What is Mutual Funds?
What is mutual fund? lets discuss the meaning of mutual funds with simple example.Every month when our income is credited then we keep some part of that income in saving account.
We keep some money as savings for our later use maybe for future expenses , for other uses such as to buy a new house,Car, for emergency,study
and so on.
So what are the ways to save our money-? one simple way is that we keep our income
in the bank and its get collected.But it is not an effective way to save our money because
such a money loses their value.
Due to increase in inflation rate the price of commodities’ also increase.But the value of our money keep decreasing every year by certain percentage according to change in the inflation rate.Because
of this reason people invest their money .There are different places or sectors to invest our money.Such as FD(Fixed Deposit),Share Market,Government bonds,Real estate etc.
Every Investment has return ,risk and time .Return means how much percent of profit are you earning through investment.Return is normally seen in percentage.
If you have put your money in investment then your profit percentage should be more than inflation rate.Risk means how-
risky it is to invest,what is the chance of losing all of our money in that investment.What is the chance of going in loss after investing there.
And time means for how long are you investing.So,the basic rule is ,if the time is more ,risk is more ,there will be the chance of more return.
A mutual fund is an investment security type that pools money from many investors and
it invest in stock/share Market,Fixed deposit,government bonds,real Estate etc.
.In the case of foreign country
AMC (Assest Management Company) manages this fund but in the case of Nepal
-A class bank are treated as AMC.
There are professional fund mangers or people in AMC ,they invest our collected funds and provide us return in the basis of fund type and profit after reducing operating charge and commission.The main
areas of investment of Nepalese mutual funds are Stock market/share market,Government bonds,
FD(Fixed Deposit) ,Debentures and so on. AMC invests a pooled fund of capital on behalf of its investors.
There are lot of Advantages of mutual funds .We can easily enter in the primary share market through
IPO(initial Public offering).But to enter in to the secondary market it is little bit risky in compare of
primary market.We need to collect more information about share market,learn about fundamental and
technical analysis,market trend , company’s history,time management and so many knowledge related to share market.Therefore mutual funds can be the best option of investment to those who do not have enough knowledge about secondary market and those who want to enter in secondary market with low investment. AMC manages our fund so there is not required to do more analysis about company,market so this is also appropriate for them who do not have enough time.
Mutual funds help us to beat inflation .Lets learn how it help us to beat inflation .Generally we save our income/salary in Saving account ,It provides security to our money but it is not effective idea to save money in saving account because its reduces our value of money every year.
If you wanna take little bit risk or more profit then you need to enter in investment or business.If we save our money in bank(saving account) it provides few interest rate that will never beat inflation(Inflation can be defined as the persistent rise in the general price level across the economy
In the case of Nepal there is <5% interest for saving account and <9% interest rate for FD(fixed Deposit).And inflation rate of Nepal in general will be more than interest rate of savings account.Therefore when we compare the interest rate of Bank and inflation rate then inflation will be more .Because of this reason value of our money decline every year.There is chance to earn profit more than inflation rate in mutual funds ,so it helps to beat inflation.
The team of AMC are professional,experience people ,therefore they mange our funds and always try to invest in better sectors .So,in less time,less knowledge ,low investment we can enter into secondary market.
Types of Mutual Funds:
There are two type of mutual funds:
-Open ended mutual fund
-Close ended mutual fund
Brief discussion on type of mutual funds:
Price of open ended mutual fund is determined on the basis of NAV(Net value assets).We can find the
value of NAV when we reduce Liability from assets and divide by number of shares.
NAV=Assets-Liability/Number of share
The close ended mutual fund is listed in Nepse and it has fixed maturity period.As well as
it is traded in both primary and secondary market.We can apply minimum 100 kitta or unit share for mutual fund in Nepal.And in the case of maximum we can apply for whole kitta/share.
The price per share is rs 10 .We can follow
the same procedure to apply
share as like other’s companies’ IPO.After being listed in Nepse
the share of mutual fund is
traded in secondary market.The price is determined by demand and supply.NAV of close ended mutual fund is published last of every month.After reducing operating charge AMC provides return to investor according to NAV or maturity period.If you have invested in
mutual fund you can sale in secondary market or hold until maturity period.The maturity period in
general for close ended mutual fund is 5-10 yrs in Nepal.
In this article we have written about mutual fund based in Nepalese share market.The information
provided on our website is for general information purpose only.if you have any questions,comments ,please write down in comment section.