Here is a brief description of how it operates:
- A mutual fund is a pool of money contributed by its buyers.
- It is run by a company (Asset Management Company) that is tightly regulated and monitored by the government (SEBI), so it is quite safe.
- A professional manager manages the pool by buying shares in good performing companies (equity), or lends it to such companies (debt).
- The profit made by the mutual fund is returned back to the people contributing to the pool, as dividend or an increase in value.
- You can redeem the units with the fund; they then sell the underlying units and credit the cash back to your bank account.
Tip: When buying a mutual fund; avoid ‘regular plans’ sold by brokers because commissions erode upto 40% of your money over time (though they may appear small at 1% to 1.5% per year). G o for commission free ‘direct plans’ from a direct mutual fund platform such as jama.co.in
