MUTUAL FUND Concept

CONCEPT

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

ORGANISATION OF A MUTUAL FUND

There are many entities involved and the diagram below illustrates the organisational set up of a mutual fund:

ADVANTAGES OF MUTUAL FUNDS

The advantages of investing in a Mutual Fund are:

Professional Management

Diversification

Convenient Administration

Return Potential

Low Costs

Liquidity

Transparency

Flexibility

Choice of schemes

Tax benefits

Well regulated

TYPES OF MUTUAL FUND SCHEMES

FREQUENTLY USED TERMS

Net Asset Value (NAV)

Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.

Sale Price

Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load.

Repurchase Price 

Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price.

Redemption Price

Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related.

Sales Load 

Is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’ load. Schemes that do not charge a load are called ‘No Load’ schemes.

Repurchase or ‘Back-end’Load

Is a charge collected by a scheme when it buys back the units from the unitholders.

About Money99

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