To many people, Mutual Funds can seem complicated. To simplify it 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 several 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, 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.
Various types of Mutual Fund Schemes exist to cater to different needs of different people. Largely there are three types of Mutual Funds.
These invest predominantly in Equities
The Primary Objective is Wealth Creation or Capital Appreciation
They have the potential to generate higher returns and are best for long term investments.
These invest in Fixed Income Securities, like Government Securities of Bonds, Commercial Papers and Debentures, Bank certificates of Deposits and Money
Market Instruments like Treasury Bills, Commercial Paper Etc.,
These are relatively safer investments and are suitable for Income Generation
These Invest in both Equities and Fixed Income, thus offering the best of both, Growth Potential as well as Income Generation.
Like other asset classes, Mutual Fund Returns are calculated by computing appreciation in the value of your investment over a period as compared to the initial investment made. Net Asset Value of Mutual Fund indicates its price and is used in calculating returns from Mutual Fund Investments. Returns over a period are calculated as the difference in sale date Net Asset Value and purchase date Net Asset Value upon purchase date NAV and converted to a percentage by multiplying the result by 100. Any net dividend or other income distribution by the fund during the holding period is also added to the capital appreciation while computing total returns.
Note: NAV of a Fund falls to the extent of dividend payout and statutory levies if any.