Lesson #1: What Are Mutual Funds?

We work for money all day long and for years & years of our life. But we never thought of making our money work for us.

Many people in this year of 2021 still put their majority of earnings in their SAVINGS ACCOUNT where they earn not more than 2.5% per annum.

Mutual Funds are great investment avenues that actually help us to make our money work for us.

Asset Management Company (AMC)

Mutual Fund is a pool of investment where people like you and me and big corporate puts Lakhs & Crores of money together with the Asset Management Company (AMC).

There are more than 42 AMC in India like SBI Mutual Fund, HDFC Mutual Fund, AXIS Mutual Fund, etc.

I’m sure you must have heard these names, What this Asset Management Company does with the pool of investments?

Fund Managers

The Asset Management Company appoints professional Fund Managers on those pools of investments, and every AMC has its own team of Fund Managers who manage their respective securities.

Types of Securities

Fund Managers invest that pool of money in different types of securities. There are two major types of securities,

1. Equity
2. Debt

Equity

Equity is known as equal ownership, which means these securities provide you the equal ownership. For example, Shares.

Say, if you buy shares of RELIANCE INDUSTRIES LIMITED you become an equal owner of that company or you have bought equity of this company.

So, the fund managers who invest the pool of money into shares are Equity Fund Managers, in other words, the investments that you put into equity mutual funds invest your money into shares and whatever the gains they have on those investments are passed on to you after deducting fund expenses.

Debt

Debt means a loan or buying Debentures, which means when you buy a debenture you give loans to the company or issuer of those debenture/bonds you have purchased, and in return, they give you interest.

So, the fund managers who invest the pool of money into debentures and bonds are Debt Fund Managers, in other words, the investments that you put into debt mutual funds are further given as loans to Governments, Banks, Corporates, etc.

The same fund earns interest on those investments which is further passed on to you after deducting fund expenses.

Professional Management

The investments that we put into Mutual Funds be it Debt Mutual Fund or Equity Mutual Fund are professionally managed by expert Fund Managers, for that we don’t need to pay hefty management fees.

Since our investments are pooled together in Mutual Fund in a similar way our expenses are also divided, so we can get our money professionally managed at a very small fee without even worrying about the selection of the right stock or bonds.

In Equity Mutual Funds, Fund Manager buys & sells stocks on your behalf, he/she decides which stocks. Or bonds to buy, how many of them to buy, at what price to buy, and at what price to sell.

Conclusion

The goal of investments in Mutual Funds is to get the most out of your investments by using the expertise and skills of professional fund managers.

So, practically it’s a passive way of investing where you don’t need to actively manage your investments because a professional manage money on your behalf.

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End of Lesson #1, Click here for Full Course.