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Basics of mutual fund.

           Do you know what is mutual fund and how it works? The article is for both of them who know its answers and who don't know its answers. Many indian don't know the inflation till now. They do not know the present inflation rate of india. They don't know how does the value of their money reduce? What effects fall on their money for inflation? Now the time is for the answer of the most important question.

Basics of mutual fund.


How does a mutual fund work?


         Fund means the money that is raised from people. Mutual fund is one type of fund where the money is raised from people and then the fund is invested according to the objectives of the mutual fund. Every mutual fund have a objective. Such the objective of some mutual fund is to invest in large cap companies where the risk is very low and it is very stable. Every mutual fund have minimum one fund manager. So the people who like the objectives of any mutual fund and also like the investing skills of the fund manager invest in the mutual fund. Then fund manager invests the fund that is raised from people according to the objectives of the mutual fund. And the profit that comes from the invested fund is shared into the investors. The company that manage the fund is called Asset Management Company(AMC). For example SBI mutual fund is asset management company. So sbi mutual fund have many mutual fund schemes. They are sbi small cap fund, sbi magnum mid cap fund, sbi bluechip fund etc. So any investors who like the objectives of any scheme and the investing skills of the fund manager and other factors can invest on the scheme. For example sbi bluechip fund is a scheme under sbi mutual fund. Let's see the objectives of sbi bluechip fund. You can get the objectives of any mutual fund scheme from Scheme Information Documents or SID. The investment objectives of the bluechip fund scheme is to provide investors with opportunities for long term growth in capital through an active management of investments in a diversified basket of large cap stocks. The type of the scheme is an open ended equity scheme predominantly investing in large cap stocks. So the people who like the objectives of the scheme and the investing skills of the fund manager,sohini andani can invest in the scheme. The mutual fund company or amc charges fees to manage the fund of investors. And the fees are called management fees.  


        Generally mutual fund invest mainly in two asset classes. They are equity asset class and debt asset class. Let's understand the debt and equity clearly. When any company needs money to expand their business or any other reason then there are two options for the company to raise the fund. And the options are 

* Debt financing.

* Equity financing.

Debt financing means to borrow money from anyone. Such as the money is borrowed from bank and later the money with interest is returned to bank. Or the money is borrowed from public issuing bonds and later the money with interest is returned to public. It means in debt financing company borrows money and later the company return the money with interest. Company can borrow money with the help of bonds,debentures and other debt instruments. And on the other hand in equity financing company raises fund selling its stake to investors. And the investors from whom the fund is raised are called shareholders of this company. In the equity financing company do not return the fund and also interest to its shareholders. In this case company gets the fund and the investors who invest on the company get the stake or partial ownership of the company. So when company needs money they raise fund from stock market with the help of equity financing. And then the company is listed in stock exchange. 


        So the mutual funds that invest in bonds,debentures and other debt instruments are called debt mutual fund. And the mutual funds that invest in stock exchange listed company are called equity mutual fund. There are many types of debt and equity mutual fund. The topic is covered in 'Types of mutual fund'. The people who wants to invest in debt market or stock market but they do not have the experties then they can invest in mutual fund. You can easily invest in debt market and equity market with the help of mutual fund. For this you do not need any expertises of equity market or debt market. Because fund managers who have investment experties manage your fund in mutual fund. So when you invest in mutual fund then fund manager takes the important decisions like where to invest and how much invest etc. So expert fund managers manage your fund and take the right important decisions in mutual fund. It is thought that mutual fund is best investment platform for beginners. So mutual fund becomes the best platform for the people who are new in this field.


          When you invest in equity mutual fund then your fund must be invested in the stock exchange listed company. And fund manager of the mutual fund decides the best companies  to invest in it. Generally every mutual fund have one or two fund manager. Mutual fund solves a big problem and the problem is the investment complexity. The people who wants to invest in stock market before needed to dominate the stock market investment experties and the stock analysis skill to pick a good quality stock. And on the other hand the people who have the stock market investment experties but do not have time could not invest in stock market before. But now mutual fund is the best investment platform for those people who wants to invest in stock market but they do nor have either time or stock market investment experties or both of them. And the same thing is also applicable for debt market. Many people wants to invest in goverment bonds or other debt instruments but they don't know its process. So now they can invest in debt instruments with the help of mutual fund. The people who want to invest in mutual fund but don't have experties can invest in equity mutual fund. Similiarly the people who want to invest in debt market but don't have experties can invest in debt mutual fund. In this way mutual fund makes easy the investment complexity. Now let's discuss the famous and popular question of investors.


Is it right to invest in mutual fund for everyone?


           We see the advertisement 'Mutual fund sahi hai' on tv from last some years. Is it really right for everyone? The answer of this question is of course NO. Mutual fund is not right for everyone. To invest in mutual fund you need minimum knowledge of choosing the right mutual fund scheme for you. So the mutual fund is not right for the people who don't have this knowledge. There are about 2000+ mutual fund schemes in india. So it is not easy to choose the right mutual fund that is perfect for your requirements. You should have to analyse the scheme,fund manager's investment skill and its performamce etc. If someone starts to invest in mutual fund leaving FD then he should know first that what is mutual fund,how does it work,how to choose the mutual fund scheme etc? If he starts to invest in mutual fund leaving FD just seeing returns or intetests then it is not right method. So the conclusion is that do not invest in mutual fund blindly. You should analyse the mutual fund scheme first. It is right that it is easier than the analysing of stocks. But you should do this. The next question is:


Does mutual fund give fixed returns?


            The answer of the question is NO. Any mutual fund can not give you the fixed returns. There is some debt mutual funds (like liquid funds) that give about fixed returns. But fixed returns are not applicable for mutual funds. Mutual funds can be divided in riskwise such high risk,medium risk,low risk mutual fund etc.


          If you have any query related to mutual funds please comment below so that the topic can be covered.


Best wishes to invest.


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