Understanding Mutual Fund Basics: A Smarter Way to Become Rich

Last updated on 17 Sep, 2017 | 0 comments

Mutual Fund Feature

Mutual fund Investments are subject to market risk. Please read the offered document carefully before investing.” You may have heard this phrase for almost thousand times but no one ever told you how rich mutual funds can make you. Mutual funds are really one of the smartest ways to invest your money.

But a note of caution: there are so many mutual fund schemes and so many types of them that it’s easy to get confused and pick the wrong ones. This segment will make you understand the basics of mutual funds and how one can maximize profit & lower the investment risk simultaneously.

What is a Mutual Fund?

A mutual fund is a pool of money from numerous investors who wish to save or make money just like you. Investing in a mutual fund can be a lot easier than buying and selling individual stocks and bonds on your own.

Investors can sell their shares when they want. A mutual fund may invest your money in stocks, bonds and other investment options, depending on the type and objectives of the scheme.

Why Investing in Mutual Fund has lesser risk than Investing in Stocks?

Unlike stock investment, in the mutual fund, each fund’s investments are chosen and monitored by qualified professionals who use this money to create a portfolio. That portfolio

could consist of stocks, bonds, money market instruments or a combination of those. While in stock market investment, you are the only one who is responsible for all your dealings.

What is a Portfolio?

The term portfolio refers to any combination of financial products such as stocks, bonds and cash. Portfolios may be held by individual investors and/or managed by financial professionals, hedge funds, banks and other financial institutions.

It is a generally accepted principle that a portfolio is designed according to the investor’s risk tolerance, time frame, and investment objectives. In mutual funds, a portfolio is that integral part which decides the risk factor and earnings ratio of your investment scheme.

Understanding the Importance of NAV or Net Asset Value

When you invest in mutual fund scheme, you receive units in exchange. The price of each mutual fund unit is called its Net Asset Value (NAV). Understanding NAV is important to understand the performance of mutual funds. The NAV of a mutual fund scheme is calculated by dividing the total value of assets the fund has by the total number of units outstanding.

For example, if the total value of its investments (in shares, bonds, etc.) is Rs. 500 crore and the mutual fund has issued 20 crore units to investors, the NAV of the scheme would be Rs. 25 (500 crore / 20 crore). If the value of the investments made under the mutual fund scheme increases after some time, the NAV would also increase.

  • The NAV of a mutual fund scheme doesn’t fluctuate throughout the day like the value of a stock as mutual funds are not traded other than closed-end mutual funds. For most mutual fund schemes, NAV is calculated just once at the end of each day. This is the price at which you will be able to buy/ sell your mutual fund units on that day.
  • Mutual fund units are available in fractions. For example, if you invested Rs. 5,000 and the NAV of the mutual fund scheme are Rs. 30, you’ll get 166.67 units (Rs. 5000 / 30). Stocks, on the other hand, are always whole numbers— 2, 12, 55, 500, etc.
  • Unlike Stock prices which may or may not be affected by dividend payments, when a mutual fund scheme pays dividend, the total value of the scheme actually decreases.

Mutual Fund Scheme Types

To be a smart investor in mutual funds you should know how these different types of schemes work so that you can make the right choice. Now, if you’re looking for high returns, you will invest

in equity funds, but it contains high risk. But, if you want steady growth with minimum risk, you must invest in Debt or Balanced Funds. The following types are most widely available:

1. Equity Funds: All investments are in the stock market in various companies. High returns possible but risks are also high.

3. Index Funds: Investments are made only in stocks that belong to a particular Index. There is potential for high to medium returns at high to medium risk.

5. Balanced Funds: Most of their investments are in debt. Remaining 10-20% is in stocks. Returns can be low to medium with similar risks.

2. Sectoral Funds: Investments are made only in stocks of companies belonging to a particular sector or sectors. Potential for very high returns but risks can also be very high.

4. Debt Funds: They invest in bonds, debentures, government securities, etc. Expect medium returns at low risks.

6. Fixed Maturity Plans: A bit like fixed deposits but with lesser tax deduction due to indexation on plans that have a minimum tenure of 3 years.


Mutual Funds these days is attracting more investors as there funds are handled by professional market experts and they incur much less risk than that of stock market. However, there is always a point of caution.

