What are a Mutual Funds?

Learn and Study, What are a Mutual Funds?

A Mutual Fund is a special type of investment institution which collects or pools the savings of the community and invests large funds in the variety of Blue-chip Companies which are selected from a wide range of industries with the objects of maximizing returns/incomes on investments. Mutual Funds are basically a trust which mobilizes savings from the people and invests them in a mix of corporate and government securities. Money collected by the investors is invested in various issues of primary and secondary markets in order to gain profits on such investments. Also learned, the Process of Investment, What are a Mutual Funds?

A Mutual Fund is a Trust, which combines the investments of various investors having similar financial goals. The Trust issues units to the investors in the proportion of their investments. A fund manager then invests these funds in different types of assets, which provide returns in the form of dividends, interests, and capital appreciation. This is distributed to the various investors in the proportion of their contribution to the pool funds. Ordinary investors, who want to invest their savings, neither understand the complexities of financial markets nor have the time to watch, research and analyze different equities, securities or any other investments opportunities that are available in the market.

At present, all the markets viz. the debt market, the equity market, the money market, real estates, derivatives, and the market dealing with the other assets have now reached a stage where a minimal information affect the markets. Besides this, the economy has opened up and global events influence their performance.

It is very difficult for a layperson to keep track of various investments, transactions, brokerages etc. In the present scenario, mutual funds are some of the most efficient financial instruments as it offers services like managing investments at a very low cost.

What is NAV or Net Asset Value?

NAV of the Fund is the market value of all the assets of the Fund subtracting the Liabilities. NAV reflects the Fund that will be available to the shareholders if the Fund is liquidated and all the liabilities are paid. In the mutual fund industry NAV refers to Net Asset Value per unitholder, which NAV of the Fund divided by the outstanding number of the units.

It shows the performance of the Fund.

Calculation of NAV = Net Asset Value of the fund sum of market value of shares/debentures + Liquid assets/cash Dividends/interest accrued – All liabilities
Net asset value per unit =NAV of the fund / Outstanding number of units

The market value of the shares and debentures is calculated by multiplying the number of shares/units by the closing price of the shares/debentures. The closing price will be of the previous day of the stock exchange from where the shares have been purchased.

If the shares were not traded on the previous day in that stock exchange, then the closing price of the shares of any other stock exchange is taken where the shares were traded. If the shares were not traded on any stock exchange the previous day, then the closing price of the shares when they were last traded is taken.

For untraded shares, the value has to be determined by the other methods such as Book Value, comparable company approach, etc. Value of the illiquid bond is estimated on the basis of yields of comparable liquid bonds.

To many people, Mutual Funds can seem complicated or intimidating. We are going to try and simplify it for you at its very basic level. Essentially, the money pooled in by a large number of people (or investors) is what makes up a Mutual Fund. This fund is managed by a professional fund manager.

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 is 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.