What Is Mutual Fund (2020) l Mutual Fund Vs Index Fund |

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what is mutual funds

Friends, no matter how much we see ads on TV, but there is always fear in mind that would it be right to invest money in mutual funds? This is so because many of us do not know what is mutual fund and how it works? People are fearful that if there is a loss in mutual funds, then all my money will be drowned?

By the rule of Warren Buffett mutual funds, even if you accidentally choose the worst shares, even after 7-8 years, your return will be at least more than the Fd. You will definitely get a 9-10% return even if you accidentally choose the worst share.

That is why there is nothing to fear, in the long term you will lose, it is almost impossible. But if you choose a good share, then you can get a return of up to 20-25%.

Therefore, due to the potential of this return, you cannot ignore the mutual funds at all. So let me tell you that it is very important to invest in mutual funds because it gives very good returns. Let’s know about what is mutual fund?

Hello friends, I am Manish Patel. Today I will tell you what is mutual fund and how does it work? And as a bonus, I will tell you about two such funds which give very high returns and I like it personally very much.

What is a mutual fund? 

Many people think that mutual funds are just a way to invest in the stock market, but with mutual funds, you can invest your money in gold, real estate or share market.

When we invest money in the share market, we need an advisor who tells which stocks are good and which are bad. If we want, we can invest our money in the stock market without any advisor but from this, it takes us a long time to identify a good share.

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What is mutual funds

So the best way to invest in the stock market is through mutual funds. In this, you do not have to need a good knowledge of the stock market nor should you have the knowledge to choose a good stock picking.

The fees are also very low in this, just you have to select a good fund. Thus the basic purpose of Mutual Funds is to invest your money in the stock market in the right way.

How does it work? 

By now you must have understood what is a mutual fund? Suppose you have only 500 dollars to invest in the stock market. But you want to buy the stock of a big company. You cannot buy the shares of those big companies alone because you have not enough money.

In such a situation, you can buy shares of those big companies through mutual funds. A mutual fund collects the money of all those people who want to invest less money in the stock market but they want to buy shares of big companies.

There is a fund-management company in mutual funds that collects money from people who invest less money. There are big experts in this company who decide which stocks to invest your money in.

Now we know what is the advantages and disadvantages of mutual funds.

Advantages of mutual funds: 

There is more diversification in a little money. If you want to put only 200-500 dollars in the share market, then you cannot invest in more companies with much less money. Because everyone’s money is collected in mutual funds, it may be that your money has also been invested in many companies.

In such a small amount of money, you can never directly invest in many companies. Therefore, mutual funds get more diversification in a small amount of money.

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What is mutual fund

The second advantage is that mutual funds are some experts who manage your money. There are a lot of people like you, invest in mutual funds and all people together pay the money of those experts, then you get an expert at a cheaper price.

The biggest advantage of this is that once you invest money in mutual funds, then that company keeps buy and sell shares from your money. In this, you do not have to worry about your transaction.

What is expense ratio in mutual fund:

When we invest in mutual funds, some part of that money is taken by the company to pay the salary of the experts then we call that money is the expense ratio.

Whenever you invest money in mutual funds, only 98 to 99 rupees of your 100 rupees are invested in it and the remaining 2 rupees are taken by the experts of mutual funds. That is called the expense ratio. The lower the expense ratio is better because it shows how much money that expert takes.

Disadvantages of mutual funds:

I hope you will know well about what is mutual fund in the above paragraph? Some mutual funds are such that they only want to collect a lot of money so that they can earn a maximum commission by this.

For this, they give a maximum number of ads and recruit more and more agents. Many times the focus of some companies is only on bringing in money and not in managing money.

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What is mutual fund

One drawback of mutual funds is that when you invest your money, the fund managers of mutual funds invest your money where the risk is less. Every time they want to invest money in well-known companies with which you do not get as much return as you expect.

What is Index Fund?

Unlike mutual funds, index funds are not intended to outperform the market, but to maintain uniformity. These build your portfolio by tracking standard market indices like Nifty 50 or Sensex.

The main purpose of index funds is to replicate index performance and provide returns at low cost. Index funds provide returns while maintaining uniformity. By investing in it, investors can balance the risk and returns in their investment portfolio.

Index Fund Vs Mutual Fund :

Mutual funds are actively managed funds, so fund houses have to employ professional stock pickers to manage the portfolio, helping to provide good returns to investors.

Mutual fund houses pay these professionals and they bear this to investors. Thus many mutual fund houses charge high fees from investors based on the performance of the mutual fund portfolio.

On the other hand, index funds do not incur very high fees in terms of fees.  Rather than hiring professionals to provide high returns to investors, index funds only buy specific stocks and keep them in proportion to their importance in the index.

For example, if index funds track a benchmark such as Nifty, its portfolio will have 50 stocks in the same proportion as those in the Nifty. Therefore, there is no significant expenditure for professionals in index funds, so fund houses do not charge more than investors.

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What is mutual fund

Friends, I wish you had known about what is Mutual Funds better? If you still have a query, you can contact us through social media.


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