Whats Mutual Funds?

A mutual fund is an open-end investment company that brings the money of various investors--its shareholders--together and invest it in a variety of securities. These securities may be in the form of bonds, stocks, money market securities or combinations of these. The shareholders gain profits which are prorated based on the percentage of their shares invested on a specific market security.

mutual funds are the frozen tv dinners of the investment world. this is not an insult to mutual funds or you or anyone. i'm just trying to give you an easy-to-understand analogy

Mutual funds are funds with a professional portfolio manager (an individual) that are bought by retail investors. They are marketed by institutions (e.g. Fidelity) that are known as fund managers.

They provide a number of benefits to individual investors. 1) Diversification. It is dangerous to have all your eggs in one basket but expensive to take small positions in individual stocks. Mutual funds allow small investors to diverisify their investments. 2) Expertise. Retail investors lack a detailed understanding of stocks and bonds. The portfolio manager provides this expertise. 3) No work. The portfolio managers monitor investments actively and act without the retail investor having to get involved in the investment process.

In return for this service the fund manager charges fees. These may be upfront, based on the value of the investment and there may be redemption fees (when the investor wants to cash in their investment).

Mutual funds have a prospectus that outlines the type of investments allowed - the fund's style. There are many different types e.g. US equities, Global Technology Stocks, Recovery Stocks, Growth Stocks, Balanced (stocks and bonds).

Hedge funds are a specific type of mutual fund aimed at high net worth investors. They are usually higher risk and promise higher returns.

Mutual funds can be open ended - there is no limit to the number of units sold - or closed in which case the number of units is established at the outset and can not be increased. The latter may be listed and traded on an exchange.

My answer here goes in indian context. The concept of mutual fund is same worldwide. The currency is Indian Rupee. Lakh Means 100 Thousand Indian Rupees.

Here goes the complete explanation of what the mutual fund is:

Let's say you and I had some money, about 1 Lakh rupees each. And we have 8 other friends with the same idea. We all decide that we need to invest this in stocks, but we don't have the time or energy to do research, tracking, buying selling etc. So we hire a "manager" who has the right experience and tell him - look, you can take upto 2.5% of the total value every year as your fees, but you buy shares that will grow over time, and sell when the time is ripe etc.

10 of us have now put in a lakh each, and the total corpus is Rs. 10 Lakh. We decide that we will issue "units" to denote our interest in the fund, so we issue 1 Lakh units at Rs. 10 each. (It's like "tokens" in a casino). So each person gets 10,000 units, corresponding to an investment of Rs. 1 lakh.

The manager, who is quite experienced and informed, makes stock buying decisions based on what we, the investors, decided up front - i.e. only LARGE cap stocks, or only Technology stocks, at least 90% invested (only 10% cash) etc.

As the stock values grow, so does the total corpus value. Let us say the value has gone up to Rs. 15.6 Lakhs in two years. Now we have to pay the fund manager 2.5% every year, let's say that is Rs. 60,000 for two years. So what's left is Rs. 15 lakhs.

So the value of the 1 Lakh "units" is now Rs. 15 Lakhs, meaning each unit is worth Rs. 15 - this is called the "Net Asset Value" or the NAV. Since each of us has 10,000 units, our individual value is Rs. 1.5 lakhs.

Now I decide to take a trip to Singapore and spend Rs. 75,000. So I "sell" half my units at the current NAV, meaning I sell 5000 units at Rs. 15. To give me money, the fund manager sells some stocks, and now the "total corpus" is down to Rs. 14.25 Lakhs.

But that will again grow with time, but I will see lesser growth than you, because I have only 5000 units and you have 10,000.

One day, when the NAV is Rs. 15 per unit, the fund manager decides the market is going to fall. So he sells half the holding. Now there is half the money in stocks and half the money in the bank. So the manager gives us the money in the bank as a "dividend". Let's say he decides to give Rs. 5 per unit as a dividend, for 1 lakh units (ignore my selling bit) - this is termed as a "50%" dividend (since the initial value of the unit was Rs. 10, and the dividend is Rs. 5. (Your initial value stays the same even after the dividend)

You get Rs. 50,000 as a dividend. But the total corpus has fallen by Rs. 5 lakhs! So the NAV (total corpus divided by no. of units) is going to fall by Rs. 5 per unit. So a dividend for mutual funds is the same as no dividend - you get money, but your fund value goes down.

This is a mutual fund.

Hi BN,

There is a good basic tutorial about mutual funds on the Investopedia.com website. Here is the link:

http://www.investopedia.com/university/mutualfunds/default.asp

I hope this helps.

Michael A. Weiss, CFA
The Editor
The Mutual Fund Investor
http://www.mutualfundinvestor.net

These funds are a type of security that can be traded on the stock market, allowing shareholders to buy and sell shares in the funds. The revenue generated by purchase of shares is used by mutual fund manager to buy more shares of specific stocks, bonds, and other market securities and money market instruments.

Since the prices of the stocks, bonds, and other securities held by the mutual fund vary, the value of the fund changes. The average value of every share of the mutual fund is fixed daily based on the total value of the underlying securities held by the fund.

check it with insurance agent and bank customer service in investment they will give better picture.

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