Mutual funds are another type of investment where we can gain money. If we apply our minds and analyse and then invest, we can get maximum profits. There are two types of mutual funds, namely open ended and close ended.
Open ended funds can be closed any time we need. Close ended funds can be closed only after the stipulated time is over.
There is another type of classifying funds - sector specific, diversified.
Sector specific funds are raised to invest only in a particular sector. i.e if there is a mutual fund for the power sector, started by a company say X, the fund invested by us in that power sector mutual fund of X, will in turn be invested by X in the shares of the power sector companies like NTPC etc.
Diversified funds section of the company X will invest the funds got from its investors like us, in several segments. It is not bounded to one particular sector.
Diversified mutual funds are better than sector specific funds. The reason being, if the sector say, power is performing low, then the value of the sector specific fund will become low and it wont yield much results for us. But the diversified fund will invest in other good performing sector and will keep on earning money and there wont be much danger for our money, as optimum value will be maintained by the diversified mutual fund.
The value of a mutual fund on a particular date is called as Net Asset value (NAV). It is similar to the share price. It will be calculated based on the transaction that the company X has performed on the other companys' shares. If the shares of the company in which our company X has invested performs well, the NAVs will also be higher. Else NAVs will be lower.
Once we invest some amount in a mutual fund company X, in a particular scheme (sector specific or diversified), we will be alloted some units (similar to shares) based on the NAV at that time. For example NAV of a scheme is Rs.10, and we have invested Rs.5000, we will get 500 units. Again here also the brokerage comes. Here we call it as load (entry load - amount paid while buying and exit load - amount paid while selling). So we will get 5 or 10 units less while purchasing.
If the NAV increases, say to Rs.20, we will get profit. If it decreases, we will incur loss. This is obvious.
This mutual fund investment can be made in two ways:
1. One time investment
2. Systematic Investment Plan (SIP)
One time investment is same as share investment. SIP is like this. Every month or every quarter, we will invest some amount. Based on the NAV at that time, we will be getting permissible units. And we can close the investment any time we need if it is an open ended fund. As a result we can get some profit or loss based on the NAVs.
Investment in mutual fund is subject to risk like the share market trading.