What is Mutual fund

what is mutual fund

A mutual fund is an investment method, where investors contribute small portion of money. These contributions are pooled to make it a large amount. This amount is then invested in a portfolio of various securities such as equity shares, bonds, liquidity etc.

When we refer the term ‘mutual fund’ we are referring to the money contributed by the investors. When we say ‘portfolio’ we are referring to the securities in which the investments have been made.

A mutual fund thus gives an opportunity to investors to participate in markets and invest in bonds, equity shares, etc and also other such instruments by pooling money. A mutual fund will have its objective at face and clearly informs you where the money will be invested and how the portfolio will be formed. Various Investors choose a fund based on their own objectives.

For example, an equity fund may says that its objective is to invest in equity shares to generate long term growth. An investor, who likes to invest in a portfolio of equity, will buy the units of this fund.

A liquid fund may says that its objective is to generate returns from investing in money markets over the shorter duration. Investors having a short term idle funds may interested to invest it in such a liquid fund.

A mutual fund is a collective investment vehicle. Usually a mutual fund product is first pre-scribed by its investment objective. Investors then invest money in that product. The money is pooled and is invested according to the mentioned objective.

Example

Axis Liquid Fund is a debt fund that invests in debt instruments, with the objective of generating income for its investors. Fund managers invest the money into securities such as equity and debt, according to the investment objective of the fund.

The risk and return of the fund depend on the investment portfolio of the fund. The benefits from the investment accrue to those investors that contribute to the pool. There is thus mutuality in the contribution and as well as the benefit. Hence the name ‘mutual’ fund. When a mutual fund pools money from several investors, each investor may not contribute the same sum of money it various as per scheme and investor needs.

How profits accrued are distributed

The profits from the fund accrue to all investors in proportion to their investment from the pool.

Example
Three investors invest Rs 50,000, Rs 30,000 and Rs 20,000 respectively in a equity fund. Then the pooled amount is Rs 100,000. The money is invested and earned 20000 over a period of time. Now the pool worth is 120,000. then the ratio of investor betwen the investor is like 5:3:2 which leads to 60000, 36000, 24000.

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