Investing in Mutual Funds offer tremendous flexibility to the investors who are serious about growing their wealth but do not want to do it by themselves. Mutual Funds take away the stress and strain from investing to a large extent and offers all the benefits that investors might seek from professional fund management companies.

When you invest in the right Mutual Fund for the long term you can get good returns and grow your wealth remarkably.

What Do Mutual Funds Do?

In India, a Mutual Funds are financial services companies registered with the Securities And Exchange Board Of India (SEBI). They offer professional fund management services to every class of investors at a very affordable cost.

Mutual Funds collect money from multiple investors, create a large fund by pooling in all these investments and then invest this money into equity and debt securities. The profits that are generated by these securities are later passed on to the investors in the form of dividends and an increase in the value of their holdings (capital gains).

How Does This Work In Real Life?

Let us understand this with the help of an example.

Suppose you have saved Rs 50, 000 and want to invest it in a suitable financial instrument to get good returns.

A distributor of a Mutual Fund company approaches you and invites you to invest in a scheme that they have floated. The investment objective of the scheme is:

You find this scheme attractive and decide to invest your surplus of Rs 50,000 into it. When you do that, the Mutual Fund gives you units of this scheme @ Rs 10 each (similar to the equity shares that you get when you invest in a company directly).

Hence, you get (50,0000/10) = 5000 units of this scheme.

The Mutual Fund also approaches investors from around India and invite them to invest in this scheme. It then pools in the money received from each of them and it is seen that the total amount that has been mobilized is Rs 100 crores.

Every Mutual Fund has professional fund managers at its service who are responsible for investing the funds mobilized in the best possible way as per the objectives of each scheme. So the fund management team of the Mutual Fund company where you have invested will now use this amount of Rs 100 crores to buy the shares of the 50 companies that form a part of the NSE Nifty 50 index as stated earlier.

After making this investment, they will continuously monitor the portfolio consisting of the shares of 50 companies and make the necessary changes to the portfolio depending on the market conditions. When the share prices go up, then they will sell them at a profit and will buy fresh shares (of these 50 companies only) when the prices fall.

The profits that are generated as a result are then passed to the investors in the proportion of the number of units that they hold.

How To Exit The Mutual Fund Investments

You can exit the investment by selling the units back to the mutual fund as per the policy of the scheme. Some schemes allow you to enter and exit at any time (open-ended schemes) and the others would require you to hold the units till maturity (closed-ended schemes and schemes with lock-in periods).

How Much Profit Did You Make?

Let us continue with our example.

Say you hold the Mutual fund for 1 year and have received Re 1 per unit as a dividend.

Therefore the total dividend you received is (Re 1 x 5000 units) = Re 5000.

Then you decide to exit the investment. The price of the units (known as Net Asset Value or NAV) at the time of selling is Rs 12.

Hence the profit you make is:

Units held x (Sale NAV – Purchase NAV)

= Rs {5000 x (12-10)}

= Rs 10, 000.

So total returns from your investment comes to (Rs 5000 + Rs 10, 000) = Rs 15, 000

Returns From Mutual Funds Are Not Guaranteed

Investing In Mutual Funds can give you decent profits and grow your money without having to do the heavy lifting yourself. The fund managers, who are experts in selecting the equity shares, debt instruments and other assets will take the pain away from investing and pass on the returns to you.

It, however, needs to be noted that no Mutual Fund guarantees any returns to the investors. The key to achieving success as a Mutual Fund investor lies in selecting the right Mutual Fund schemes and in staying invested for the long term. Also, Mutual Funds are not get-rich-quick schemes. Being patient is a key to reaping good returns from your Mutual Fund portfolio.

How to select the schemes

With around 45 SEBI registered Mutual Fund companies in India at present and thousands of schemes to choose from, it is easy to get confused while selecting a scheme. If you want to select one yourself, then you can visit various Mutual Fund analytics portals like Morning Star and Value Research. These will provide you with all the information that you need to pick the right schemes.

If you are not comfortable in doing so then feel free to talk to a Professional Financial Adviser and take his/her help in building a strong portfolio that will give you the best returns over time.