A mutual fund is a managed trust that collects the savings of many investors and invests them in securities like stocks, bonds, short-term money market instruments and commodities such as precious metals. Mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.
We can also say that the Mutual Funds usually invest their funds in equities, bonds, debentures, call money etc., depending on the objectives and terms of scheme floated by MF. There are also some MF which even invest in gold or other asset classes. Investors in a mutual fund have a common financial goal and their money is invested in different asset classes in accordance with the fund’s investment objective.
Investing in a mutual fund can be a lot easier than buying and selling individual stocks and bonds on your own. Investors can sell their shares when they want and that’s why one of the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult to create with a small amount of capital. Each shareholder participates proportionally in the gain or loss of the fund. Mutual fund units or shares are issued and can typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per share, which is also termed as NAVPS.
The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time by various MF companies under the rule of SEBI.
What is NAV
NAV means Net Asset Value. The investments made by a Mutual Fund are marked to market on daily basis. This is very volatile and keeps on changing with the changes in the market rates of equity and bond markets. In other words, we can say that current market value of such investments is calculated on daily basis. NAV is arrived at after deducting all liabilities except unit capital of the fund from the realizable value of all assets and dividing by number of units outstanding. Therefore, NAV on a particular day reflects the realizable value that the investor will get for each unit if the scheme is liquidated/sold on that date. Therefore, the investments in Mutual Funds is not risk free and always advisable to read the terms and condition before buying any mutual funds from any financial institution.