Learning About MUTUAL FUNDS

What are MUTUAL FUNDS?

So, Many of us have seen the ad "Mutual Subject to market risk read all scheme related documents carefully" but we lag in even basic understanding of it. First of all, we need to understand what Mutual Funds are and how do they work. A mutual fund is a type of financial vehicle made from a pool of investors to invest in stocks, bonds, money market and other assets. They are a good choice for someone not having market knowledge and doesn't know how to invest his money.

How do they Operate?

Mutual funds pool money from investing public. They have experts having knowledge of the current market. They invest public's money in assets like stocks, bonds and earn profit from it. Investing in Mutual Funds is different from investing in shares of stock. A share of Mutual Fund represents an investment in many assets instead of just one holding.

A Mutual Fund company is both an investment company and an actual company. The value of the company is measured through returns. Greater the returns higher will be the fund's market value.

How do Investors Earn?

1. If more and more people invest in funds then its price increases and hence investor has the right to sell off his funds.

2. Income earned from dividend on stocks and interest on bonds. Approximately, its whole part is paid to the investor. 

3. Mutual Funds Investors can claim tax deduction up to Rs. 1.5 lakh. Investors can also claim indexation benefit. 

Mutual Fund and investment goals

Investment groups are broadly into 3 categories

1. Short term goals(1-3 years)

2. Mid-term goals(3-5 years)
3. Long term goals(5 years and more)

One can select a plan according to your plan for example To buy a house you must select a long term goal and for a car, a short term goal is the best.