Hello readers, we are happy to announce that our
team of MoneyWiseMind.com launched a new section “Investing Insights: Weekly Q&A For Stock
Market Newbies”, to spread the basic stock market knowledge to the
beginners.
Day 8: Basic Stock Market
Concepts
Understanding Mutual Funds:
1. What is a Mutual Fund?
A mutual fund is a type of
investment vehicle that pools money from multiple investors to purchase a
diversified portfolio of stocks, bonds, or other securities. Professional fund
managers of Asset Management Companies (AMCs) handle the investments, making it
an accessible option for beginners who want exposure to different asset classes
without directly managing their own portfolios.
2. How do Mutual
Funds Work?
Mutual funds collect money from
investors and use it to buy a variety of securities. The fund manager makes
investment decisions based on the fund's objectives. Investors buy shares in
the mutual fund, which represent a portion of the overall portfolio. As the
value of the portfolio increases or decreases, the value of each investor’s
shares also fluctuates.
3. What are the Different Types of Mutual Funds?
There
are several types of mutual funds, these are as follows:
1.
Equity Mutual Funds:
These types of funds invest at least 65% of their assets in
equity and equity-related instruments. There are sub categories of funds under
this category, such as Large cap, Mud cap, Small cap, Large and Mid cap,
Multicap, Focussed Funds, Dividend Yields Funds, ELSS Funds.
2. Debt
Mutual Funds:
These types of funds Invest in fixed income instruments such as
bonds, government securities, and money market instruments.
3.
Hybrid Mutual Funds:
These types of funds combine their investments in both the
equity and debt the debt instruments to balance the risks and returns.
4.
Index Fund:
These funds track a specific index like Nifty or Sensex.
4. What is an Expense
Ratio in Mutual Funds?
The expense ratio is
the annual fee that mutual funds charge their investors to cover management and
operational costs. It is expressed as a percentage of the fund’s average
assets. A lower expense ratio means more of your investment stays in the fund,
while a higher expense ratio reduces returns over time.
5. What are the Advantages of Investing in Mutual Funds?
Some key advantages include:
Diversification:
Mutual
funds invest in wider range of stocks and bonds to provide instant
diversification. This can help reducing risk of portfolio.
Professional Management:
Professional
fund managers invest your money on behalf of yourself, you need not to do any
analysis.
Accessibility:
Many
mutual funds have low minimum investment requirements making accessible to the
beginners.
Liquidity:
Mutual
funds can be bought or sold at any time due to liquidity.
6. What is a Load Fee in Mutual Funds?
A load fee is a sales
charge or commission paid when you buy or sell mutual fund units or shares.
There are two main types of load:
Front-End Load:
A
fee paid when you purchase mutual fund shares.
Back-End Load:
A
fee paid when you sell mutual fund shares. Some no-load funds do not charge
these fees, allowing you to invest without additional costs.
7. What is a Net Asset
Value (NAV)?
The Net Asset Value or
NAV is the per-share value of a mutual fund, calculated by dividing the total value
of the fund's assets minus liabilities by the number of outstanding shares. NAV
fluctuates based on the performance of the securities held in the fund and is
typically calculated at the end of each trading day.
Suppose, the NAV of a
mutual fund is 20, you invest Rs.1000 in it. That means you will be entitled to
get (1000÷20) =50 units of that fund.
8. What is a
Systematic Investment Plan (SIP)?
A Systematic
Investment Plan or SIP allows investors to invest a fixed amount of money
regularly (monthly or quarterly) in a mutual fund. SIPs help build a
disciplined investment habit and reduce the risk of timing the market. Over
time, SIPs can benefit from rupee cost averaging, lowering the overall cost of
investment. It's a very effective and popular way of investment mechanism to
earn a good return over a longer time period.
9. What is the Difference Between Active and Passive Mutual Funds?
Active Mutual Funds:
Managed
by fund managers who make decisions about buying and selling assets in an attempt
to outperform the market or a specific benchmark.
Passive Mutual Funds:
Aim
to replicate the performance of an index (e.g. Nifty 50) by investing in the
same securities as the index. Passive funds usually have lower fees since they
require less management.
10. What is the Role
of a Fund Manager in a Mutual Fund?
A fund manager is
responsible for making investment decisions on behalf of the mutual fund’s
investors. Their role includes researching and selecting securities or assets
class, balancing the portfolio, and adjusting strategies to align with the
fund's objectives to earn maximum returns. The fund manager's expertise and
experience are crucial in determining the performance of actively managed
funds.
If you have any other questions in your mind
relating to stock market basics or need any clarification, please put your
query into the comment box, We will try our best to clarify the same
Disclaimer: The information provided on
MoneyWiseMind is for educational and informational purposes only. It is not
intended to be financial advice, and you should not rely on it as such. Before
making any financial decisions, you should consult a licensed financial advisor.
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