What is a mutual fund? Here's all you need to know about this investment scheme

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Mutual fund…Equity fund…SIP & Lumpsum scheme…'Imma bounce' is what you would feel if someone asks you about these and you don't know what these words actually mean.

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Mutual funds often generate a lot of curiosity among professionals who are seeking to invest their hard-earned money for saving purposes. But what exactly is a mutual fund? How do they work?

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In simple words, a mutual fund refers to pooling of money from a number of people who have a common investment gold.

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The amount collected from the investors is then invested in stock market instruments like shares, debentures and other securities.

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The income earned through these instruments are shared by its unit holders (investors) as per the units held by them.

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“Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is diversified because all stocks may not move in the same direction in the same proportion at the same time

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Mutual funds issue units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unitholders,” Securities Exchange Board of India (SEBI) says.

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An asset management company is the firm which manages the money pooled in from the investors and then invests the amount in various instruments.

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The AMCs are also known as money managers or money management firms. The funds are either actively or passively managed by a fund manager.

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The fund manager takes all decisions pertaining to the sale and purchase of securities.

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According to Securities Exchange Board of India (NAV), the performance of a particular mutual fund scheme is denoted by its net asset value.

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In simple words, mutual funds invest money collected from the investors in securities markets. The NAV is actually the market value of these securities held by the scheme. The NAV changes on a day to day basis.

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The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date.