Mutual funds -combine safety and high return on investment

A mutual fund is a professionally managed pool of money formed by collecting money from many investors. It combines safety with good return on investment. The pooled money is invested in various securities-either debt securities such as bonds and debentures or equities (stocks).

As the money is managed by experienced people the risk is greatly minimized. However this does not mean that any particular level of return on investment is guaranteed. The fund manager diversifies the pool so that loss in one security is compensated by profit in others. Because of this an investor has the advantage of investing in different securities with a relatively smaller amount of money which cannot be done with stock market investing .

Investors purchase units of mutual funds. This does not reflect the value of any particular security but gives an idea of the Net Asset Value (NAV) of that particular fund. The NAV of the fund is the total market value of the assets of that particular scheme minus its liabilities. If the NAV of the scheme is divided by the total number of the units we get the NAV per unit.

Conversely if we multiply the NAV per unit of the scheme by the number of units held by an investor we get the market value of the units of that particular investor. For example if you have 100 units of a scheme and its NAV is 100 the market value of your investment is 10,000. The NAV is subjected to variation and is regularly announced by the fund manager. If you can sell it at a higher price than you purchased you make a profit.

Some fancy terms are used by mutual fund companies and it is better you know what they mean so that you do not get confused or carried away. Some name is given to the scheme. Often the name is such that you get a feeling that investing in that scheme will solve all your financial problems.

But in the bottom of the document in small print it will be mentioned that the name is just for identifying the scheme and that there is no guarantee that the scheme will perform well. It is a euphemistic way of saying that you may even lose your money!

Sale price: It is also called offer price. It is just the price you pay when you purchase the units.

Sales load: It is also called as entry load or front-end load and refers to the fee collected by the company when it sells the units. It is nothing but a service charge. If you do not know about this you will be wondering why your NAV is lower than mentioned or you got less number of units than you should have got.

Suppose you purchased 100 units at a NAV of 10 and the entry load is 2 percent the market value will be mentioned as 980 not 1000. Either you get 98 units or 100 units at a NAV of 9.8. Great! You lost some money as soon as you invested in a mutual fund. Do not get scared. Mutual funds are not that bad. Give them time and they make money for you.

Exit load: It is also called repurchase load or back end load and is the money you pay when you sell the units. The company has to ensure that it makes money irrespective of whether the investor books profit or loss. But usually either entry load or exit load is charged. Occasionally you come across no load mutual funds also.

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