Mutual Funds
A Mutual Fund is a body corporate that pools the savings of a number of investors and invests the same in a variety of different financial instruments, or securities. The income earned through these investments and the capital appreciation realized by the scheme is shared by its unit holders in proportion to the number of units owned by them. Mutual funds can thus be considered as financial intermediaries in the investment business that collect funds from the public and invest on behalf of the investors. The losses and gains accrue to the investors only. The Investment objectives outlined by a Mutual Fund in its prospectus are binding on the Mutual Fund scheme. The investment objectives specify the class of securities a Mutual Fund can invest in. Mutual Funds invest in various asset classes like equity, bonds, debentures, commercial paper and government securities.
Let us make this concept easier to understand for you. Assuming that there is a Box of 12 apples costing Rs. 40. Four friends decide to buy these apples but they have only Rs. 10 each and the shopkeeper only sells by the box. So the friends then decide to each pool in the Rs.10 that they have and buy the box of 12 apples. Now based on their contribution, they each receive 3 apples or 3 units, if equated with Mutual Funds.
And how do you calculate the cost of one unit? Simply divide the total amount with the total number of apples: 40/12 = 3.33.
So if you were to multiply the number of units (3) with the cost per unit (3.33), you get the initial investment of Rs. 10.
This results in each friend being a unit holder in the box of apples that is collectively owned by all of them, with each person being a part owner of the box.