Back to Blog
When you learn how to drive a car, the first thing you learn is how a car basically operates: when to start, when to push the clutch, when to hit the brakes, and what the right moment is to change gears. Investing in mutual fund schemes works on a similar pattern; you need to learn how they operate before you let mutual funds drive your growth.
Investing in mutual funds has become a popular choice for individuals looking to achieve their financial goals. But have you ever wondered how these funds actually work? Despite having little knowledge of how the stock market operates, you might be interested in making investments there. In these circumstances, mutual funds are preferable investment choices for novices looking to gain market experience. We will discover what they are in this blog post, along with how mutual funds operate in India.
In India, how do mutual funds operate?
In India, mutual funds are regulated by the Securities and Exchange Board of India (SEBI), which sets guidelines and regulations for their functioning. Mutual funds pool money from multiple investors and invest it in various asset classes such as stocks, bonds, and money market instruments.
Depending on the asset class they invest in, their structure, risks, and benefits, there are various types of mutual funds in India. Mutual fund investments can be made in lump sums or through a Systematic Investment Plan (SIP).
Let’s examine the steps involved in launching a mutual fund scheme, learning how they operate, purchasing mutual funds, and redeeming them.
- Launch of a New Fund Offer (NFO): An asset management company (AMC) releases a new fund offer (NFO), which is a first-time subscription offer for a new mutual fund scheme. In order to invest in securities like shares, bonds, and other financial instruments, the fund house first raises money from the general public through the new fund offer. The NFOs are open for subscription for a limited time, and after it closes, investors can only purchase the units of that fund.
- Pooling money: Money is gathered by mutual funds from a large number of investors who make modest investments. These investors have the opportunity to invest in sizable securities portfolios.
- Investment in Securities: The portfolio manager then invests the money pooled in different asset classes, such as shares, bonds, commodities, etc., depending upon the fund’s strategy. These investments are done on the back of their expertise, in-depth research, and analysis based on the strategy created to maximise the returns for the investors.
- Returns to Investors: The performance of a mutual fund scheme is assessed by its Net Asset Value (NAV). It is the market value of all the securities held by the scheme. The market value of securities changes every day, and so the NAV of a scheme also varies on a day-to-day basis.
- Redemption: Investors can sell or redeem their mutual fund investments. For this, the fund manager utilises the portfolio’s cash balance to pay investors who redeem their investments.
Conclusion
It is important for investors to carefully consider factors such as past performance, expense ratio, investment strategy, and track record before investing in mutual funds. They should also assess their own risk tolerance and align their investments accordingly.
Overall, mutual funds provide individuals with an accessible and professionally managed investment avenue that allows them to participate in various financial markets within India while diversifying their risks.
