For those who wish to engage in the stock market but lack the time or knowledge to manage their own portfolios, mutual funds are a popular choice. They are a sort of investment vehicle that collects funds from several participants in order to purchase securities like stocks, bonds, and other assets. Here are the Top 8 Questions And Answers on Mutual Funds (Part 1) :


1. What is a mutual fund?

A mutual fund is an investment program that is professionally managed and diversified in its investments. The process involves professionals using the funds of retail investors to invest in a carefully selected set of investment products to build a diversified portfolio. The professionals who are responsible for managing a mutual fund are known as fund managers. A fund manager is an expert who is well versed with how the stock market works. He/She aims to build a portfolio that performs a certain market index.


Suppose you wanted to buy a pizza, but you have money that’s worth half the cost of the pizza. The only solution here would be to find another person, who is interested in buying the other half of the pizza with you.

Why? Because –

1. The pizza shop will not sell you only half a pizza; and

2. Doing so will get you the exact amount of pizza you wanted, at the exact amount of money you wanted to spend


What is a mutual fund?

2 2. What are the advantages of mutual funds?

Advantages of Mutual friends

3. How does a mutual fund investment work?

To invest in a mutual fund, one needs to purchase the units of a mutual fund. The price of one unit is called the NAV (Net Asset Value). For example, say the price of petrol is Rs 70 currently. Therefore, for one liter of petrol, you will have to pay Rs 70. Similarly, for one unit of a mutual fund, you will have to pay the NAV of the fund.


So, how is a NAV calculated?


In mathematical terms:

To explain simply, it is basically the market price of the units held by investors. Hence, the performance of a mutual fund scheme reflects in its NAV. This NAV is affected by the market from where the securities are purchased.


4. What are the various factors to be considered while choosing a mutual fund scheme?

The various factors are as follows –

i.                 Time horizon

The time horizon is the period for which the investment is to be made. The period could range from 1 day to as much as more than 5 years. For long term, equity should be chosen and for short term debt instruments should be chosen.

ii.                 Risk Tolerance

For a risk-taking investor, a volatile fund like a small cap fund can be chosen and for a risk adverse investor a large cap fund may be chosen. The best and the quickest way to identify the risk appetite that the mutual fund serves is by looking at its risk-o-meter. A risk-o-meter is a graphical representation of the risk involved in a mutual fund. It helps the prospective investor to understand if the risk level of mutual fund scheme matches with that of his own


It contains 5 levels of risks –

What is a mutual fund?-Risk Tolerance

a. Low;

b. Moderately low;

 c. Moderate;

 d. Moderately high; and

 e. High.

          Following are examples of some of each category

Risk Profile

Types Of Funds

Low Risk

Liquid Funds

Moderately Low Risk

Short-duration Funds, Ultra Short-duration Funds

Moderately Risk

Fixed Maturity Plans

Moderate High Risk

Large Cap Funds, Mid and Small Cap Funds, Balance Funds

High Risk

Sector Funds


iii.               Performance against category

Another way to find the best mutual fund is to compare its performance against the other schemes in that category. It should be remembered that comparison must be made between the schemes of the same category. For instance, a large cap fund must be compared with other large cap funds and not with small or mid cap funds. 

iv.               Consistency of performance

A mutual fund should generate good returns for its investors on a regular basis and not just a one-off good performance. We should look for a fund that provides decent returns in both bull and bear markets.

v.                Fund manager experience

The educational qualification and the duration for which the fund manager has been managing that fund should be considered. His past record should be tracked as well.

vi.               Expense Ratio

This reflects the fee which is charged by an AMC for the fund management and other costs related to the fund. Naturally, the investor should choose a fund which has a lower expense ratio compared to other funds provided the returns are consistent.


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