How does an Equity Mutual Fund Work?

1. Pooling of Funds: Investors pool their money into a mutual fund scheme, which is managed by a professional fund manager or a team of experts.

2. Diversification: The fund manager diversifies the fund’s portfolio by investing in a mix of stocks across various sectors and industries. This diversification helps spread risk.

3. NAV Calculation: The Net Asset Value (NAV) of the fund is calculated daily. It represents the per-unit value of the fund and is based on the total market value of the underlying assets.

4. Units Allocated: When investors invest in the fund, they are allocated units equivalent to the amount they invest. The number of units depends on the prevailing NAV.

5. Active Management: Active fund managers continuously monitor the market and make investment decisions to optimize returns while managing risk.

6. Redemption and Dividends: Investors can redeem their units at any time at the prevailing NAV. Equity mutual funds may also distribute dividends to investors from the profits earned by the fund.

Equity Mutual Funds can be defined as a pool of funds collected from various investors and invested in a diversified portfolio of equities (stocks) across different sectors and market capitalisations. Equity mutual funds are a popular investment option that offers individuals the opportunity to invest in the stock market without directly buying individual stocks. Equity mutual funds are known for their potential to deliver long-term capital appreciation, making them an attractive choice for those looking to participate in the growth potential of the stock market.