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Quick and Easy way to understand how mutual fund works..!!

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how mutual fund works

Mutual funds are one of the best methods to protect and grow your money.  But few people are aware about how mutual funds work. 

How mutual fund works 

 The mutual fund is a professional managed financial product which pools money from investor to make investment in multiple domain, such as stocks, bonds and money market funds. This provides an excellent opportunity to the investor to invest in a class, which you cannot afford alone or have no prior knowledge, experience and information. 

These mutual funds are managed by asset management company through professional managers. These professional investment managers build a portfolio of assets to accomplish the aim of a mutual fund. Let’s disintegrate the whole process of how a mutual fund works. 

  •  First, the fund managers pool the money from a group of investors, whether retailers or any big investor. 
  • The fund manager invests the accumulated money in various securities depending upon the nature of securities whether its debt and equity. 
  • These funds generate either profit or loss depending upon the market fluctuation of respective securities. 
  • Gains will add to the profit of the mutual funds and losses will erode the principal value of the fund. 
  • The generated returns are distributed among investors in two ways. 
  •  Growth option: In this process, returns are paid back into the fund in order to make the advantage of compounding effect. 
  • Divided option: In this process, returns are payback to the investor in the form of dividend or periodic payment. 

 The role of AMC (Asset Management Company) in the Indian mutual fund industry is quite important. Let’s look deeper to understand how AMC plays a critical role in the mutual fund industry. 

The role of AMC in the mutual fund industry: 

AMC is defined as an Asset Management company. A company that manages their client assets fund by pooling client’s fund into various securities to match their declared financial objectivity. It provides diversification of resources and investing option which they find it by themselves. AMC is mainly considered buy side firms that they help their client to invest money and buy securities. They decide what to buy from data analytics research and public recommendations. 

How does an AMC Manager manage the fund? 

 When Investor buys an AMC share then the company is responsible for driving the mutual fund and make decision which benefit the investors. The asset manager makes decision to benefit the investors according to the financial objective of the scheme. Here are the various things a fund manager looks upon before investing. 

  •  Asset Allocation: 

Every fund decides to make a certain allocation to the fund in asset depending upon their financial objective. A debt funds invest not more than 20% of their asset in equities, whereas a balanced fund will invest only 60% asset in equities. This is one of the decision asset managers must take. 

  •  Research and Data analysis: 

To invest in the mutual fund, the fund manager deploys analyst to research and analysis on the data on daily basis, whether it’s related to the market, micro and macro-economic aspects as well as fund performance regularly. A fund manager is the one who takes the last call on the stock selection. 

  •  Performance measures: 

 Every mutual fund company provides regular updates regarding their fund performances to their investor. It provides regular updates about the fund sales and repurchase, NAV (net asset value), Portfolio details to their respective investor. 

 

*Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.

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