What is a mutual fund?
A mutual fund is a type of investment where a number of investors money is pooled together and used by the fund manager (referred to as Asset Management Company or AMC) to invest in underlying securities in line with the objectives of the scheme.
By this method you can achieve a much wider spread of investments than if you were investing directly in the underlying investments. It is generally accepted that by spreading you investment you are spreading your risk, therefore investing in mutual funds is considered to be low risk than direct investment.
When you invest in mutual funds you do not own the underlying investments but have a claim to a number of units in the fund representing the size of your investment. the value of each unit of the mutual fund scheme, calculated based on the market value of the underlying investments after deducting expenses and liabilities, is referred to as the ‘net asset Value’ or NAV.
The first time a mutual fund scheme is available for purchase is referred to as New Fund Offering or NFO.
How does a Mutual Fund work?
What types of mutual fund schemes are there?
Mutual funds can be classified in two ways:
1. by structure and
2. by asset category
There are hundreds of specific schemes designed around these parameters, to meet different investment objectives with regard to risk, return and investment horizon.
By structure
By structure, mutual funds schemes can be classified as open-ended funds and close-ended funds.
Open-ended funds
Open-ended funds do not have any fixed maturity period and are a ...