Professional investors know the market well, but it doesn’t imply that there is no risk. You must always properly go through the scheme beforehand investing.

Mutual fund Investments are subject to market risk. Please read the offered document carefully before investing.” You may have heard this phrase for almost thousand times but no one ever told you how rich mutual funds can make you. Mutual funds are really one of the smartest ways to invest your money.

But a note of caution: there are so many mutual fund schemes and so many types of them that it’s easy to get confused and pick the wrong ones. This segment will make you understand the basics of mutual funds and how one can maximize profit & lower the investment risk simultaneously.

What is a Mutual Fund?

A mutual fund is a pool of money from numerous investors who wish to save or make money just like you. Investing in a mutual fund can be a lot easier than buying and selling individual stocks and bonds on your own. Investors can sell their shares when they want. A mutual fund may invest your money in stocks, bonds and other investment options, depending on the type and objectives of the scheme.

Why Investing in Mutual Fund has lesser risk than Investing in Stocks?

Unlike stock investment, in the mutual fund, each fund’s investments are chosen and monitored by qualified professionals who use this money to create a portfolio. That portfolio could consist of stocks, bonds, money market instruments or a combination of those. While in stock market investment, you are the only one who is responsible for all your dealings.

What is a Portfolio?

The term portfolio refers to any combination of financial products such as stocks, bonds and cash. Portfolios may be held by individual investors and/or managed by financial professionals, hedge funds, banks and other financial institutions. It is a generally accepted principle that a portfolio is designed according to the investor’s risk tolerance, time frame, and investment objectives. In mutual funds, a portfolio is that integral part which decides the risk factor and earnings ratio of your investment scheme.

Understanding the Importance of NAV or Net Asset Value

When you invest in mutual fund scheme, you receive units in exchange. The price of each mutual fund unit is called it’s Net Asset Value (NAV). Understanding NAV is important to understand the performance of mutual funds. The NAV of a mutual fund scheme is calculated by dividing the total value of assets the fund has by the total number of units outstanding.

For example, if the total value of its investments (in shares, bonds, etc.) is Rs. 500 crore and the mutual fund has issued 20 crore units to investors, the NAV of the scheme would be Rs. 25 (500 crore / 20 crore). If the value of the investments made under the mutual fund scheme increases after some time, the NAV would also increase.

  • The NAV of a mutual fund scheme doesn’t fluctuate throughout the day like the value of a stock as mutual funds are not traded other than closed-end mutual funds. For most mutual fund schemes, NAV is calculated just once at the end of each day. This is the price at which you will be able to buy/ sell your mutual fund units on that day.
  • Mutual fund units are available in fractions. For example, if you invested Rs. 5,000 and the NAV of the mutual fund scheme are Rs. 30, you’ll get 166.67 units (Rs. 5000 / 30). Stocks, on the other hand, are always whole numbers— 2, 12, 55, 500, etc.
  • Unlike Stock prices which may or may not be affected by dividend payments, when a mutual fund scheme pays dividend, the total value of the scheme actually decreases.

Mutual Fund Scheme Types

To be a smart investor in mutual funds you should know how these different types of schemes work so that you can make the right choice. Now, if you’re looking for high returns, you will invest in equity funds, but it contains high risk. But, if you want steady growth with minimum risk, you must invest in Debt or Balanced Funds. The following types are most widely available:

1.Equity Funds: All investments are in the stock market in various companies. High returns possible but risks are also high.

2.Sectoral Funds: Investments are made only in stocks of companies belonging to a particular sector or sectors. Potential for very high returns but risks can also be very high.

3.Index Funds: Investments are made only in stocks that belong to a particular Index. There is potential for high to medium returns at high to medium risk.

4.Debt Funds: They invest in bonds, debentures, government securities, etc. Expect medium returns at low risks.

5.Balanced Funds: Most of their investments are in debt. Remaining 10-20% is in stocks. Returns can be low to medium with similar risks.

6.Fixed Maturity Plans: A bit like fixed deposits but with lesser tax deduction due to indexation on plans that have a minimum tenure of 3 years.


Mutual Funds these days is attracting more investors as there funds are handled by professional market experts and they incur much less risk than that of stock market. However, there is always a point of caution. Professional investors know the market well, but it doesn’t imply that there is no risk. You must always properly go through the scheme beforehand investing.