Basics of Mutual Funds

Many investors across the country do not understand what mutual funds are. This is due to the various mutual funds that are available such as SBI Mutual Funds, Fidelity Mutual Funds and others. Mutual funds are a means of investment which people should be clear about and understand them at an investment level. In order to understand Mutual Funds(MFs), there are certain other common terms which you might have already heard or know, but we would like to explain so that you are in the right context.

Company:

A company is an entity voluntarily formed by an associate of people for the purpose of doing business with a distinct name and limited liability.

Shares:

To keep it simple, it is a share that you have in a company. For example, if you have 5 shares of 1000 rupees each of Company ABC, it means that you have invested 5000 rupees in that company and is the owner for that much part. Shares are also commonly called as stocks or equities.

With the above information, and good knowledge about analyzing companies quarterly performance, buying and selling shares, good knowledge of stock markets can invest directly into companies in the stock market. But, there are people who have no understanding of stock markets and unable to make the decisions for their money. It is for such people that Mutual Funds can help.

Mutual Funds is a collective pool of money used for investment:

Mutual Funds is a financial instrument that allows people to pool their money to create a large corpus wherein this money is then taken by a group of investment experts who have an in-depth understanding of stock markets and financial markets. All Mutual Funds have units just like shares in a company. For example, if a person wants to invest Rs 5000 in XYZ MF where price for a unit is Rs.5, then he/she gets 1000 units of XYZ MF. The price of these units (here Rs. 5) are referred as Net Asset Value (NAV).

Different Classification of Mutual Funds (MFs)

Open ended and close ended MFs are one way of classifying MFs. An open ended MF is open at all time for entry and exit where as a close ended MF has a definite entry and exit time.

Another way of looking at classification depends on the type of company that it invests in, such as Large Cap, Mid Cap and Small Cap.

The third type of classification, depends upon the assets class in which the MF is invested. If a MF is driven to invest majority of money in shares (equity) of that company, it is referred to as Equity Mutual Funds. If MF is invested in debt instruments like government bonds, company bonds, then it is Debt Mutual Funds, and if you find balanced blend of both equity and debt, it is termed as Balanced MF.

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