What is a Mutual Fund?
A mutual fund is a financial instrument that pools money from different investors. This pooled money is invested in various securities like stocks, bonds, money market instruments, etc. The objective of the mutual fund is to provide diversification and professional management at a relatively low cost.
Every mutual fund portfolio has a common investment objective and is managed by a professional fund manager. The fund manager aims to maximize returns for its investors. However, the profits and losses are shared among the investors' proportionate basis of holding in the fund.
Understanding How Mutual Funds Work?
Mutual funds invest pooled money in financial assets like stocks, bonds, etc. Investors whose investment objective aligns with that of the mutual fund can invest to generate returns. Money thus pooled from different investors is managed and invested in the assets by a fund manager.
## What is Mutual Fund Units (NAV)? When you invest in a mutual fund, you buy the fund units. This is similar to buying company shares at a market price. Each unit gives exposure to all the assets in the fund. For instance, if a Fund XYZ invests in Company A (15%), Company B (20%), Company C (25%), Company D (30%) and 10% in debt instruments. Thus, buying one fund unit in a mutual fund gives you exposure to all the instruments in the same ratio.
You must buy and sell each fund unit at the prevailing Net Asset Value (NAV). The NAV is the combined market value of all the securities the fund holds on a particular day. In other words, NAV represents the market value of units of the mutual fund scheme. This value is subject to change daily based on the performance of underlying assets of the mutual fund scheme.
Net Asset Value (NAV) = {{Market Value of All Assets} - {Liabilities & Expenses}}/ {Outstanding Mutual Fund Units}}
Example: If you invest Rs.500 in a mutual fund scheme and the NAV is Rs.10, you will have 50 units (500/10) of the mutual fund scheme.
Learn more about HDFC Mutual Funds
Glossary
Financial Instrument - It is a monetary contract between parties which holds capital and can be traded, modified and settled.
Money Market Instrument- They are short term financing instruments which can be converted to cash easily like bonds, T-bills, commercial paper, etc.
Securities - It is a financial asset that holds monetary value and represents ownership of financial assets like shares, bonds, options, etc.
Stock - It is a security that represents a fraction of ownership of a company.
Bonds - It is a security that represents a loan from an investor to borrower where the borrower promises to pay interest and principal on the loan.
Start with Mutual Funds Investment at Sigfyn
