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A Mutual Fund is nothing but a common pool of money collected from a lot of people which is used by an experienced fund manager who invests the money in the Share market. Not many of us are experienced in investing directly in the Equity market. Mutual funds are a boon to the investor who doesnt have enough knowledge to invest directly in the market but wants to take a risk and gain higher returns from the market.
A Mutual fund works as follows. (I am not getting into the technical terms. This is a very simple explanation)
Mr. X who has a lot of experience in the share market decides to start a MF. He calls for prospective investors. Say investors A, B, C, D & E decide to invest Rs. 10000/- each, Mr. X would be starting his MF with a corpus of Rs. 50000/- X would be creating MF units of face value Rs. 10/- each and distribute it to all the investors. So each A, B, C, D & E would get 1000 units each.
Inv amount = 10000 & Unit Face Value (NAV) = 10
==> No. of units given = 1000 (I have not taken into account the entry load since this is only a theoritical example)
Using this Rs. 50000/- X would buy/sell shares and make profit. At the end of each trading day X would calcuate the total net worth of the initial investment. Say after 1 month of trading, the total value of the investment is Rs. 58000/- then the current NAV of the fund would be Rs. 11.60/- which means each of the investors has made a profit of Rs. 1.60 per unit they bought from Mr. X.
Note: This 58000 would be the amount that is arrived at after subtracting the profit margin that Mr. X would take for using his expertise in forming this MF and making profit. This profit margin would vary from fund to fund but has an upper cut off set by SEBI.
Say after one succesful year of operation the Net assets in the MF stands at Rs. 1,00,000/- then the NAV on that day would be Rs. 20/-
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