What is a Mutual Fund?

A mutual fund is a professionally managed investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Mutual funds offer investors access to a wide range of investment opportunities while being managed by experienced fund managers.

How are mutual funds priced?

When you invest in mutual funds, the units are allotted to you based on their Net Asset Values (NAVs). The NAV of a mutual fund is calculated by dividing the total value of assets in the fund’s portfolio by the number of outstanding units.

How to calculate mutual fund returns?

Mutual fund returns are calculated based on the change in NAV over a specific period. This change can also be adjusted for distributions such as dividends or capital gains. Investors can evaluate returns using metrics like the annualised return, which provides a standardised measure of performance. The returns are usually measured with CAGR or XIRR.

What are mutual fund categories?

Mutual funds are categorised based on their investment objectives, asset classes, and risk profiles. Common categories include equity funds, debt funds, hybrid funds, and money market funds. Each category serves different investment needs and risk appetites.

Advantages of investing in mutual funds

Investing in mutual funds offers diversification and professional management. Additionally, mutual funds provide liquidity, allowing investors to buy and sell shares at NAV prices.

Drawbacks of investing in mutual funds

Despite their advantages, mutual funds may have drawbacks such as the potential for underperformance, and a lack of control over specific securities in the portfolio. The management fees for the mutual fund can also be of concern to some investors.

How does a mutual fund work?

For instance, consider an equity mutual fund that invests in a diversified portfolio of stocks. Investors buy units in the fund, and the fund manager allocates the capital across different stocks based on the fund's investment objective and strategy. As the value of the underlying stocks fluctuates, so does the NAV of the mutual fund.