How does mutual fund work?

Mutual funds are a way of doubling money. Nowadays everyone is getting attracted towards mutual funds as it provides excellent returns.
mutual fund

Have you ever wondered why you get good returns through mutual funds, if not, then in today’s article we will give you information about how mutual funds work. If you also want to understand better how mutual funds work, then stay with us.

How does mutual fund work?

The main function of mutual funds is to provide investment in stocks, bonds and other securities. These investments are pooled together to get the highest possible return.

Mutual funds can be classified into two different types: open-ended funds and closed-end funds. Open-ended funds are investment vehicles that continuously issue new shares while closed-end funds issue a fixed number of shares when created.

Mutual fund managers actively manage investments for these funds by buying and selling them in the secondary market to maximize their value to investors (for example, higher returns to investors).

mutual fund investment
Whenever you invest in mutual funds, then this question must have come in your mind that whether investing in a company and investing in mutual funds are two different things. So the answer is yes.

These two are different things because when you invest in the company, you get the shares of the company, but when you invest in a mutual fund, it is the unit of the mutual fund that is given to you.

Mutual Fund Structure
Mutual fund is not a company, it is a product of an asset management company. Asset Management Company is the one which is licensed by SEBI to launch Mutual Funds.

Example: HDFC AMC is a company that operates different mutual funds under the name of HDFC. Like equity funds, debt funds and hybrid funds, apart from these, there are many other funds in which you can invest.

As of today, there are total 44 Asset Management Companies in India which are registered by SEBI. It operates more than 2500 mutual funds.

What is Mutual Fund AMC?
Companies use IPO to collect money from the public, similarly an asset management company uses NFO (NEW FUND OFFER) to collect investment from the public. The shares of the company are given to the investors through IPO, similarly the units of mutual funds are given to the investors by the AMC.

The net asset value of each unit is kept at Rs 10 at the time of NFO. The public can apply from one unit to buy any number of units as per their wish. After the completion of the NFO process, the fund managers of the mutual fund invest the collected investments in the mutual fund according to their own, this is called Asset Management Company.

What is Net Asset Value (NAV)?
A unit value of a mutual fund is called Net Asset Value (NAV) or you can also call it the cost of one unit of a mutual fund. You get profit when you buy shares and their Net Asset Value increases.

The way the shares keep going up or down throughout the day, in that way the NAV does not go up or down. It is updated after the market closes. NAV shows the growth of the unit of the mutual fund.

Calculation of NAV of Mutual Funds
To calculate NAV, you have to understand its formula, only then you can know the NAV value.

Net Asset Value = (Asset- Liability) / Total Number of Units

Suppose in 2022 the cost of investment of Rs 2,00,000 increases to Rs 4,00,000 and the liability becomes Rs 30,000 with the number of units increasing to 5,000 what will be the NAV now?

NAV (2022) = (4,00,000-30,000) / 5,000
= 3,70,000 / 5,000 = Rs 74

What is units in mutual fund?
Mutual funds are divided into small parts so that investors can invest even with small amounts. These parts are called units. According to these units, mutual funds are bought and sold.

If you are asked to buy mutual funds worth 20,000 crores. So is it possible for you?

Your answer would be no at all.

Because the general investor does not have that much amount, but if that 20000 crore mutual fund is divided into 200 crore parts.

Now the price of one unit of this will be Rs 100. So now it is possible for ordinary investors to buy it.

How to calculate units in mutual fund?
You can know from the formula given below how many units you will get on the amount you have invested in mutual funds.

Units = Invested by Investor Divide Net Asset Value

You will understand well from the table shown below:-

Investment amount Rs.50,000
NAV (cost of one unit) Rs.50
units will get 1000 units

Rules for selling mutual fund units
When the investor buys the shares of the company, he cannot sell it in fraction as if you have 10 shares of the company, then you cannot sell 6.5 shares out of it. But this does not happen in mutual funds, where you can sell units in fractions, for example

If you have 100 shares of any mutual fund and you want to withdraw Rs 420 from it, then a unit equivalent to Rs 420 can be sold in that unit.

How are units distributed on SIP and Lump Sum?
Now you must have understood about NAV, so now the question is how the units are distributed on the investment amount whether you are taking SIP or taking Lump sum, the day your money reaches the mutual fund company the NAV of the same day The unit is divided on the base. You are given units by dividing the current NAV in your investment.

Example: Suppose you have a SIP installment of 2,000 and the NAV at that time was Rs 100, then you will be given 20 units.

What is NAV?
NAV is a unit value of a mutual fund.

What does SIP mean?
SIP means depositing money by the investors in fixed installments every month instead of depositing them all at once. HDFC Mutual Fund

What did you learn today?
I sincerely hope that I have given you complete information about how mutual funds work. And I hope you guys have understood about what is Mutual Fund AMC.

I request all of you readers that you also share this information in your neighborhood, relatives, your friends, so that there will be awareness among us and everyone will benefit a lot from it. I need your cooperation so that I can pass on more new information to you guys.

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