Mutual fund is a portfolio of stocks and other securities managed a by group of fund managers and financial analysts. They are responsible for investment of funds on behalf of the investor in various sectors and markets. a mutual fund is funded by multiple investors who share a common goal, but do not want to manage their portfolio on their own.
Mutual funds are best suited for the people who want to generate some profits from the stock market but do not want to directly deal or bet on the multibagger stocks and other investment instrumnents. Mutual funds are much more safe than holding individual stocks of companies.
To invest in stocks, you need to have a background and in depth knowledge about that stock or the owner company. whereas to invest in a mutual fund, you need not do much research and should have much knowledge, because a mutual fund is generally pooled from a diversified portfolio of different stocks and other markets.
There are stock boker companies through which you can easily invest in stocks and mutual funds and can earn a passive income for a secured future.
There is a positive curve in the number of investors in US especially for the mutual funds from 1980 to 2024, the percentage of mutual fund investors in US has increased from just 6% to a massive 54%.
This huge jump in the number of investors in stock market and mutual funds is due to multiple reasons such as growing financial literacy in US and other countries and ease of investments in stock market due the availability of stock broker apps and aggregators.
Lets Gather More Understanding on Mutual Funds
its not very difficult to understand stock market and start making a passive income from that. It is just that you need a zeal to understand the core concepts of investing and slowly and gradually start your investment journey by investing in mutual funds and other investment assets.
A mutual fund is a way by which investors pool a sum of money together and have it professionally managed by an expert fund manager. This manager invests the money in a variety of assets like stocks and bonds, aiming for the growth of investments.
By investing in a mix of assets, the fund reduces risk compared to putting your money in a single company in case of stock investments. You buy shares of the fund, and their value goes up and down with the performance of the underlying investments.
Different Types of Mutual Funds
There are multiple types of mutual funds which are explained below:
Stock Funds / Equity Funds
Stock funds are those funds which are generally invested in equity or stocks of multiple companies. There are different categories of stock mutual funds such as small cap, mid cap and large cap based on the size of the company.
Equity Funds are a collection of different company shares. The fund manager thoughtfully chooses stocks they believe will rise in value and will give a good return on investment in the near future. This strategy can lead to substantial returns, but also comes with more risk, as stock prices can experience significant swings. Equity funds are a good fit for investors with a long-term investment plan and an appetite to bear the risks involved in the investment.
Bond Funds
Bond funds come under the category of fixed-income assets that generate a consistent return on your investment. This mutual fund foucus on investments in government bonds, corporate bonds, and other debt instruments that pay a fixed rate of interest.
The fund managers of bond funds always seek for the undervalued funds that can be sold at a high price in the market. These mutual funds generally pay a higher interest but also involves a certain amount of risk.
there are different types of bonds available in the market and the only risk they carry is of the change in interest rate.
Balanced Funds
Balanced funds are investment across different financial securities such as bonds, stocks, money markets or other alternative investment assets. before investing in a mutual fund you can know well in advance where your funds will be invested by looking at the fund allocation strategy of that particular fund.
Sectoral and Theme Mutual Funds
Sectoral or thematic mutual funds aims to invest in a particular sector like finance, chemical, electric mobility, agriculture, manufacturing, IT industry, Real Estate, FMCG etc. Sectoral mutual funds are beneficial for those who keep in depth knowledge about a particular industry and would want to invest their money in that sector only.
Investing in sectoral funds may involve extreme risks with it as there can be rise in price of stocks in one industry at some point and decrease in stock prices for some industries at the same time. So this is the main challenge faced while investing sectoral mutual funds.
How the Price of Mutual Fund Shares is Calculated?
Unlike stock investments, mutual funds investments allocate a part of the portfolio you are investing in. When you invest in any mutual fund you get a part of the whole portfolio. Investing in stocks is very different from investing in mutual funds.
Mutual funds share prices are calculated on the basis of NAV(Net Asset Value). The NAV is calulated by dividing the total value of securities in that fund by the total number of shares.
Mutual funds are traded on the NAV price and also the NAV does not fluctuate throughout the day trading hours, it gets settled at the closing of the day.
Conclusion
Mutual funds are the best suited investment opportunity for those who want a diverse portfolio and also do not want to invest much time in observing the stock prices and doing analysis. Mutual funds carry stocks from different sectors or industries, which makes the protfolio of the investor to be diversified.
Investors get the opprtunity to choose from various options in mutual funds investments such as sectoral funds, stocks funds, bond funds, money markets, index funds etc. The investment strategy and return on investment is different in all types of investment options in mutual funds.
Hope you were able to understand the important concepts about mutual funds and would want to invest your money wisely in stocks and mutual funds or even other securities.
