Understanding the concept of mutual funds

Taking the discussions on mutual funds further, let’s discuss the concept of mutual fund. As has been accentuated in the post earlier, mutual funds are nothing but money pooled from a group of investors that is invested in a common scheme. The fund thus created out of “mutual” objective of profit making is managed by a fund manager who generally undertakes the responsibility of managing the entire fund. Once there is any sort of appreciation and income from the fund, these investments are passed on to the investors in proportion to the number of units owned by them.

The entire process can be demonstrated by way of a diagram below

Now you understand that mutual fund is basicllay a collection of shares, stocks or debentures where you invest your money through a fund manager. Now since the mutual funds are constituted of shares, any effect in the prices of the shares are reflected in the Net Asset value of the scheme. A Net Asset value are the total market value of the scheme and is arrived at by dividing the market value of scheme's assets by the total number of units issued to the investors.

Let’s try to understand this by the help of an example –
Lets say that the market value of a particular fund is Rs 5,00,000.
The total number of units issued to investors is 50,000.
Net Asset value of this particular scheme thus is Market Value of Fund/ Number of units . That is Rs 5,00000/50,000 = Rs 10.
Now suppose you own 10 units of this particular scheme, so your total investment to this particular scheme would be NAV * No of units . that is Rs 10 *10 = Rs 100.

Now in the future if the net asset value of this fund increases owing to the better performance of stocks constituting this, then you stand to gain . While if the NAV falls from the level when you purchased it, your fund would loose.