A mutual fund is a company that pools in money from many investors and invests it in multiple stocks, bonds etc. usually following a theme and creating a portfolio.nbsp;
As investors, you buy units in the mutual fund where each unit represents part ownership in the fund and profits, if it generates any.
The mutual fund company is managed by fund managers who take a management fee, typically ~ 2% plus other additional fees may be applicable. Itrsquo;s important to check all fees before investing in a mutual fund as these are deducted from your investment or earnings.
The performance of a mutual fund is usually measured via two metrics called alpha and beta.
Letrsquo;s start with alpha: Alpha measures how well or badly the fund did in comparison with an index. Remember that mutual funds are thematic - can be a sector, size of companies etc. To estimate alpha we need to know the closest index, letrsquo;s say for a fund that invests in large companies, BSE100 index may be appropriate.
What fund managers aim to achieve is a positive alpha i.e. deliver greater returns than the index however, negative alphas are also a reality.
On the other hand, beta, is about volatility i.e. the ups and downs in prices and hence your earnings.nbsp; If your mutual fund is more volatile than the comparative index that it has a high beta (gt;1) and low beta (lt;1) if it is less volatile than the market.
It is preferred that a fund have a high beta when the markets are generally trending up and a low beta when they are in a decline.nbsp; This adjustment is dependent on the fund managersrsquo; skills.
India has nearly 2000 mutual fund schemesnbsp; registered with SEBI with the option of investing directly i.e. when you donrsquo;t have to go through an intermediary (advisor/broker) and regular when you do. The latter comes with some advice that may reduce risk.
Itrsquo;s important that you choose a mutual fund after necessary understanding and diligence. It is also critical that you keep track of your investment as mutual funds are dependent on every changing market conditions and volatility.