“Mutual fund Sahi hai” … ad keeps coming again & again..! Begs the question, what is a mutual fund?
First let me tell you about a big fight which happened in our housing society a few years back.
There are a bunch of boys who play cricket & table tennis. Its a common sight in most of our societies. Kids play.
But here in our society older men play. Men who are dads,big burly, belligerent men. As you can imagine, there was a ruckus. Cars got dented, windows were shattered. Big fights ensued with residents every day. Meetings were called, shouting matches happened. At the end of it they were stopped from playing.
The men/boys got together and decided that they loved to play and needed a place to play table tennis, snooker & cricket.
All were reasonably well off, so they thought lets buy a room which was lying vacant on the ground floor of the complex. It was the property of the society used as a general dump yard.
They pitched in bought the place and spent some money for lights and flooring & put in a table tennis table as well as a snooker table.
It was a joint property and to be used by the co owners. Worked out well.
For cricket they pooled funds, bought a professional kit & started hiring a ground to play.
After a couple of years, a few guys decided to move. Now the question arose, what about the game room?
Again, meetings ensued. By now prices had risen in the locality. And the most of the men had moved onto other activities.
They sold the game room.
The guys made a neat packet each. They enjoyed playing for the time they owned it and now they made a profit off it too.
Now you will be wondering.. whats the relevance to mutual fund sahi hai? Have I gone bonkers? Is it a wrong heading?
No.
Say the bunch of guys had pooled in and bought a bunch of stocks together instead of the game room. And they had designated one of guys as a fund manager to build and monitor the portfolio.And paid him fees. All were a joint owners and would share the profits or losses.
Then it would be basic version of a Equity mutual fund .
Sahi hai, If you know what you are getting into.
In a mutual fund , there are hundreds of owners for a bunch of securities. For our purpose lets talk only about equity mutual funds.
There is a company called asset management company who employ professional fund managers and float schemes which are advertised aggressively.
People like you and me who wish to invest,write a cheque, give them money to invest.
Everyday the performance of the scheme is published along with the value of one part or unit of the scheme. (The Net Asset Value or the NAV)
People who wish to get out at that value and new people get into the schemes who wish to invest at the same value.
In the earlier example, it is akin to having the value of the property getting published everyday and the co owners had the option to sell their stake everyday. There are enough buyers available all the time. Or if buyers not available there then the society buys the stake and holds it and then sells it later.
Its easy to operate.
Also instead of one or two shares they invest in a bunch of them. So there is diversification. If the value one share falls a lot , it wont wipe out the full portfolio.
On the other hand if one or two shares do well, the gain will also not be crazy.
This is the basic concept of a Mutual fund.
People bunch together, handover funds to a smart guy and buy an asset. It could be stocks, debt, real estate, commodities, international equites, gold , anything.
The fund manager is paid fees.
The distributor or advisor sells those schemes and advises you on the performance. He gets comission on what he sells.
If you decide to withdraw for your own reasons, you will be given the value of your share by the Asset Management Company. (NAV * No. of units you own).
It could be higher or lower then your investment.
The performance of your investment depends on the assets performance you invested in and the competence of your fund manager.
If you invested in equity mutual fund and the equity market shot up, you will make a bomb.
If you invested in a gold fund and gold prices remained stable you will get modest returns.
There are hundreds of different schemes. You have to pick and choose depending on your goals and needs.
Sahi hai or not you decide.
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