What is a Mutual Fund? The very “very” basics.

If you have not heard of Mutual Fund, you are either an alien or been in a state of hibernation. This is one of the most dreadful topics not only most of the youngsters but also for some of the Uncle Ji’s (and Aunty Ji’s – diversity and inclusion is important).

So, we will try to cover the very basics of a mutual fund and the topics we will talk about are –

  1. What is a Mutual Fund?
  2. Why Mutual Fund?
  3. Risks Associated
  4. Types of Mutual Fund
  5. Categories of Mutual Funds
  6. What is an SIP?
  7. What is “inside” a Mutual Fund?

Let’s get started.

How a Bank works?

Whilst this was not a topic to cover but it will be good to get the basics right before we start venturing into an uncharted territory of Mutual Funds.

Individuals, like you and me, take our savings to the bank and deposit the same in Savings, Fixed Deposits and Recurring Deposits. In this way, the bank gets sufficient liquidity built up. The bank then lends this pool of money to again, individuals like you and me via loans – home, vehicle, personal etc. and to businesses as working capital. On this money, bank earns interest income which it then gives back to the depositors. Now, you would of course know that the rate of interest of lending is more than the rate of interest for deposits. The bank uses this amount to cover its expenses, to pay dividend to its investors and to cover losses against any NPA’s (non-performing Assets).

What is a Mutual Fund?

Likewise what a mutual fund does is that when you put your money in a mutual fund house and similar to you there are like-minded people who will put their money into a mutual fund house, the mutual fund house then invests this money into various securities. These can be equity, treasury bills, certificate of deposits and so on and so forth depending on what kind of a mutual fund it is. When the mutual fund house receives these earnings from these instruments either in terms of the share appreciation prices

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