Demystifying Mutual Funds
An explainer on Mutual Funds: Read on to know the what and why of Mutual Funds.
Mutual Fund is a way of investing in stocks or bonds wherein a number of people “pool-in” their money, which is then managed by an ‘experienced and learned’ professional.
Mutual: something that we do together (“held in common by two or more parties.”)
Fund: a pool of money (“a sum of money saved or made available for a particular purpose.”)
Major reasons why people “pool” their funds and invest:
1) They have idle money, but no time to manage it. So, better give it to an expert who knows / claims to know about the markets.
2)They want to buy shares / bonds of a lot of different companies, but have limited funds.
Example: You want to buy RIL @ ₹1,100 and HDFC Bank @ ₹900 (total ₹2,000). But, sadly, you have only ₹1,000. The stock market does not allow you to buy half-and-half of both (fractional shares are not allowed).
Now what to do? You call up your friend, and fortunately, he / she also wants to buy the same stocks, and has also only ₹1,000 (mother of coincidence - but bear with me).
So, they mutually agree to create a fund of ₹2,000 by contributing 50% each and hence, are able to purchase the shares.
3) Mutual Funds help in “diversifying” your risk of losing money. Instead of betting on one horse, you bet on the majority of horses, which ultimately reduces your risk of losing (however, note that it also reduces your chances of winning big).
The Mutual Fund companies basically pool lots and lots of small amounts of money from lakhs of investors, and then invest the money on their behalf. In return, the "mutual fund holder" is allotted 'units' in the mutual fund. Each 'unit' represents your percentage share in the fund.
Watch this space to know more about Mutual Funds.
Thousands of readers get our daily updates directly on WhatsApp! 👇 Join now!