Sunday, September 10, 2006



Mutual Funds – a globally proven investment vehicle – is slowly finding a place in the investment itinery of Indians. For those averse to Mathematics, the title might sound a little intimidating but it is all the same inviting.There is no magic mathematical formula for successful Mutual Fund investing… all it requires is pure common sense and a clear understanding of the concept.

Welcome to the world of mutual funds…..

In this blog, it will be my endeavour to demystify the concept of Mutual Funds so that even a layman can reap the benefits it offers and build his wealth.

What is a Mutual Fund?

A Mutual Fund is a trust that is mutually beneficial to all those who have put their money in it. It is an investment vehicle that pools the money of several investors and invests it in different securities. It is not an alternative investment option to shares and debentures.Rather it pools the money of several investor s and invests in the same.

To understand Mutual Funds, we need to take a step back. If you want to invest, say in shares or debentures of companies, how do you go about it?

First, you decide on what level of risk you are willing to take and what kind of returns you are expecting. Your decision at this stage will determine the amount of investment you will do in shares (equities) and debentures (debt). Normally, shares carry a higher risk and result in higher returns while debentures carry a lower risk and have lower returns. This allocation of investments is known as asset allocation.

Once you have done this, you have to select the shares and debentures you want to invest in. You can do this by independently researching companies or act on tips. This process of choosing specific investments is known as scrip selection.

If you have selected shares, which are quoted on the stock markets, you will have to call up your broker and place the order. Alternatively, if you have selected a company whose share is available by way of a public issue, you will have to fill up the necessary application form and pray that you will get some amount of shares (especially if the public issue is considered attractive). Similarly you could be buying debentures, which are listed on the stock markets, or apply for them in public issues.

Now that you are invested in the companies of your choice and in the manner you choose, equity and/or debt, you have to continually monitor your investments. You have to track the company's performance, collect your dividends and interest payments and take that most crucial decision of selling your shares when you feel you have achieved your target price OR live with your losses if the share prices/investments have tanked.

Seems a lot of work, doesn't it? Wish there was someone who would do it all for you?

That's what a Mutual Fund does. It collects money from lots of small investors and invests on their behalf.
The investors pool their money with the Fund Manager who in turn invests it in securities. These securities generate dividends, interest and sales proceeds that are distributed to the investors on a pro-rata basis. The owner of a MF unit gets a proportional share of the fund’s gains losses , income and expenses.
And the cycle continues…

Thus, buying a MF is like buying a small slice of a big pizza.

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