How Does Mutual Fund Help You Grow Your Money?

How Does Mutual Fund Help You Grow Your Money?

A Mutual fund is a common pool of money into which investors put their assistance that is to be invested in accordance with aassured objective. The ownership of the fund is thus “mutual”; the fund belongs to all investors. A single investor’s ownership of the fund is in the same proportion as the amount of the contribution made by him or her bears to the total amount of the fund.

A mutual fund uses the money collected from investors to buy those assets which are specifically allowed by its stated investment objective. Thus, an equity mutual fund would buy mainly equity assets – ordinary shares, preference shares, warrants etc. A bond fund would mainly buy debt instruments such as debentures, bonds, or government securities. It is these assets which are owned by the investors in the same proportion as their contribution bears to the total contributions of all investors put together.

When an investor invests in a mutual fund company , he or she buys a part of the assets or the pool of funds that are outstandingat that time. It is no different from buying “shares” of a joint stock company, in which case the purchase makes the investor a part owner of the company and its assets. In fact, in the U.S.A a mutual fund is constituted as an investment company and an investor “buys into the fund”, meaning he buys the shares of the fund. In India, a mutual fund is known as a Trust and the investor invests to the “units” issued by the fund, which is where the term unit trust comes from.

However, whether the investor gets fund shares or units is only a matter of legal distinction. In any case, a mutual fund shareholder or unit-holder to denote the mutual fund investor, in line with the common Indian usage of the term. The term unit-holder includes the mutual fund account-holder or closed –end fund shareholder. A unit-holder in Unit Trust of India US-64 Scheme is the same as a UTI Master share-holder or an investor in an Alliance or DSP Merrill Lynch or Prudential –ICICI or TATA or Templeton or SBI or any other fund manager’s open-end or closed-end scheme.
Since each investor is a part of a mutual fund, it is necessary to establish the value of his part. In other words, each share or unit that an investor holds needs to be assigned a value. Since the units held by an investor evidence the ownership of the fund’s assets, the value of the total assets of the fund when divided by the total number of units issued by the mutual fund gives us the value of one unit. This is generally called the Net Asset Value (NAV) of one unit or one share. The value of an investor’s ownership is thus determined by the NAV of the number of units alleged.

Let us see an example. If the value of a fund’s assets stands at Rs. 1000 and it has 10 investors who have bought 10 units each, the total number of units issued is 100, and the value of one unit is Rs.10.00 (1000/100). If a single investor in fact owns 3 units, the value of his ownership of the fund will be Rs.30.00 (1000/100*3 units). Note that the value of the fund’s investments will keep fluctuating with the market-price movements, causing the Net Asset Value also to fluctuate. For example, if the value of our fund’s assets increased from Rs. 1000 to 1200, the value of our investor’s holding of 3 units will be (1200/100*3) Rs.36 The investment value can go up or down, depending on the market value of the fund’s assets