WHAT ARE MUTUAL FUNDS AND NET ASSET VALUE?

When considering investments, people often are skeptical about Mutual Funds simply because they feel it is complicated to understand and manage. Keeping aside the jargon when simply put, it is a pool of funds put together by like-minded investors. And whatever the sum of their contributions are managed by professional fund managers, who keep up with the markets and use their skills to invest in various financial instruments.

Now, these investors have a common financial goal. On the basis of their objectives, their funds are put into an MF Scheme. These funds are generally well diversified, invested in varied stocks, bonds, short-term money market instruments and commodities. This way mutual fund investments offer an attractive way of savings. They manage the money quite passively, without asking for much attention and that too by experts who manage money every day.

When choosing types of funds, an investor must first be clear on the sum of investment, term of investment and risk-taking ability. For this, it is necessary that you know about the different options available. So the basic three categories of mutual funds are:

• Debt funds

• Equity Funds

• Liquid/ Hybrid Funds

Debt funds, as the name, suggests works on borrowings. It is on these funds that most of the companies, state, and even central governments work. They do so by offering several debt instruments like T-bills, debentures etc. Debt fund gives assurance of principal investment returned after the tenure. And the interest too calculated on a given rate of interest. It is these debt funds that bring stability to investment portfolio because the risk involved is lower to that of Equity Mutual Funds.

When you invest in equity funds, you are quite like the owner of the company for the extent of investment you’ve contributed. This obviously explains how profit and loss of these funds and their performance directly impacts you. And because of the high risk involved the potential of returns are high as well. But one must keep guard of inflation in the long run and market fluctuations in the short run.

Liquid funds are highly liquid assets, which is as good as cash. Being readily available back to the investor, these have the least risk involved. And the returns these may give you can be slightly higher than a savings account. Hybrid funds, as the name suggests has a combination of debt and equity in the portfolio. Depending on the mix of equity and debt, hybrid funds can have quite a variety.

Net Asset Value, When you withdraw your funds back, they paid back basis Net Asset Value (NAV). NAV, like share price, represents the market value of each unit of a fund or the price at which investors can buy or sell units. This is a calculated basis the combined market value of the shares, securities, and bonds on a particular day.