InvestorQ : What are mutual funds? How do they work?
Ashwini Kadam made post

What are mutual funds? How do they work?

Anjana Aiyar answered.
11 months ago
A mutual fund is an investment where a fund house pools money from various investors who have a common investment objective and invests that money in various asset classes like equities or debt funds. Investment in various categories is based on the investment objective of the scheme.

Let me explain this with an example, say, a mutual fund invests in equity. This simply means that the particular fund will purchase equity shares of various companies, and it all together will be a new fund. This entire fund will consist of equity instruments of various companies, which are growing differently. Since the fund has multiple companies’ stocks, they may or may not move in the same direction, so when some move upwards and some shares face downfall, the returns are balanced for the investor.

How do mutual funds work?

There is an Asset Management Company (AMC) that pools resources from various investors, which altogether are called Asset Under Management (AUM). This AUM is the total value of the fund/investment in securities. Investors buy units of a mutual fund based on its NAV, and then it grows over time depending upon the nature of securities. NAV stands for Net Asset Value, which is the excess of assets over any outside liabilities. A mutual fund is managed by fund managers who are experts in their field.

Investment in various securities is changed over time if it is not performing well. Every mutual fund aims to achieve one objective, which is value appreciation. So, when you invest in a mutual fund, you do not buy securities, you buy units of that fund at its prevailing NAV which invests in certain securities. If you are investing through SIP in mutual funds, you buy additional units of the mutual fund every month.