Mutual Funds -a basic understanding

This article educate you about basics of Mutual Funds . 

It’s an Indian habit whether we receive our monthly salary or when we decide our budget for our business income we usually save a bit for our future.

So how an individual usually saves this money can be brief as below : –

• Saving account – The money kept in bank’s saving account provides you certain percentage of interest, which increases it’s amount but not it’s value. In my opinion it’s a worst type of investment as the interest provided by bank is unable to beat inflation rate. So it’s a no use investment and usually waste time with no gain. So your investment should be able to beat inflation rate to earn certain profit.

• RD/ fixed deposit -A fixed deposit (FD) is a financial instrument provided by banks or NBFC which provides investors a higher rate of interest than a regular saving account , until the given maturity date

A recurring deposit is a special kind of deposit offered by banks in India which help people with regular incomes to deposit a fixed amount every month into their recurring deposit account and earn interest at the rate applicable to fix deposit.

• Gold

• Real estate -> Requires huge amount of money

• Share market -> High risk -> High return

• Mutual Funds -> Diversified -> High Return

The factors which impacts these type of investment are as follows : –

1. Return percentage

2. Risk- Chances of loosing money

3. Time — More time more money

What is diversification of investment?

A diversified investment is a portfolio of various assets that earns the highest return for the least risk. A typical diversified portfolio has a mixture of stocks, fixed income, and commodities.Diversification works because these assets react differently to the same economic event.

What are mutual funds ?

Mutual Funds are professionally managed investment funds that gathers money from many investors to purchase  securities such as stocks, bonds, money market instruments and others. These investors may be retail or institutional in nature.

These funds are managed by certain companies known as AMC or Asset Management Companies.

When these funds are invested in share markets, it is known as equity mutual funds. Equity MF involves high risk along with High returns, since funds are allocated in different companies the risk involved is lower then in share markets.

When these funds are allocated in debt like Govt Bonds or Debentures the amount of risk involved and return to be gained is quite low and such mutual funds are known as Debt Mutual Funds.

The mixture of both equity funds or debt funds i.e the allocation of money is equally distributed in both shares and debts the risk involved also is moderate, such funds are called Hybrid Funds.

Money when directly invested in share market, provides you number of shares and money invested in mutual funds provides you number of units.