Mutual Funds Investing #1 : What are Mutual Funds?

Basics of Mutual Funds Investment: With Example

Mutual Funds started all the way back in 1963, with the establishment of the Unit trust of India.

Mutual funds evolved as a system where many small investors could pool their resources with the help of a Mutual funds Investor.

This investor would offer them units for their investments, and then invest their combined funds in various financial instruments offered by the market, and distribute the return thereon to the respective unit holders.

Think of a scenario, this is the core concept of Mutual Funds Investing:

Mr A is a Market Analyst. A number of the local people of Maharashtra approach him to ask his advice on where they should invest their money for maximum returns. He offers to study the market for a fee of Rs 5000. He collects their money, and in return gives them a token for every Rs 100 they gave him.

He gave away a total of 90000 tokens (called UNITS) and collected a sum of Rs 90 lakhs. And then using his investment management skills, Mr A invested Rs 90 lakhs in 3 different companies.

Mr A would receive his fees from the funds itself. He would also collect the return on the investments made by him.

Now, let's say the 3 companies yielded a return of Rs 1.15 lakhs, 1.25 lakhs and 2.15 lakhs. In total, Mr A collected a Total return of Rs 4.55 lakhs)

Mr A would then deduct his fees of Rs 5,000.

The remaining 4.5 lakhs, he would distribute Rs 5 to every unit holder.

So, if a person had purchased 20 units of 100 each, he would receive Rs 100 as his portion of the returns of the mututal funds.

To Conclude:

Mr A is a Mutual Funds Investor. The tokens he gave away are called units. The local people of Maharashtra are the unit holders. This is the grass root concept of Mutual Funds Investment.