The beginner's guide to Stock Market — Part 2
WHAT ARE MUTUAL FUNDS?
“Mutual Fund investments are subject to market risks, please read all scheme related documents carefully before investing”
I am sure you read this sentence in that very peculiar tone and tried reading it as fast as we have all been hearing it till date ;) Yes, we all are familiar with the term Mutual Fund. But very few of us actually know its nitty-gritties.
A mutual fund is a collective fund that is made up of money invested by many different investors. This collection of money is then managed by a professional fund manager, who decides where to invest that money. This money is usually invested in stocks, bonds, commercial papers, or corporate deposits depending on the actual objective of that mutual fund. The profits earned are then distributed among the investors in the same ratio as the money was invested in.
Now the question arises…..if my money is being used by the fund manager to invest in stocks and bonds, why should I invest in MF and not directly in the stock.
Well….you can! Mutual funds are specifically for passive investors, who do not have the time or the inclination to commit to the research required for direct investment yet still want to grow their finances. The benefit of investing in mutual funds is that your money is handled by the expertise of a fund manager. Thus you are worry-free of the complexities that come with investing in stock markets.
Investing in mutual funds is extremely simple, you can start with an amount as low as Rs50–100, and also choose the funds best suited for you. Every kind of mutual fund is available ranging from short-term, Long Term, Low Risk, High Risk, etc.
Myths Around Mutual Funds:
- All Mutual funds are risky: Every mutual fund is different and has been created with a particular strategy and goal. No two mutual funds are the same in terms of risk or returns. You just need to find the one that works for you.
- Higher-rated funds give a higher payout: Ratings are always based on the past performance of the funds. So the past performance is not an absolute judge of the future performance of the funds. There is no guarantee of performance consistency in the funds.
- You need a lot of money to invest in Mutual Funds: One can invest as low as Rs100 in mutual funds. There are a plethora of apps available for investing, so just choose and start right away.
- A higher NAV is not right: NAV actually stands for Net Asset Value, which is the price you pay for one unit of the mutual fund. NAV is dependent on how long the mutual fund has been around and the performance of the fund, making the NAV higher. But a high NAV does not mean lower returns.
It is always recommended to diversify your portfolio and put money across different mutual funds.
Now with the myths around mutual funds busted and a clear understanding of mutual funds and their working, you can go ahead and download any investing app and start off investing for your goal.
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