Mutual Fund Basics


What is a Mutual Fund?

A Mutual Fund is an investment company that pools together money from different investors and invests them in various securities depending on the investment objective of the fund. The mutual fund company issues shares to the public that represents their holdings in the fund.

What are the different types of Mutual Funds available?

There are four basic types of mutual funds currently available in the market categorized according to the investment objective of the fund or the investments that the fund is  primarily invested in.

  1. Money Market Funds invest purely in short-term (one year or less) debt instruments.
  2. Bond Funds invest in long-term debt instruments of governments or corporations.
  3. Balanced Funds invest both in shares of stock and debt instruments.
  4. Stock Funds / Equity Funds invest primarily in shares of stock.

What is the NAVPS?

NAVPS or the net asset value per share represents the price of one share from a mutual fund. All shares in a mutual fund are bought and sold using the NAVPS, which changes every business day depending on the market performance of the fund.

How do I earn from Mutual Funds?

If the NAVPS of the mutual fund you are invested in increases or appreciates, you can sell your mutual fund shares for a profit. In the same way, if the NAVPS of the mutual fund you are invested in decreases or depreciates, you may realize a loss if you redeem.

Like any other investment instrument, mutual funds are best held long-term especially for mutual funds that have investment objectives of capital growth such as equity funds.