A mutual find is basically a pool of money that is strategically invested by an asset management company.
- There were a lot of people like you and me who had little sums of money that they wanted to invest but they did not have any knowledge as to where to invest that money in order to get the best possible returns.
- They were amazing companies with amazing business propositions. They have the best product in the market and they had the service that could generate million dollar profits. However, they did not have enough capital to keep their cash flow going ,eventually to accelerate their growth.
- There were people who had the perfect knowledge about which companies to invest in and which companies would give out amazing returns. But they did not have capital themselves to invest into all of those companies.
This is where the concept of mutual funds came in, wherein the money is accumulated from all the small investors by the financial and business experts. Then these business experts use their knowledge to carefully invest that money into amazing companies . Eventually the amazing companies get capital, they generate cash flow and they scale their growth to deliver great profits. So this creates a win-win-win situation wherein the company makes money, the experts get paid for their knowledge and the investors like you and me get paid for our capital. This is the fundamental concept of mutual funds. Now just to put this in technical terms the investors are people like you and me, the business and financial experts are what we call as asset management companies and the money that they make is what we call as commission and the kind of investment they make is what gives us the different types of mutual funds.
- Equity funds
- Debt funds
- Hybrid funds
- Solution oriented funds
- Other schemes
- The first method is the regular method and here’s where you go to a mutual fund distributor or advisor. Then this distributor facilitates your money into an AMC and then the AMC invests the money into financial instruments. Over here you have to pay commissions to two entities, the AMC and the distributor.
- The second method is the direct method. In this method, instead of going to a distributor you directly facilitate your money to an AMC which further gets invested into financial instruments. Over here, you have to pay commission only to the AMC and you can save up on the distributor’s commission and like I said before the (x) factor that most people either neglect or underestimate is the huge difference, this little distributor commission can make to your investment.
