Learn about mutual funds, types and how are they priced

May 30, 2023

Mutual funds have emerged as a popular and effective choice for investors seeking reliable and diverse investment options. Mutual funds offer the opportunity to pool resources with other investors, allowing them to access professionally managed portfolios comprising a range of securities.

What is a mutual fund?

A mutual fund is an investment tool that brings together funds from numerous investors to create a diversified portfolio of securities, including bonds, stocks, and other assets. These funds are professionally managed by fund managers who make investment decisions based on the fund’s objective. Investing in mutual funds allows individuals to access a wide variety of investments that might be challenging to achieve on their own.

Types of mutual funds:

  • Equity Funds: The main focus of these funds is to invest in stocks for the purpose of achieving long-term capital growth. They are categorized as either large-cap, mid-cap, or small-cap funds depending on the market capitalization of the companies they invest in.
  • Debt Funds: Debt funds invest in fixed-income securities such as government bonds, corporate bonds, and money market instruments. They are suitable for conservative investors seeking stable income and capital preservation.
  • Hybrid Funds: As the name suggests, hybrid funds combine equity and debt instruments in their portfolio. These funds offer a balanced investment approach, providing potential capital appreciation and regular income.
  • Index Funds: These funds are designed to mirror the performance of a particular market index, like the Nifty 50 or the Sensex. They follow the index in a passive manner and have low expense ratios than actively managed funds.
  • Exchange-Traded Funds (ETFs): Similar to index funds, but traded on stock exchanges like individual stocks. Investors can buy and sell units throughout the trading day at market prices.

How are mutual funds priced?

Understanding the pricing mechanism of mutual funds is crucial for investors. Here are the main factors that determine the pricing of mutual funds:

  • Net Asset Value (NAV): NAV is the price at which investors buy or sell mutual fund units. It is calculated by dividing the total value of a fund’s assets (securities, cash, and accruals) minus liabilities by the number of outstanding units. NAV is published daily and reflects the fund’s performance.
  • Entry load and exit load: Some mutual funds charge entry and/or exit loads, fees paid by investors during purchase (entry) or sale (exit) of units. These charges are deducted from the NAV and affect the investor’s returns.
  • Expense ratio: The expense ratio represents the annual expenses incurred by the mutual fund, including management fees, administrative costs, and marketing expenses. It is expressed as a percentage of the fund’s average net assets. Lower expense ratios are generally favorable for investors as they minimize the impact on returns.

To wrap up

Mutual funds offer a convenient and accessible way for Indian investors to participate in the financial markets and achieve their investment objectives. Mutual funds provide a wealth of opportunities by diversifying investments, leveraging professional management, and tailoring investments to specific goals. 

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