In Part I, we define what a Mutual Fund is and the factors you must consider before investing in them

Our latest video explains, in very simple terms, what a mutual fund really is. If you have heard the word ‘mutual fund’ and wondered what it is and how it works, you have come to the right place.

Let’s say that you want to invest in equity shares. If you are not clear on what equity shares are, do check out our earlier video in which we describe equity and debt investments. Now, investing in equity shares is not easy – you need to do a lot of research on which companies’ shares to buy. You will have to understand the business of the company, analyse its financial statements, do market research, etc. You will also need to analyse how the share price of that company has moved in the past as its not just sufficient to buy the shares of the right company, you have to buy them at the right price as well.

To cut the story short, that’s a lot of work and most individuals may not have the time or the inclination to do all this work. I mean, wouldn’t you rather go for a picnic over the weekend than drown yourself in financial statements?

So, does this mean you cannot invest in equity shares without doing all the hard-work? A mutual fund solves exactly this problem. A mutual fund is managed by a professional who does all the hard-work of analysing which companies’ equity shares to buy, and you can simply invest your money in the mutual fund and benefit from the professional’s expertise. For their services, a mutual fund charges a small fee, which is called the management fee, and it is generally about 1%. So if you invest INR 100 in a mutual fund, you will pay 1 rupee as management fee each year.

Mutual funds enable several people, like you and me, to invest their savings with the comfort that there is an expert who is looking after your money based on sound research.

Now that we understand what a mutual fund is, let’s look into certain factors that you should keep in mind before investing in a mutual fund.

First, please remember that there are several different types of mutual funds. There are mutual funds which invest in equity, mutual funds which invest in debt and even mutual funds invest in gold. And even within equity mutual funds for example, there are several different types of equity mutual funds. So, you need to properly understand which mutual fund is suitable for you.

Second, when you invest in a mutual fund, you are trusting the mutual fund company to hire the right experts for managing you money. These experts are called Fund Managers, as they manage the funds collected form the investors. So it is important to make sure that the mutual fund company is of repute.

Third, irrespective of which type of mutual fund you are investing in, there will always be risk involved that you can lose your money. This risk can be large or small, depending on which type of mutual fund you are investing in, but there will always be risk. Please do not get fooled if anyone tells you that they know a mutual fund which is 100% safe – such a mutual fund does not exist.

Fourth, none of the mutual funds guarantee a return. In fact, mutual funds are prohibited by the regulator from promising any return. This is because mutual funds invest in financial markets, and financial markets are unpredictable and volatile. So if anyone is promising you that you will get x% return if you invest in a particular mutual fund, you should know better.

So, the next time you hear the work mutual fund, you will exactly know what is being talked about. Mutual funds are a great investment product, but only if you understand them well. In our subsequent video and post, we will delve deeper into the exciting world of mutual funds!