Discover the fundamentals of mutual funds

As an investor, before you buy mutual fund ‘units’, which are a presentation of your share of holdings in a particular scheme, it is important to delve into the intricacies of mutual fund meaning. A mutual fund is a professionally managed investment scheme, usually run by an asset management company (AMC) that brings together a group of people and invests their money in stocks, bonds, and other securities. You can purchase or redeem these units at the fund’s current net asset value (NAV). These NAVs keep fluctuating, according to the fund’s holdings. Thus, each investor participates proportionally in the gain or loss of a fund.

SEBI registration is mandatory for all the mutual funds. In order to protect the interests of the investor, mutual funds function within the provisions of strict regulation. The prime advantage of investing through a mutual fund is that it allows small investors to access professionally managed, diversified portfolios of equities, bonds and other securities. Whenever shares are bought by an investor in a mutual fund, this happens through paying the expense ratio/fee. The expense ratio for any fund is basically the total management/advisory fee and administrative costs required. Also, these fees can be assessed on the front-end or back-end. The fees are assessed during the initial purchase transaction whenever there is a front-end load for a mutual fund. For a back-end loan, mutual fund fees are assessed when an investor sells his shares.

However, sometimes an investment company offers a no-load mutual fund, which is basically sold as a commission or sales charge. These funds are distributed directly by an investment company rather than through a secondary party. One can expect a gamut of benefits of investing in a mutual fund, including liquidity, transparency, professional expertise and so on. There are 3 main types of mutual funds namely equity funds, fixed-income funds, and money market funds.

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