invest only in a particular share. Instead, a mutual fund plan would invest across several investment options to provide investors with the best possible returns. Also, investors are not required to do their research to pick the best-performing stocks as the fund manager, and his team of analysts and market researchers do the research and choose the top-performing instruments that have the potential to offer high returns.
The mutual fund investors are allocated with fund units proportional to the amount they have invested. The returns that an investor would get will depend on the number of fund units held by them. Each fund unit has exposure to all the securities that the fund manager has chosen to include in the portfolio. Holding fund units does not provide investors with the voting rights of any company.
By investing in mutual funds, the investors need not worry about the concentration risk as the fund manager mitigates this by investing across several instruments. Therefore, investing in mutual funds is an excellent way of diversifying your investment portfolio. The price of the fund unit of a mutual fund is referred to as the net asset value (NAV). It is the price at which you buy or sell fund units of a mutual fund scheme. The NAV of a mutual fund is calculated by dividing the total worth of assets in the portfolio, minus liabilities. All mutual fund units are sold and bought at the prevailing NAV of the mutual fund.