A Brief On The Working Of Mutual Funds

A mutual fund is a pool of investments used to buy a large portfolio of securities that will be managed by a professional adviser

. When you buy a share in a mutual fund, you effectively buy a bit of each security held in the fund's portfolio. They are sometimes referred to as "investment companies."

These investment companies should not be confused with investment banking companies, which raise capital for corporations and municipalities. Mutual funds, on the other hand, are "investment companies" whose shares are sold to the public and which invest the proceeds of these sales in other public companies.

Mutual funds can be either or both of open ended and closed ended investment companies depending on their fund management pattern. An open-end fund offers to sell its shares (units) continuously to investors either in retail or in bulk without a limit on the number as opposed to a closed-end fund. Closed end funds have limited number of shares.

Mutual funds have diversified investments spread in calculated proportions amongst securities of various economic sectors. They get their earnings in two ways. First is the most organic way, which is the dividend they get on the securities they hold. Second is by the redemption of their shares by investors will be at a discount to the current NAVs (net asset values).

One must not forget the fundamentals of investment that no investment is insulated from risk. Then it becomes interesting to answer why mutual funds are so popular. To begin with, we can say they are relatively risk free in the way they invest and manage the funds. The investment from the pool is well diversified across securities and shares from various sectors.

The fundamental understanding behind this is not all corporations and sectors fail to perform at a time. And in the event of a security of a corporation or a whole sector doing badly then the possible losses from that would be balanced by the returns from other shares.

This logic has seen them to be perceived as risk free investments in the market. Yes, this is not entirely untrue if one takes a look at performances of various mutual funds. This relative freedom from risk is in addition to a couple of advantages they carry with them. So, if you are a retail investor and planning an investment in securities, you will certainly want to consider the advantages of investing. Lowest per unit investment in almost all the cases Your investment will be diversified Your investment will be managed by professional money managers Reliance Mutual Fund is a destination that helps you make mutual fund investments. There's less paperwork and no transaction costs involved at all. So it is a platform for young investors to get started.

by: Harsh Sharma

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