What are Mutual Funds?

A mutual fund is a pool of money that is professionally managed for the benefit of all shareholders. As an investor in a mutual fund, you own a portion of the fund, sharing in any increases or decreases in the value of the fund. A mutual fund may focus on stocks, bonds, cash, or a combination of these asset classes.

The beauty of mutual funds:
Mutual funds offer a number of advantages, including diversification, professional management, cost efficiency and liquidity.

Diversification : A mutual fund spreads your investment Rupees around better than you could do by yourself. This diversification tends to lower the risk of losing money. Diversification usually results in lower volatility, because when some investments are doing poorly, others may be doing well.

Professional management : Many people don't have the time or expertise to make investment decisions. A mutual fund's investment managers, however, are trained to search out the best possible returns, consistent with the fund's strategies and goals. In essence, your mutual fund investment brings you the services of a professional money manager.

Cost efficiency : Putting your money together with other investors creates collective buying power that may help you achieve more than you could on your own. As a group, mutual fund investors can buy a large variety and number of specific investments. They can also afford to pay for professional money managers and fund operating expenses, where they wouldn't be able to afford it on their own.


Liquidity : With most funds, you can easily sell your fund shares for cash. Some mutual fund shares are traded only once a day at a fixed price, while stocks and bonds can be bought or sold any time the markets are open at whatever price is then available.

Buying shares :
You can buy shares a few different ways, depending on the rules of the particular fund. Funds are often described as either being "no-load" or "load" funds, depending on whether or not they charge a sales commission.

No-load funds: Many funds are no-load funds that charge no (or a very low) sales fee or commission. Financial companies typically sell no-load funds directly to investors in places like newspapers and magazines. In this case, you complete all the paperwork yourself.

Load funds: These funds charge a sales fee or commission for purchases. Some funds charge the fee when you buy shares; others charge when you sell them. Brokerage firms and banks often sell load funds, and will help process any paperwork.

There are reputable, high-performing funds in both categories. Because sales charges reduce your return, we believe that investors should consider no-load funds whenever possible.

Funds typically give you two ways in which to invest:

Lump sum: You can invest any amount you want at one time, as long as you meet the minimum requirements of that fund. Some funds have no minimum for opening an account or no minimum for additional share purchases, while others do.

Automatic investment: Most funds offer plans that allow you to transfer set amounts on a regular basis automatically from your bank account or paycheck. This is a great way to save money on a routine basis.

With automatic investing, you get the benefits of rupee cost averaging. That is, when you make regular investments in a mutual fund, such as investing 1000 Rs/- every month, you can take advantage of both the ups and downs of the market. When the market is down, your monthly investment typically buys you more shares of the fund, helping to increase your ownership in the fund. When the market is up, your monthly investment typically buys you fewer shares of the fund, helping you avoid buying too many shares at higher prices. Over a long period of time, the end result is that the average cost of your fund shares is lower than the average price of the fund shares during the same period.
Exchanging and selling shares

Many funds allow you to make free exchanges of your shares for shares of another fund owned by the same fund company. Typically, there is a limit to the number of free exchanges you can make. Be aware that even though an exchange may be free, there may be tax consequences associated with it.

To sell shares, you either call the fund directly if you have a no-load fund, or have your broker or bank officer do it if you have a load fund. Typically, you are given the option to have the proceeds deposited into your account or sent directly to you by check or wire. Some funds will charge you a fee if you don't keep the fund shares for a minimum amount of time (e.g., 90 or 180 days).

Share price:
The value of a mutual fund share is calculated based on the value of the assets owned by the fund at the end of every trading day. Here is how it works:

The fund calculates the value: A share's value is called the Net Asset Value (NAV). The fund calculates the NAV by adding up the total value of all of the securities it owns, subtracting the expenses of the fund, and then dividing by the number of shares owned by shareholders like you.

Value changes daily: Since the value of the stocks or bonds owned by the fund can change daily, the value of the fund can also change daily. Therefore, a fund is required by law to adjust its price once every trading day to provide investors with the most current NAV.

How many shares you own: To see the value of your investment, you take the value of one share and multiply it by the number of shares you have in the fund. Or, if you are considering investing say 1,000 Rs/- in the fund, you would divide that money by the value of one share to see how many shares that 1,000 Rs/- would give you. While you cannot buy a fraction of a share of stock, you can own a fraction of a mutual fund share, if the amount you invest does not divide evenly by the NAV.

Earning money :
Once your money is in a fund, it can provide you with earnings in three ways. They are discussed in the following sections.

Appreciation: The value of a fund share can appreciate or go up in value. (Of course, it can also go down in value.) When the total value of the securities owned by the fund rises, the value of your fund shares rises with it. Again, the reverse is also true.

Dividends: If the fund receives dividends from stocks, interest from bonds, or other investment income, it distributes those earnings to shareholders as a dividend according to the terms outlined in its prospectus. Depending on the fund, these distributions can be monthly, quarterly, or annually.

Capital gain distributions: Every time the fund manager sells securities at a profit, the fund earns capital gains. Funds are required to distribute these gains to the shareholders at regular intervals, typically once or twice a year. You can choose to have the fund automatically reinvest the money in more fund shares, keep it as cash in your account, or send the money to you.


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