Mutual Funds For Beginners

Mutual Funds For Beginners

A mutual fund is an investment scheme launched by an asset management company.

Usually, there are multiple schemes launched by the same AMC.

Each scheme is managed by a fund manager who has a background in investment management and finance.

Each mutual fund scheme has a defined investment objective and the fund manager manages the funds in accordance with these goals.

Understanding NAV , Load and other Jargon

When you Invest INR  100  in a mutual fund scheme, the scheme allots you a

Certain amount of Units in lieu of the money invested by you . These units are

allotted at a price which is called NAV (Net Asset Value). The NAV at which

units are allotted/redeemed is arrived at the end of the day.

The basic tenet of investment in mutual fund is the same as in stocks or any other investment products : Buy low , Sell high.

So, as an investor looking for appreciation, your goal should be to Buy more units

at Lower NAV and Sell at Higher NAV. The differential of selling and buying

NAV is your Profit /Appreciation.

e.g.

 You invest INR 10,000/- in a MF Scheme @ NAV of 50 on 1st Jan’12.

Therefore, you are allotted 200 units of the scheme.

The schemes NAV is now 120 on 1st Jan’15  . On selling all the units on 1st Jan’15, the money in your account will be 200*(120-50)= INR 14000/-.

Net return / Year (%) ={ 14000-10000/ 10000}/3*100 = 13.33 %

(This is a ball park absolute yearly return . The figure will change if you use the compound interest formula).

 

Why Mutual Funds when there are simpler investment options?

Agreed, there are simpler, less risky and easy to understand investment options in the market. So,why should You invest in Mutual Funds that are risky and somewhat fancy to understand?

The answer lies in Inflation adjusted returns compared to other investment options. Now, what is inflation??

Inflation is the general rise in price of good and services over a period of time.

Haven’t you wondered why the prices of essentials  keeps rising every year?

This is inflation for you. Inflation is like a hole at the bottom of a tumbler that keeps trickling away your wealth .

Always remember, Real Return is Nominal Return – Inflation.

e.g.  If the inflation rate was @ 4%/year, your real return will be 9.33%

( 13.33 % – 4% )

Recommended: http://www.oracleinvestor.com/category/mutual-funds/

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