Mutual Funds have become a popular investment choice for individuals looking to diversify their portfolios without diving too deep into the volatility of the stock market. It's always important to know how Mutual Funds work and their classifications to estimate the potential returns of your investments.
How do Mutual Funds work?
A Mutual Fund is a pooled investment vehicle. When you invest in a Mutual Fund, your money is combined with that of other investors to create a fund. That fund is managed by professional fund managers who invest the money in a diversified portfolio of stocks, bonds or other securities. The key advantage here is diversification, which reduces the risk and caters to different financial goals.
Each investor owns units, that represent a small portion of the holdings of the fund. The unit value is determined by the Net Asset Value (NAV), which is calculated as -
NAV = (Total value of the fund's assets) - (Liabilities) / (Number of outstanding units)
How are returns calculated?
If you invest ₹1,000 in a Mutual Fund with an NAV of ₹50 per unit, you would own 20 units of the fund. If the value of the fund's assets increases and the NAV rises to ₹55, your investment would now be worth ₹1,100 (20 units x ₹55). Returns from Mutual Funds come in three forms: dividends from stocks, interest from bonds and capital gains from selling securities at a profit.
Factors affecting Mutual Funds
1. Market conditions: Economic factors, geopolitical events and market sentiment can cause fluctuations in the value of the securities within the fund.
2. Fund manager’s expertise: The experience and skill of the fund manager play a crucial role in making investment decisions that can affect the fund's performance.
3. Investment strategy: Different funds have varying strategies, such as growth, income or balanced, which can influence risk and return profiles.
4. Expense ratios: Fees associated with managing the fund, including administrative costs and management fees, can impact your overall returns.
Also Read: How to invest in Mutual Funds in 7 easy ways
Ways to Invest in Mutual Funds
- Lumpsum: You can invest a large amount of money as a one-time investment in a Mutual Fund. To get maximum benefit of lumpsum investment you need time the market.
- SIP: SIP involves investing a certain amount of money at regular intervals (usually monthly). This promotes disciplined and convenient investing as you can invest small amounts over an extended period. Additionally, when you invest in SIP, you get the benefit of rupee cost averaging. You may buy more units when prices are low or fewer units when prices are high, lowering the average cost of your investments.
Understanding how Mutual Funds work is important for effective financial planning and investment decisions. You can explore different types of Mutual Funds and their benefits to create strategies that align with your specific goals, like wealth creation, income generation or risk management.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.
