Mutual funds operate by acquiring funds from a number of a large number of investors and then investing them in various securities such as government bonds or for equity in companies. The type of fund you invest in will determine where your funds are spent. Equity funds are normally short-term funds and have the possibility of providing high returns. However they are subject to market conditions and based on that, their rate of return can vary greatly. Having said that most experts feel that if investors are willing to hold out for the long run they will always have an increased capital return with equity funds.
Funds that invest in securities such as government bonds or other regular return schemes usually do not provide as a high a return than equity schemes. They are also almost always long-term schemes. Thus in order to obtain assured returns you are sacrificing a higher rate of return as well as committing to the fund for an extremely long time.
Some mutual funds invest in a combination of both securities in order to obtain the benefits of both. These diversified funds can provide you with regular income as well as a higher rate of return by allocating assets accordingly. The risk involved depends entirely on what percentage of the fund is being invested in equity. Higher the investment in equity leads to greater risk on investment.
In India we are taught that saving money is very important. We are taught to always keep aside as much as we possibly can for the proverbial rainy day. This has led to a very reserved population when looked at from an investment point of view. We are always looking for the safest way to invest our money and incurring as little risk as possible. At the same time we are not averse to making more money and supplementing our regular income. These returns are considerably lower with savings or fixed deposits. This is where mutual funds provide us with a safe avenue to invest.
Fund managers or fund management companies are usually responsible for mutual fund investments. When the same manager or company is handling the funds then they are considered to be part of the same fund family. The goals of each fund can be found in its prospectus. These documents will also provide with an idea of risk involved in each fund as well as how the fund plans on investing its capital. It becomes very important therefore to read this document very carefully before investing so as to be aware of every aspect of your investment.
Usually when investing into a mutual fund a person purchases units within that fund. These units act like shares within the fund and the number of units purchased will decide the percentage of returns the investor is entitled to. Each unit has its own cost which can increase or decrease based on the type of fund on market conditions. This cost is known as the net asset value or the mutual fund’s NAV.
As discussed, while investing in mutual funds can be safer than investing directly into the share market, it is still important to arm yourself with all the information available. Also, speak to experts to decide on what your investment goals are and which funds are better suited for you to achieve these goals.
