Mutual Fund Investment Basics: What is Mutual Fund?

To answer the question what is mutual fund should we break the term mutual fund into mutual + fund. Yes, may be that will help us derive the literal meaning of what is mutual fund. The word mutual means common or shared and the word fund means monetary investment.

So we arrive at an answer that provides us the literal meaning of our question what is mutual fund. A mutual fund is shared investments. In a mutual fund, the monetary investments made by different people is put into a fund comprising well-chosen financial instruments. Individually it may not be possible to buy enough units of each type of financial instrument stock for realizing worthy gains. So the monies invested by a large number of people is pooled and put into funds.

What is Mutual Fund Diversity?

A mutual fund comprises of select financial instruments and their units. The selection of financial instruments and the number of units of each selected financial instrument is made by the fund manager. The mutual fund manager aims to develop a fund portfolio that attains to the maximum the objectives of the fund and minimizes the risk. A mutual fund investment portfolio with minimized risk is called a diversified portfolio. For portfolio diversification, mutual fund managers apply advanced software models based on CAPM, alpha and beta risk calculation methods and other advanced risk calculation models. How do we know that a mutual fund has been well diversified? For this, we study the performance of the fund with respect to growth, returns, dividend yield, bonus and other benefits. A well-diversified mutual fund portfolio shows a steadily rising performance over time. Constructing a well-diversified portfolio also involves applying volatility tests to eliminate volatility as far as possible and ultimately arrive at the least volatile option.

What is Mutual Fund Type?

Mutual fund type is based on the investment objective of the mutual fund. A mutual fund can have several profiles based on investment objectives. Thus we have stable mutual funds, balanced mutual funds, growth and high growth mutual funds. Mutual fund type is also based on the type of financial instruments selected by the fund manager.

There are equity-based mutual funds, bond and debt based mutual funds, mixed mutual funds, large-cap mutual funds, mid-cap mutual funds and small-cap mutual funds. When the component of equity is more the fund aims for high growth and a high component of debt based instrument aims for stability whereas a mix of equity and debt instruments aims for a balanced mutual fund profile. Mutual funds can also be the tax saving mutual funds.

What is Mutual Fund Lump Sum Plan?

Under mutual fund lump sum plan, the investors make a lump sum investment in a mutual fund. These days mutual funds are providing greater flexibility and liquidity. The investor may choose to withdraw part or whole of the invested amount anytime from flexible mutual funds. If the withdrawal is made after three years, no charges or interests are deducted. Withdrawing prior to three years can be permissible after deduction of applicable charges.

What is Mutual Fund SIP?

SIP means a systematic investment plan. Many investors may choose to invest periodically rather than through lump sum mode. Mutual fund SIPs have been started to encourage more people to invest in mutual fund plans. A SIP can have yearly, semi-annually, quarterly, monthly or even weekly payment frequency. Nowadays SIP plans can start with as low as Rs 500 per month investment. SIP-based mutual funds are offering great flexibility. The investor may choose to withdraw his or her investments any time without the deduction of any charges.

What is Mutual fund Return?

Mutual fund return implies the total gain derived by an investor by investing in the mutual fund. Total mutual fund returns are based on the NAV or the Net Asset Value of the mutual fund portfolios comprising an n number of financial instruments. The NAV of a fund is calculated by dividing the fund’s total net assets by the fund’s total outstanding shares. The fund’s total net asset is calculated by subtracting from the fund’s total asset its total liability. The fund’s outstanding shares are calculated by subtracting the market value of stock holdings from the fund’s net asset.

The return percentage components of individual stock comprise of the percentage of price appreciation of the stock and the dividend percentage with the initial stock price as the base. For example, if the initial price of the stock is Rs 30 and it appreciates to Rs 33, then the percentage of price increase is 10 % [(33-30)/30*100]. Suppose the company declares a dividend of Rs 1 on the stock then dividend return is 3.3 % [(1/30)*100]. So by summing the two return percentages, we arrive at the total return of the stock which is 13.3 %.

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