What is Mutual Fund and How does it Work?

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What are Mutual Funds and How does it Work?, Introduction to mutual funds, asset management company (AMC), net asset value (NAV).

Hello everyone, this video is going to be an introduction to mutual funds.

I am sure most of you have already heard of the term “Mutual Funds”. Either in a TV commercial, New papers or anywhere in social media. And also more than 50% of people who have some information about mutual funds, are also under the assumption that it is very easy to make money by investing in Mutual Funds. In reality, it is not that easy.

So what are the key points to remember while investing in mutual funds?. We will provide answers to all such questions step by step in upcoming videos. But in this video, lets try
to understand what actually mutual funds are.

As per wikipedia,
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities.
Lets try to understand this in simple words.
We can think of ‘Mutual Fund’ also as ‘Money of a group’
As a simple example, lets assume you live in a co-operative society or apartment where the society collects some funds from everyone living in that society as maintenance charge every month. Lets assume there are around 100 apartments and we collect 100 rs from each apartment. Which will be around 12,00,000 Rs per year.
Now this money may not be returned back to you but it will be used for the developmental activities of the society from which every one will be benefited. For example celebration of festivals, cleaning of the tanks or even for social causes.
So basically the task which was difficult to accomplish with one person’s income, can be easily achieved with the help of a group of people.
The Mutual Funds also works somewhat in a similar way.
So if you want to invest in mutual funds, you will have to approach something called as the Asset Management Company (or AMC).
The Asset Management Company consists of a group of experts who knows how to manage the money pooled from you and other investors like you by investing the pooled money on stocks, bond, real estate and other securities.
When we talk about the stock market investing alone, we have a lot of options such as Large Companies, Medium Companies, Small Companies and also there are different sub-categories like Public Sector, Oil Sector, Cement Sector, Textile Sector, Agriculture Sector etc. Which is all very confusing and very risky for common people to take decisions on investing.
The experts in the Asset Management Companies work continuously to manage the pooled money with certain schemes so that all its investors get the best returns for their investments.

The Asset Management Company has a lot of ‘Schemes’ and each of the scheme has an expert who is also called as the ‘Fund Manager’. The Fund Manager is responsible to manage the funds for a particular scheme and decides where and how to invest the money collected from the investors so as to get the best returns.
An Investor will gets something called as Units by investing in mutual funds. His returns will depend on something called as Net Asset Value (NAV) of the selected scheme.The Net Asset Value will increase and if it becomes more than the invested Net Asset Value, All the investors of that scheme will get positive returns, and vice versa is also possible.

As a beginner, most people who want to invest in mutual funds mostly do it by selecting the schemes by just searching on google about current returns of the schemes.
It is not necessary that the scheme which is performing well now will surely perform better and remain consistent in coming years as well.
Every Asset Management Company has so many Schemes and every Scheme has different fund managers. So scheme’s portfolio is also very important to consider while investing.
And finally, if you have any confusions while investing in Mutual Funds, don’t hesitate to take advice of the Mutual Fund advisors available in your city.