About Mutual Funds
Past couple of years have seen a surge in mutual fund investments. In fact, mutual funds are fast emerging as the preferred vehicles for capital market investments. The purpose is to familiarize you with the terms and processes involved in mutual fund investing so that you can better assess the associated risks and rewards.

In general
The information below defines for you the relevant terms, explains the different kinds of mutual funds, the costs of investing, and discusses some procedures involving mutual funds such as buying and redeeming units.

What is a Mutual Fund?
A mutual fund is a pool of investments used to buy a large portfolio of securities that will be managed by a professional advisor. When you buy a share in a mutual fund, you effectively buy a bit of each security held in the fund's portfolio.

Risk
Mutual funds are not risk free investments. Even investing in mutual funds whose portfolios consist only of guaranteed government bonds contains an element of risk. Before you invest in a mutual fund, be sure you completely understand the risk. When you invest in a fund, the risk of total loss is lessened due to the diversity in the portfolio.

Terms

Debt Security.
This is a security such as a bond or debenture, in which a specific amount is owed to the purchaser of the security. These are sometimes referred to as fixed-income assets.

Equity Security.
This is a security such as a common stock in which the purchaser of the security actually purchases a piece of the company and is an owner of the company.

Issuer.
The issuer is the entity from which the security is derived. Reliance Industries is the issuer of its common stock, for example. Mutual funds are the issuers of their units.

Government Backed or Guaranteed.
The government guarantees that if you buy its bonds, it will pay the amount shown on the face of that bond. This does not guarantee that the market price will remain constant, and for that reason, a fund fully invested in government securities may still fluctuate in value. This is because interest rates and the prices of existing bonds move in opposite directions.

Types of Funds
Mutual funds are either closed-end or open-end. A closed-end mutual fund issues only a certain number of units. After the units are sold and the money is invested in its portfolio of securities, trading of the fund's units can take place on a stock exchange.

An open-end mutual fund, by contrast, is constantly offering new units to the public and redeeming its outstanding units. There is no limit to the number of units that can be issued. Mutual funds may also be classified as Growth Fund, Income Fund or a Balanced Fund. A Growth oriented mutual fund typically looks to increase the capital gain through investment in equities. They aim to offer higher returns, but the returns in these funds are also highly variable and therefore riskier.

The Income oriented mutual funds, on the other hand, typically look for a steady rise in the portfolio value, and therefore lean towards debt instruments. A balanced mutual fund looks to achieve a balance between growth and steady returns and divides the investible funds among equities and debt instruments.

Net Asset Value
The net asset value is the present rupee value of each unit of the mutual fund. It is determined by totaling the market value of all securities owned by the fund and subtracting all its liabilities. The balance is divided by the number of the fund's outstanding units to arrive at the net asset value per unit of the fund. The fund uses this value when redeeming (or selling) units.