What is Mutual Funds – A Layman’s Explanation

What is Mutual Funds? – A Layman’s Explanation

Let us today discuss something basic about the mutual funds. All of you have heard the word Mutual funds right? But very few of you may know that what really the mutual funds are?

Many people ask me that how to invest in mutual funds. But well, when I ask them that do you really know that what the mutual funds are? – Most of the people scratch their head.

Well, Let us understand today that What exactly the mutual funds are and how they work?

Well, Mutual Funds are nothing but the money pool. Well, Yes. A Mutual Fund is a money pool. Means one mutual fund pools the money of literally hundreds of thousands and even millions of small to large investors like you and me.

Thus, a typical mutual fund collects literally millions and even billions of dollars from the hundreds of thousands of small investors (And even large investors) like you and me.

Now, What do the mutual funds do with this much large amount of money?

Well, It’s Simple. – The Mutual funds have their own Fund managers and the team of research analysts who invest our money on behalf of us in the Securities (Stocks, Bonds, Gold, Corporate Papers, Art, Wine and Several other varieties of Assets).

So Why they Invest our money on behalf of us?

Well, It is because they are expert in doing so. The fund managers of the mutual funds are expert in investing. They have all the information about the stock markets, bond markets, domestic economy and the global economy and that’s why they can take the informed investment decision on behalf of us.

Mutual Fund managers build a portfolio of Securities (Stocks or Bonds or Mixed – depending on the type of the mutual funds) on behalf of us and invest the whole of the money in these securities.

Over the time these securities generate returns and the mutual funds distribute this profit among the investors.

But We can invest our money by ourselves than Why Mutual Funds?

This is because of several reasons.

Reason: 1 Professional Management of your Money

The Number one reason why mutual funds are the best vehicles for investing your money is – Professional management. All of us are expert in something. Not the all of us are expert in investing. Some is expert in Car driving, some in Medicine, Someone is in Art or anything else. Mutual Funds and their fund managers are expert in investing. They are expert in investing and manage your money.

Reason: 2 Can invest in large stocks

If you want to invest small amount of money in the stock market than you can not diversify it properly. This is because some stocks in the stock market are worth of thousands of bugs. And that’s why if you have very small investment amount, you will end up buying only one or two company stocks which is a risky bet.

On the other hand, Mutual Funds have large amount of money collected from literally millions of small investors like you and me and that’s why they can take a better position in the stock market and diversify your money well.

So How the Mutual Fund Houses Make Money?

Well, by charging Fund Management Charge which is usually 0.50% to 2.25% per annum depending on the country, fund house and the type of the mutual fund.

Mutual Funds make their money on volume. The larger amount of money they will manage, the larger commissions they will make.

Thus, this is the basics of mutual funds and this is how they work. So now onwards, when someone asks you about the mutual funds teach them this basics of the mutual funds. Mutual Funds are created to make your life easy.