Mutual Fund is an investment scheme in which money is invested in the share market in multiple shares. There are various mutual funds available in the market. Mutual funds which provides tax benefit on the money invested in it, are called tax benefit mutual funds. Such mutual funds generally have a lock-in period of three years. It means you cannot withdraw your money before three years once invested. There is another category of mutual funds which does not provide any kind of tax benefit. You can withdraw your money anytime after investment. You just need to pay an exit load in these mutual funds. Exit load is a charge you need to pay while exiting from such mutual funds before one year.
Each mutual fund has a NAV (Net Asset Value) which varies as per the share prices in which mutual fund’s money is invested. NAV is also known as the per unit price of a mutual fund. NAV per share is calculated once in a day based on the closing market prices of the shares. The money which you invest in a mutual fund is converted into number of units of the mutual fund after dividing it by NAV of the mutual fund.
There are different methods to invest in the mutual funds. The best way of investment is systematic investment plan. Under this plan, a fixed amount of money is deducted automatically on a specific date from your account. This money is converted into number of units of the mutual fund as per the NAV value. It means if you are making an investment of Rs 1000 on a particular day, and NAV value of the mutual fund is Rs 20. Then total number of units purchased are 50. In other words, your money is converted in 50 units of mutual fund.
To make investment in a mutual fund, it becomes necessary to keep track on the NAV of that mutual fund which is a very difficult task. To make this task bit easier, companies has provided us SIP option. Using this option, you need to select a mutual fund, a specific amount that you want to contribute every month, and the time period for investment. At the time of taking SIP option, you can select a specific date for this investment. For example, you can select that on 5th of every month, an amount of Rs. 2000 per month is invested in HDFC Top 200 mutual fund for a period of 12 months. Using SIP option, your money is invested with different NAV in the mutual fund. You can calculate profit or loss on a specific day by dividing the number of units of mutual fund by NAV.