InvestorQ : What is mutual fund? Actually I didn't have knowledge but I need to know about it clearly.
Vamshikrishna arikilla made post

What is mutual fund? Actually I didn't have knowledge but I need to know about it clearly.

Aastha Awasthi answered.
4 years ago

A mutual fund is the best way any individual, with limited market knowledge, can invest in the equity market. A mutual fund is launched by an asset management company (AMC) that collects money from investors and invests it in select stocks on their behalf. For the services provided, the AMC charges investors a small fee called expense ratio. Mutual funds are also called investment funds or managed funds and are currently the most sought-after investment option.

In a mutual fund, an investor gives a company (an asset management company or AMC) the right to use his/her money to be invested into various stocks according to the fund manager’s discretion.

It is like several friends pooling in their collective money to create a lumpsum amount to be invested in the stock market.

What a fund manager does with the pool of money is that he/she selects an amount from the entire pool of money and invests it in a particular stock. This way he selects multiple stocks which he believes will perform well in the years to come and parks funds in it.

A mutual fund is a relatively safer investment option for a person who wants to invest in the equity market. If you were to invest Rs. 10000 in stock A by directly buying the stock, you stand to lose the entire sum if the stock tanks due to any negative development or news. However, when you invest Rs 10000 in a mutual fund, the money gets divided in all stocks that the mutual fund is holding at that point of time. So, even if you hold stock A in your MF portfolio, the other stocks will help balance your MF’s performance, thereby ensuring you make relatively lower loss.

Mutual funds have gained popularity in the past few years as the Systematic Investment Plan (SIP) route has found many takers, especially young adults who have realised that the conventional forms of investing don’t benefit the investors as much.