What are Mutual Funds ?

AAAA 1 Mutual Fund, Mutual Funds, SIP, Systematic Investment plans

What are Mutual Funds?

Mutual Funds are investment products that are managed by professionals. In Mutual funds the professional investment managers / Fund managers along with team plan and invest the amount invested by investors in various products like Shares, Bonds, Debentures depending on type of mutual fund.

Let us take an example here  

Say Mr. A want to invest Rs.1,00,000/- in Mutual Funds. Then Mr. A will select a particular mutual fund say PQR Mutual fund. Now Price (technically known as NAV – Net Asset Value) of mutual fund is Rs.2000/- per Unit. Mr. A is allotted 50 units (i.e., Total amount invested / price per unit so in this case it is 100000/2000). Like Mr. A there may be many other investors who would have invested in this fund. Now Fund manager will invest this amount in various shares of a company, Corporate bonds and debentures, Government bonds depending on nature of fund.

Now let us assume that Total Fund value is Rs.10,00,000/-. Fund manager will invest this in various securities and monitor the returns for the same.

image 2 Mutual Fund, Mutual Funds, SIP, Systematic Investment plans

So, as we can see in above example fund managers allocate and monitor funds on behalf of investors.

“Mutual Funds are subject to market risks. Please read offer document and other terms and conditions carefully before investing.”

We have often seen or heard this in various advertisement. What does it mean?

It means that risk for investing in mutual funds is to be borne by investor and not fund managers.

Fund managers manage and monitor our funds. They do not assure fixed returns. It is investors responsibility to evaluate a particular fund based on past performance, Asset composition of Fund ,expected returns, bearable risks that investor is ready to take.

How can we invest in mutual funds?

Method 1: Lumpsum Investment

The Lumpsum amount can be invested in mutual fund at a particular time.

For example: Mr. C has excess of Rs.2,00,000/- on 15th April 2020 which he plans to invest in mutual fund. So Mr. C has decided to invest 2,00,000/- equally in following 4 mutual funds:              

Name of FundPrice (NAV)Amount of InvestmentUnits allotted
ABC FundRs.200Rs.50000250 Units (Rs.50000/Rs.200)
PQR FundRs.300Rs.50000166.67 Units (Rs.50000/Rs.300)
XYZ FundRs.100Rs.50000500 units (Rs.50000/Rs.100)
MNO FundRs.5000Rs.5000010 units (Rs.50000/Rs.5000)
Total Rs.200000 

Method 2: SIP (Systematic Investment Plan)

In SIP (Systematic Investment Plan) a fixed amount can be invested at regular intervals say once in month, once in quarter, instead of making a lumpsum investment.

For Example: Mrs. D is able to save Rs.20000/- per month from her income. She is planning to invest the amount in SIP every month from 15th April 2020. Mrs. D plans to invest equally in 4 funds.

The following tables show details of amounts invested for April 2020 , May 2020 and June 2020.

On 15th April 2020

Name of FundPrice (NAV)Amount of InvestmentUnits allotted
ABC FundRs.200Rs.500025 Units (Rs.5000/Rs.200)
PQR FundRs.300Rs.500016.67 Units (Rs.5000/Rs.300)
XYZ FundRs.100Rs.500050 units (Rs.5000/Rs.100)
MNO FundRs.5000Rs.50001 unit (Rs.5000/Rs.5000)
Total Rs.20000 

On 15th May 2020

Name of FundPrice (NAV)Amount of InvestmentUnits allotted
ABC FundRs.250Rs.500020 Units (Rs.5000/Rs.250)
PQR FundRs.325Rs.500015.38 Units (Rs.5000/Rs.325)
XYZ FundRs.150Rs.500033.33 units (Rs.5000/Rs.150)
MNO FundRs.3000Rs.50001.67 unit (Rs.5000/Rs.3000)
Total Rs.20000 

On 15th June 2020

Name of FundPrice (NAV)Amount of InvestmentUnits allotted
ABC FundRs.200Rs.500025 Units (Rs.5000/Rs.200)
PQR FundRs.400Rs.500012.50 Units (Rs.5000/Rs.400)
XYZ FundRs.150Rs.500033.33 units (Rs.5000/Rs.150)
MNO FundRs.2500Rs.50002 units (Rs.5000/Rs.2500)
Total Rs.20000 

Now if we observe any particular fund the number of units that are purchased for same price are different. This is because of change in price / NAV of the mutual funds on these dates.

How and When to sell mutual funds?

Except for close ended mutual funds all other mutual funds can be sold anytime in market at Price / NAV as on that date.

For E.g.: Mr. C has following mutual funds on 31st March 2020.

Name of FundPurchase Price (NAV)Amount of InvestmentUnits allotted
ABC FundRs.200Rs.50000250 Units (Rs.50000/Rs.200)
PQR FundRs.300Rs.50000166.67 Units (Rs.50000/Rs.300)
XYZ FundRs.100Rs.50000500 units (Rs.50000/Rs.100)
MNO FundRs.5000Rs.5000010 units (Rs.50000/Rs.5000)
Total Rs.200000 

Now Mr. C wants to sell PQR mutual fund. NAV of PQR Fund is Rs.325/- as on 31st March 2020. So Mr. C can sell 166.67 units @ Rs.325 per unit. Total sales proceeds from mutual funds is Rs.54,167.75 (166.67*325)

So This was about basics of mutual funds , SIP (Systematic Investments plans).