Mutual funds are one of the best ways to participate in wealth creation through investing in stock markets while reducing the risk that is associated with investing directly in the public stock markets. As a result, no matter what risk profile you as an investor fit in mutual funds are and should be part of your investment portfolio.
However, a lot of people are wary of investing in mutual funds due to lack of information around how mutual funds work and what they are. While mutual funds work similar to how stock markets work in terms of the underlying assets, they are quite different in how the investments work to who manages the investment as well as the underlying asset classes mutual funds invest in.
In a bid to simplify the understanding of how mutual funds work, we scoured the interwebs to find the easiest way to understand how mutual funds works and based on the success of our video tutorials, we found a great video tutorial that goes into the basics of mutual fund investing in a very simplified way. Without further ado, we present a video tutorial explaining how mutual funds work
Here are some specific topics the video covers in great simplified detail,
What are mutual funds: Unlike specific asset classes such as public stocks, bonds, commodities mutual funds can be considered as a bucket of different asset classes comprising of different asset classes. This means that when you invest in a mutual fund, you are essentially buying a portion of all the asset classes that the said mutual fund invests in. This helps distribute your risk to a certain extent since a decline in one asset class might be offset by another asset class that comprises the portfolio of the mutual fund
Who manages the mutual fund investment: While investment in stock markets are largely managed by individuals or wealth managers (for high networth individuals), mutual fund investments are managed by seasoned portfolio managers who manage the investment strategy for the entire portfolio on behalf of all mutual fund investors. This process makes mutual funds a great investment vehicle for individuals who are either new to stock markets or do not have the know how required to effectively manage their investments
Understanding the value of a mutual fund: In the case of stock market investments, every public stock has a market traded value on its own which is essentially the currency of the stock. In the case of mutual funds, the underlying currency for mutual funds is known as Net Asset Value (NAV) which is essentially calculated based on the value of the entire portfolio of the mutual fund at the time of the closing of public markets
Fees & Charges associated with Mutual Funds: Similar to how demat accounts charge you a fees for buying and selling stock, there are fees associated with investing in mutual funds as well. While the specifics differ by the type of mutual fund you invest in, some of the fees involved are entry load (a % of the investment charged as management fees) as well as exit fees (a % of the investment paid when you sell the mutual fund). Depending on the type of the fund, there are taxes associated with capital gains associated with the sale of mutual funds
Types of Mutual Funds: Since mutual funds take a portfolio approach investing across asset classes, there are various types of mutual funds depending on the nature of the investment portfolio. This allows you to invest in a mutual fund that suits your risk profile or wealth creation goals.
Risks: Despite the obvious benefits of mutual funds, there are risks associated with investing in mutual funds also like most other investment vehicles. Since the underlying assets a mutual fund invests in carry market risk, an ill managed mutual fund or an external market condition could severely impact the value of your mutual fund investment
Please make sure you take the time to watch the entire video to learn more about how mutual funds work. Please feel free to ask any doubts or thoughts through the comments and we will try our best to provide additional information. If you like the article, please share it with friends and family who might benefit from learning more about mutual funds