What the Hell Are Mutual Funds?

Hmmm.. Lately, you have been hearing a lot about Mutual Funds, everyone seems to be talking about it. And every financial institute, ranging from banks to PMCs seem to be offering these. But, what the hell are these. 

So, let’s start with the most basic question, “What are Mutual funds”. And we’ll demystify this down the line. In simple language, mutual funds are a pool of funds. Lot of like minded investors pool their money together. They than hire a professional fund manager to play around with their money. The fund manager is responsible for managing the money. He decides where to invest the money, when to invest and when to book profits. He is the one who is in complete control. And the profit(or loss) that he makes on the investments is shared among the investors in proportion of their investment. Advantage of such a fund is obvious. Money is managed by a professional fund manager who has better knowledge than a normal investor, and investor is freed from the worry of managing money at all the time. The worries are taken care by Fund manager, and investors just sits back and reaps the benefits( or losses, in some cases.) 

A lot of fund houses have come up globally that offer mutual funds. These fund houses launch mutual funds in same way as companies launch their stocks. These fund houses charge a lot of different kind of fee from investors who wish to put money in mutual funds. Fee is in form of entry load, exit load and fund management charges. But for a good fund, these charges would be negligible compared to the returns offered by the mutual fund. 

As the stocks are traded at stock prices, similarly mutual funds also have a price associated with them called NAV or Net Asset Value. When fund houses launch mutual funds, they define rate of a unit of fund (mostly $1). Then as the investments made by the mutual fund grows or decrease, the rate of a unit increases or decreases proportionately. Investors buy or sell mutual funds based on their NAV only.