Today we will learn how mutual fund works?
A mutual fund is a type of investment that involves a group funding by like-minded individuals who have mutual or common interests.
Let’s understand this with an example.
Sameer has Rs. 10 and he wants to buy a chocolate bar. This chocolate bar is yummy, expensive and has 10 slabs each. Now, to be able to buy this chocolate, Sameer asks his friends to join in and they too get interested. So, Sameer and four of his friends take out Rs.10 each and put-together Rs.50. They decide to give this money to Sameer’s Dad, who will take care of it until they can buy the chocolate bar. Here, the chocolate becomes the mutual or common interest for all the investors, that is Sameer and his four friends. Their individual investment is Rs.10 and the net total value of their asset is Rs.50.
Since the chocolate bar has 10 slabs, so all the five investors or buyers of the chocolate get 2 slabs each. Now, these slabs in the mutual fund context become units owned by per investor. So, at any point of time, Sameer or either of his friends who have invested towards the chocolate will only get the value of 2 units.
You may be wondering that after the investment pool is made, who monitors it? Well, the person who monitors the fund is called the Fund Manager. In this case, Sameer’s Dad becomes their fund manager as he has taken the responsibility to buy the chocolate bar for the kids with their collected money pool. Therefore, he is responsible for deciding where and how the collected money is to be guided, so all the kids can get the value of the chocolate they want to buy and that too equally.
At any point, Sameer or either of his friends may choose to withdraw their investment and get the value of the units (2 units) they owned originally. So, if the current price of the chocolate is Rs. 50 (each slab is Rs.5) and Sameer withdraws his investment, then he will get back the value of 2 units (2 units x Rs. 5) here, that is Rs.10.
There you go, this is how a mutual fund works.
What should you do when you don’t understand Stock Markets
If you are in that phase of your life, where you want to understand the money market then this can be a great starting point for you, especially living in India. There’s almost nothing to as much that you can learn upon starting a mutual fund, because your Fund Manager actually does all the crucial market analysis for you. Just bring in the desired investment amount and the rest can be managed by experts like us, keeping all the risks in mind.
– Pooja Patel, CFP CM