Let us understand the concept of mutual fund in a very simple and layman term .
A mutual fund is a professionally-managed trust that pools the savings of many investors and invests them in securities like stocks, bonds, short-term money market instruments and commodities such as precious metals.
Before we start watch this video
A mutual fund is a legal vehicle that enables a collective group of individuals to:
i. Pool their surplus funds and collectively invest in instruments / assets for a common investment objective.
ii. Optimize the knowledge and experience of a fund manager, a capacity that individually they may not have
iii. Benefit from the economies of scale which size enables and is not available on an individual basis.
Investing in a mutual fund is like an investment made by a collective. An individual as a single investor is likely to have lesser amount of money at disposal than say, a group of friends put together.
Now, let’s assume that this group of individuals is novice in investing and so the group turns over the pooled funds to an expert to make their money work for them. This is what a professional Asset Management Company does for mutual funds. The Asset Management Company (AMC) invests the investors’ money on their behalf into various assets towards a common investment objective.
Lets us take an example that there is a box of 12 chocolates costing ₹40. Four friends decide to buy the same, but they have only ₹10 each and the shopkeeper only sells by the box. So the friends then decide to pool in ₹10 each and buy the box of 12 chocolates. Now based on their contribution, they each receive 3 chocolates or 3 units, if equated with Mutual Funds.And how do you calculate the cost of one unit? Simply divide the total amount with the total number of chocolates: 40/12 = 3.33.So if you were to multiply the number of units (3) with the cost per unit (3.33), you get the initial investment of ₹10.This results in each friend being a unit holder in the box of chocolates that is collectively owned by all of them, with each person being a part owner of the box.
Hence, technically speaking, a mutual fund is an investment vehicle which pools investors’ money and invests the same for and on behalf of investors, into stocks, bonds, money market instruments and other assets. The money is received by the AMC with a promise that it will be invested in a particular manner by a professional manager (commonly known as fund managers). The fund managers are expected to honour this promise. The SEBI and the Board of Trustees ensure that this actually happens.
The organisation that manages the investments is the AMC. The AMC employs various employees in different roles who are responsible for servicing and managing investments.
The AMC offers various products (schemes/funds), which are structured in a manner to benefit and suit the requirement of investors’. Every scheme has a portfolio statement, revenue account and balance sheet.
I hope now mutual fund concept is clear to all of you , please keep reading and keep following us.
A mutual fund is a professionally-managed trust that pools the savings of many investors and invests them in securities like stocks, bonds, short-term money market instruments and commodities such as precious metals.
Before we start watch this video
A mutual fund is a legal vehicle that enables a collective group of individuals to:
i. Pool their surplus funds and collectively invest in instruments / assets for a common investment objective.
ii. Optimize the knowledge and experience of a fund manager, a capacity that individually they may not have
iii. Benefit from the economies of scale which size enables and is not available on an individual basis.
Investing in a mutual fund is like an investment made by a collective. An individual as a single investor is likely to have lesser amount of money at disposal than say, a group of friends put together.
Now, let’s assume that this group of individuals is novice in investing and so the group turns over the pooled funds to an expert to make their money work for them. This is what a professional Asset Management Company does for mutual funds. The Asset Management Company (AMC) invests the investors’ money on their behalf into various assets towards a common investment objective.
Lets us take an example that there is a box of 12 chocolates costing ₹40. Four friends decide to buy the same, but they have only ₹10 each and the shopkeeper only sells by the box. So the friends then decide to pool in ₹10 each and buy the box of 12 chocolates. Now based on their contribution, they each receive 3 chocolates or 3 units, if equated with Mutual Funds.And how do you calculate the cost of one unit? Simply divide the total amount with the total number of chocolates: 40/12 = 3.33.So if you were to multiply the number of units (3) with the cost per unit (3.33), you get the initial investment of ₹10.This results in each friend being a unit holder in the box of chocolates that is collectively owned by all of them, with each person being a part owner of the box.
Hence, technically speaking, a mutual fund is an investment vehicle which pools investors’ money and invests the same for and on behalf of investors, into stocks, bonds, money market instruments and other assets. The money is received by the AMC with a promise that it will be invested in a particular manner by a professional manager (commonly known as fund managers). The fund managers are expected to honour this promise. The SEBI and the Board of Trustees ensure that this actually happens.
The organisation that manages the investments is the AMC. The AMC employs various employees in different roles who are responsible for servicing and managing investments.
The AMC offers various products (schemes/funds), which are structured in a manner to benefit and suit the requirement of investors’. Every scheme has a portfolio statement, revenue account and balance sheet.
I hope now mutual fund concept is clear to all of you , please keep reading and keep following us.
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