What is a Mutual Fund?
A mutual fund is a pool of money collected from many investors. The fund then invests this money in assets like shares, bonds, and other investments.
You can think about it like a college group fund. Imagine 20 students putting ₹500 each in a common pool to buy something for a college project. Everyone contributes a small amount, but together it becomes a large pool of ₹10,000.
A mutual fund works similarly. Many investors put money into one fund, and a professional fund manager decides where to invest it. You receive units of the fund based on how much you invest in it.
It helps you build a saving habit. You save and invest a small amount out of your pocket money or income regularly. Later, you may have a larger pool of money to use toward your financial goals.
How does a Mutual Fund work?
The basic working of a mutual fund is simple. You invest money in a mutual fund. The fund collects your money and uses it to buy different investments. In return, you get units of the mutual fund.
The price of each unit is called Net Asset Value (NAV). It tells you how much one unit of that mutual fund is worth. For example, imagine a mutual fund has a NAV of ₹20, and you invest ₹1,000 in it. You would receive 50 units. (₹1,000/₹20).
Later, if the fund's NAV increases to ₹25, your 50 units would be worth ₹1,250. Since the NAV can also fall, let’s imagine it drops to ₹18. In that case, your investment would be worth ₹900.
Depending on what the mutual fund invests in, its NAV can fluctuate. That is why mutual fund returns aren't guaranteed.
Modes of Investing in a Mutual Fund
There are two common ways you can invest in a mutual fund:
SIP:
The Systematic Investment Plan (SIP) is the most popular way of investing in a mutual fund. And there’s a reason for it. It gives you flexibility to choose the frequency. For example, you can invest ₹500 every month or ₹100 every week. You can also invest a small amount every day with the daily SIP option.
Lump sum:
In a lump-sum investment, you invest a large amount in one go. For example, you save a small amount in a piggy bank and, after a year, break it open and invest the whole amount in a mutual fund at once.
What are the types of Mutual Funds
There are many types of mutual funds to invest in. But broadly, they are divided into these four categories:
- Equity funds: These funds mainly invest in company stocks. They can offer higher long-term growth but also come with higher risk.
- Debt funds: These funds mainly invest in debt securities like government and corporate bonds. They generally have lower risk than equity, but also their returns can be lower.
- Hybrid funds: These funds combine equity and debt. They invest some portion in shares and the rest in bonds. They offer a slightly balanced risk and reward.
- Index funds: These funds replicate a market index, such as the Nifty 50 or Sensex. Their returns are similar to the index and have comparatively lower risk. They are generally a safer option for beginner investors.
What are the pros of a Mutual Fund?
- Diversification: By investing in a mutual fund, you automatically invest in a basket of multiple assets. It reduces your overall risk.
- Professional management: A fund manager does research and monitors the market to decide which assets to buy or sell. This helps if you don’t have time to do that.
- Easy to buy and sell: You can easily buy units of a mutual fund and sell whenever you need money. However, an early exit may attract some charges.
- Helps in building discipline: Investing a fixed amount every month can help you develop a habit of saving regularly.
What are the cons of a Mutual Fund?
- No guaranteed returns: Mutual funds are linked to the market. So you may incur losses if the market crashes or the underlying asset's value drops.
- No direct control: You cannot pick individual stocks inside the fund’s portfolio. You have no control over the mutual fund’s investment strategy if it doesn’t match yours.
- Fees and expenses: Mutual funds charge an annual fee called an expense ratio. This fixed percentage is deducted from your returns every year.
How to invest in a Mutual Fund on Millions?
Now that you know what is a mutual fund, here’s how you can start investing on Millions with a few taps on your smartphone:
- Download the Million app from the Google Play Store or the Apple App Store.
- Verify your mobile number and complete KYC to open a free account.
- Go to the mutual funds section and select a mutual fund you’d like to start investing in.
- Click on SIP or lump sum. For SIP, you can choose between daily, weekly, or monthly.
- Enter the amount you’d like to invest and make your first payment.
Always pick a mutual fund that suits your financial goals and risk-taking capacity. You don’t need to know everything about the stock market before you begin. A mutual fund helps you take the first step with no big commitment. Start small and be consistent to start your wealth-building journey.
