post 14
Dated15/5/2020
Mutual Funds
snippet Today we will introduce the concept of Mutual funds

We all want to invest our savings somewhere and want our money to work for us but we are somewhat afraid of Stock Market due to it’s volatility and senstivity, But what if there is a reasonably safe and easier approach to invest money and generate profits??

Let’s see the basics of a Mutual fund :

as we have talked earlier that investing in a company requires deep knowledge of fundamental analysis and a handsome amount of time to analyze a single company. It also requires a constant watch on an invested company for it’s performance.

But what if we oursource this task to someone else and create a common fund collected from a large community of investors, Well this healthhy pool of money is called a Mutual Fund that have mutual contributions from a lot of people.

Now what is the benefit of this common collection and who is responsible of it’s maintainance??

  1. Sometimes in market we cannnot purchase shares of a company that are too pricy like MRF tyres stands alone at 58,200 as on 15-05-2020. but a mediocre investor cannot atfford this price for a single share and has will to invest in company!!
    so in laymans terms one can buy a part of share by investing in mutual funds because when a lot of investors with a common thought pool in money, The targeted share becomes affordable due to collection of corpus.

  2. As we have seen the fund management is outsorced and investor has a little to do in research and analysis once he finds an Trusted AMC.

  3. AMC is Asset management Company and is responsible for creation of a Fund portfolio that contains selected companies and debt instruments and is precisely balanced according to a goal and vision of Fund Manager. In return fund manager charges a small amount for their services called TER or Total Expense Ratio which is generally .2%-1% of the investment and is quite reasonable too.

  4. This takes us to fourth point never keep all eggs in same Basket mutual funds provide this service by defining a portfolio according to our investment needs with a mix of balance of each aspect.

Mutual Funds are like a ice cream shop from a child’s fantasy with all the possible flavours and sometimes it becomes difficult to choose one :).
first of all let’s again visit the concept of Equity and Debt.

now in equity we (or AMC on our behalf) gets a partial ownership of that company and we are entitled to both profits and lossed equally hence Investments in Equity are riskier comparatively.
But in the case of debt there is no loss sharing. Company has to pay us the money back with our interest hence this segment is nearly risk free.
Now a mutual fund portfolio is ike a icecream cone which is selected according to our taste and risk taking abilities, Some funds are Equity Focussed and some are Debt oriented. Now for high risk equity funds can give returns as high as 25%-30% in good functioning of market and can also pose losses for same.
whereas the debt segment is somewhat stable with about 8-12% of return annually…..It’s still better than your old Bank FDR.
Now a perfect mix of these two broad options is reffered to as a hybrid fund.

Another classification of mutual funds is wether they pay dividend or not! if they do then they are called dividend funds and have a defined frequency of paying dividend
if they don’t then they are called the growth option, Here the value of NAV appreciates and we have to sell them to obtain profit

also to be noted that the mutual funds are better for investment wether it be short term or long term because they are not traded like shares on a stock exchange. To avoid trading mentality the price NAV is daily released in evening about 10Pm instead of updating it every second as of shares on an exchange.
But what is a NAV :: it stands for Net Asset Value, it is the basic price of a single unit of a mutual fund. Also unlike shares mutual funds can be purchased for less than a unit. Example if I have less money I can purchase 0.25 units of a Mutual fund too. Hence these are customisable.

Hope you will also experience sweetness of this icecream studio

Happy Investing
This is just an effort to share something I have during this Lockdown stay safe and keep learning