What is a Mutual Fund?
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. It is essentially a diversified portfolio of financial instruments - these could be equities, debentures/bonds or money market instruments. The corpus of the fund is then deployed in investment alternatives that help to meet predefined investment objectives. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is a suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
You could make money from a Mutual Fund in three ways:
Income is earned from dividends declared by Mutual Fund schemes from time to time
If the fund sells securities that have increased in price, the fund has a capital gain. This is reflected in the price of each unit. When investors sell these units at prices higher than their purchase price, they stand to make a gain
If fund holdings increase in price but are not sold by the fund manager, the fund's unit price increases. You can then sell your Mutual Fund units for a profit. This is tantamount to a valuation gain