Basics of investing in mutual funds

This is our reason for being! We believe that mutual funds are the best investment instruments for you.

What are mutual funds?

In the previous sections you read about stocks and bonds. Mutual funds are simply portfolios of stocks, bonds, and other investment instruments.

The value of each portfolio is the sum of the value of the investments (stocks, bonds) which they hold. You own a portion of the portfolio when you purchase a 'unit' of it. That's it!

Dividends

Price increase, or capital appreciation, is not the only way you can make money on stocks.

Many companies also pay yearly dividends. These are cash payments that represent a portion of profits. However, it is entirely up to the companies whether to pay out dividends or not. They are not obligated to.

But some companies have policies to pay regular dividends; they will return a portion of their earnings to reward their investors.

Diversify your risks

While history shows that the prices of stocks of good companies will rise in the long run, there are no guarantees -- especially when it comes to individual stocks. Companies do go bankrupt. When that happens, the share price drops to zero (remember Enron?) and you lose all your money.

The best way to avoid this heartache is to diversify your investments by owning a variety of stocks. That way, the collapse of a single company wouldn't give you a minor stroke.

You can either choose to hold a range of different stocks and monitor each one, or simply buy into an equity mutual fund, which is a diversified collection of stocks, and let a professional fund manager manage your money.

These fund managers spend all their time studying companies and their earnings potentials and chances are that they will do better at stock picking and make more money for you.

What you can be assured is that, there is definitely less stress, as you won't need to watch prices everyday!

What are stock markets?

Stock markets are places where companies can offer their shares for sale. They do this through an initial public offer or IPO. If a company sells Rs 10 lakh of its shares at Rs 10 each, then it is able to raise Rs 1 crore for itself.

Companies raise money for a variety of reasons. Mostly, it is to expand its business or to pay down debt.

Potential investors who look at a company's IPO will ask the same two questions outlined above. What is the company's earnings potential, and whether there are other investments which might give them a better return. If they decide that the company's earnings potential is good, and can offer a better rate of return, they will invest in it.

That is why many companies who offer IPOs usually price their stocks at attractive levels.

After the IPO, the thousands or millions of investors who have bought the stocks can go back to the stock market and sell the stocks to other investors, so 'trading' of the stocks begin. A stock market is simply the clearing house for these 'trades'.

Get rich by investing in stocks and mutual funds

Have you ever dreamt of owning a part of Infosys or Reliance Industries? With stocks you can.

Stocks are basically 'shares' of a company. It is ownership in the most literal sense: you get a piece of every desk, filing cabinet, contract and sale in the company. Better yet, you own a slice of every rupee of profit that comes through the door. The more shares you buy, the bigger your stake in the company.

Stocks are the means by which companies obtain additional financing for their businesses -- by selling off parts of their company to investors. The price of a stock can vary tremendously, from less than a rupee of a share, to a few thousand rupees a share!

Fundsupermart.com

Get rich by investing in stocks and mutual funds

Have you ever dreamt of owning a part of Infosys or Reliance Industries? With stocks you can.

Stocks are basically 'shares' of a company. It is ownership in the most literal sense: you get a piece of every desk, filing cabinet, contract and sale in the company. Better yet, you own a slice of every rupee of profit that comes through the door. The more shares you buy, the bigger your stake in the company.

Stocks are the means by which companies obtain additional financing for their businesses -- by selling off parts of their company to investors. The price of a stock can vary tremendously, from less than a rupee of a share, to a few thousand rupees a share!

Fundsupermart.com