Are you someone who want to start Investments in Mutual Funds but worry about the proper knowledge? You don’t know what is Equity and Mutual Funds. What is the difference between the two? Because in schools, we learn about a lot of things but financial knowledge is not given to us. As per data, only 24% of Indian Adult people are Financially Literate. 76% of People don’t even know about Saving and Investments and their Difference.

 

As a layman, we always think about What is Mutual Funds and How it works? What are the types of Mutual Funds and How to Invest? So, Now all your questions are going to get their answers today. In this first article, you will come to know about What is Mutual Fund and How it Works.

 

But First, you should have basic knowledge about Saving and Investments. Because we are talking about money and if we don’t have our base clear, we can also lose our money. So, I want all my readers to get full clarification about everything related to money. Here are 5 Powerful Ways to Understand Mutual Funds.

  1. What is Saving?
  2. What are Investments?
  3. What is the difference between Saving and Investments.
  4. What is Mutual Funds.
  5. How Mutual Funds Works to Create Wealth.

 

 

  1. What is Saving.

 Saving is nothing but an excess of Income over Expenditure.

As a child, we get some money as pocket money and as an employee, we get salary and as a Businessman, we generate some Profits. So, we earn some money and we do some expenses and after expenses whatever is left, that is saving.

 Suppose, If you are An employee and working in a company. Your monthly income is 1 lakh. Now, there are some monthly expenses also. Like, household expenses, Rental expenses, Entertain expenses and Travelling expenses, etc. Suppose you do 70k expenses per month to cover all your living costs. Now you are left with 30k per month. Whatever is left with you after doing all the expenses, is your saving. Now you can put that 30k either at your home or your saving bank accounts. Both will come under-saving only.

  1. What is Investments.

Now, I hope you are completely aware of saving. Now we will try to understand about Investments.

Suppose, you decided to put that money in Equity or Mutual Funds or you decided to Buy any Property which gives you monthly rental or capital appreciation. Now, these products will give you Returns. So, Any asset class where you put your money and you generate returns then it is called Investments.

Now, You are completely aware of Saving and Investments. Now, we will try to understand why you should have to invest your money. Because by investments, you generate Returns and with the help of capital appreciation, you Create Wealth for Yourself and your family. So Wealth Creation helps you to complete your financial Goals like Buy a House, car, Foreign Tour, Children’s Education, Own Retirement

So, you save to invest or You Invest because you want to generate returns and Returns helps you to create wealth for you and this wealth helps you to fulfill your life goals. This is the full concept of Saving and Investments.

  1. Difference between Savings and Investments.

Now, What happened if you are not doing investments and you put your saving at your home or saving accounts. Inflation plays a very critical role in this. Inflation eats your uninvested money and decreases your purchasing power. This can be understood by a simple example.

Suppose 20 years ago, in 2002 you put Rs 100 at your home at a secret place and forgot about it. At that time with that 100 rupees, you could have bought 10 liters of milk. Now in 2022 after 20 years, while cleaning your home you find 100 rupees and you are very happy. But now the question is, what can you buy with that same 100 rupees of note which holds the value of 10 liters of milk in 2002. Is it possible to buy the same quantity of milk today also? Not possible. You will hardly get 2 liters of milk with that same 100 rupees. Because due to inflation, which milk cost was 10 rupees in 2002, now that same milk cost you 55 rupees in 2022. So, we understand that money is losing its value over time due to inflation and Investment is essential to Fight Inflation.

  1. What is Mutual Fund.

Now, with the above example, we understand that Investment is important but is it easy to do investments. As a common man, it is very hard to understand and to do investments in the right asset class. We don’t have the skills, Time, and Resources to find the right asset classes for investments.

 A mutual fund is a solution for all the problems which an individual investor feel. Mutual funds comprise 2 words. Mutual and Funds. Mutual means a large number of people coming together and combining their money and forming a pool or Fund.

Let’s understand this concept with an example. Suppose there are 5 people and they belong the different professions. Now they have some goals in their life and to achieve the goals they want to invest some money but they don’t have time and resources for investments. However, one thing is common between them. They are looking for long-term wealth creation and they want to stay invested for at least 10 years. This is the Investment Objective.

Now, one can easily find, a Mutual Fund scheme with the same investment objective. Several mutual funds schemes represent various Investments objectives and People according to their goals and objectives can choose a scheme in which they have to invest. These Mutual Fund schemes cater to various investments objective like for 1 day, 1 month, 1 year, 5 years, 10 years, and more than 10 years.

  1. How Mutual Funds Works to Create Wealth.

Now, Suppose there is one Mutual Fund scheme name XYZ, which fulfills the objective of that 5 people who want to invest for 10 years and long-term wealth creation. And they decided to invest their money in that XYZ scheme. In the XYZ Mutual Fund scheme, there is a Professional who has knowledge, experience, and resources to invest the investor’s money. This professional is called the Fund Manager. Now, this Fund Manager will invest the investor’s money in various asset classes such as Equity, Debt, Gold and Money Market Instruments according to his knowledge, research, and prospects of the companies in line with the pre-defined Investments Objective of Long-Term Wealth and Investments horizon of more than 10 years.

Now, Returns that will be generated from all these asset classes will be passed on to those investors in the proportion of their investments contribution.

Conclusion

So, After understanding Saving and Investments, Mutual Funds, and How it works, I am very sure that you are now very much excited to start your journey with Mutual Funds. Now you can proudly say that you are a Financially Literate person and nobody can make you a fool by selling any cheap product and misguiding you about Mutual Funds. Happy Journey of Wealth Creation.