The Basics of Investing in Mutual Funds (2024)

FAQs

What are the basics of investing in mutual funds? ›

A mutual fund is a managed portfolio of investments that investors can purchase shares of. Mutual fund managers pools money from many investors and invest the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio.

The Bottom Line

An investment fund is a pool of capital from many investors that can purchase a wide variety of securities. By investing in one, you can easily build a diversified portfolio at a relatively low cost. Before investing, consider a fund's management style and fees.

Mutual funds offer flexibility and liquidity and provide easy entry and exit options. Liquidity allows beginners to access their money whenever they need it without penalties or waiting periods. Thus, mutual funds provide investors with various options to suit their investment goals and risk appetite.

A mutual fund is a pool of money managed by a professional Fund Manager. It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities.

For example, if you had a sum of Rs 1 lakh to invest then you could go in for lumpsum investment and invest the entire amount of Rs 1.0 lakh at one go in a mutual fund of your choice. The units allotted to you will depend on the NAV of that fund on that particular day.

Appreciation in the fund's NAV, which happens if the fund's investments increase in price while you own the fund. Income earned from dividends on stocks or interest on bonds. Capital gains or profits incurred when the fund sells investments that have increased in price.

How do mutual funds work step by step? ›

Mutual funds pool money from multiple retail investors. Retail investors receive a share in the form of units. The fund managers, using their expertise, then invests in stocks and bonds on behalf of the investors. Once the fund earns returns, it is distributed to the investors in the proportion of their investment.

Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.

However, mutual funds are considered a bad investment when investors consider certain negative factors to be important, such as high expense ratios charged by the fund, various hidden front-end, and back-end load charges, lack of control over investment decisions, and diluted returns.

The 50:30:20 rule of investing

The 50:30:20 rule suggests allocating 50% of your income to needs, 30% to wants, and 20% to savings and investments. Following this rule can help you strike a balance between meeting your current expenses and saving for the future.