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With rising investor consciousness in India, mutual funds (MF<\/a>) have soared in popularity. The earlier you begin your investment journey in MF schemes, the better your chances of enjoying superior wealth creation. If you\u2019re new to investing in this asset class, read this to article to know what is a mutual fund and how does it work?<\/p>\n\n\n\n Look at MFs as a type of financial vehicle that pools money from different investors, which is then used to purchase securities such as bonds, stocks, money market instruments, etc. These funds are usually invested in a variety of assets to create a diversified portfolio \u2013 one that can weather the storms of the volatile market.<\/p>\n\n\n\n Based on the performance of each stock or bond in the portfolio, investors make a profit or take a loss. There are three ways to earn from an MF scheme<\/a> \u2013<\/p>\n\n\n\n Given below are some basic terms you must know as an investor \u2013<\/p>\n\n\n\n This ratio is a key indicator of the financial strength of a company deduced by the company\u2019s current assets\/current liabilities.<\/p>\n\n\n\n The act of diversifying investments into various asset classes so as to reduce risks while ensuring profitability.<\/p>\n\n\n\n This is the value of each MF unit that measures a fund’s performance.<\/p>\n\n\n\n It is a set of goals you have for your portfolio, for instance, invest to maintain capital, invest to achieve income, etc.<\/p>\n\n\n\n This is your income calculated by computing appreciation in investment value compared to the initial investment.<\/p>\n\n\n\n Additional Read: <\/strong>What kinds of investors should opt for mutual funds?<\/a><\/p>\n\n\n\n MF schemes are classified into different categories, as given below.<\/p>\n\n\n\n Open, closed, and interval<\/p>\n\n\n\n Equity, debt, and hybrid<\/p>\n\n\n\n Large-cap<\/a>, mid-cap<\/a>, small-cap<\/a>, and multi-cap<\/a><\/p>\n\n\n\n Note \u2013 <\/strong>Funds belonging to the above-mentioned categories could be further classified into sub-categories.<\/p>\n\n\n\n The strategy for each fund is set at the time of the New Fund Offer (NFO)<\/a>. The fund must follow the decided strategy.<\/p>\n\n\n\n From the launch of NFO to the distribution of returns, mutual funds investing is a 4-step process, as mentioned below.<\/p>\n\n\n\n You can subscribe to such schemes from their inception; however, once the NFO closes, you need to purchase the units. NFOs are cheaper than existing funds, but you need to consider the fund house’s reputation, risk, etc.<\/p>\n\n\n\n Investors like yourself purchase small fund units, after which the money is pooled.<\/p>\n\n\n\n The pooled money is invested in securities like shares and bonds.<\/p>\n\n\n\n Efforts are made to increase the NAV of the fund – diversification, portfolio rebalancing, etc. The returns are either distributed to investors or invested back into the scheme for further wealth creation.<\/p>\n\n\n\n Additional Read:<\/strong> Understanding Mutual Fund Terminologies<\/a><\/p>\n\n\n\n So you see, it’s not that confusing at all! Plus, now you can compare different MF schemes from the comfort of your home with Tata Moneyfy’s mutual fund app<\/a>. Take your time and choose schemes that align with your risk appetite, investment objective, etc.<\/p>\n\n\n\nWhat is a mutual fund and how does it work?<\/strong><\/h2>\n\n\n\n
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What are some basic terms you need to know about mutual fund investing?<\/strong><\/h2>\n\n\n\n
\u2022 Acid test ratio \u2013 <\/strong><\/h3>\n\n\n\n
\u2022 Asset allocation \u2013<\/strong> <\/h3>\n\n\n\n
\u2022 Net Asset Value (NAV) \u2013<\/strong> <\/h3>\n\n\n\n
\u2022 Investment objective \u2013<\/strong> <\/h3>\n\n\n\n
\u2022 Returns \u2013<\/strong> <\/h3>\n\n\n\n
Types of mutual fund schemes<\/strong><\/h2>\n\n\n\n
\u2022<\/strong> Based on the maturity period \u2013 <\/strong><\/h3>\n\n\n\n
\u2022 Based on the investment objective \u2013<\/strong> <\/h3>\n\n\n\n
\u2022 Based on market capitalisation \u2013<\/strong> <\/h3>\n\n\n\n
How do mutual funds work?<\/strong><\/h2>\n\n\n\n
\u2022 NFO launch \u2013 <\/strong><\/h3>\n\n\n\n
\u2022 Money pooling \u2013<\/strong> <\/h3>\n\n\n\n
\u2022 Investing in securities \u2013<\/strong> <\/h3>\n\n\n\n
\u2022 Fund returns \u2013<\/strong> <\/h3>\n\n\n\n
Bottom Line<\/strong><\/h3>\n\n\n\n