For many years, I struggled to visualize just what exactly is a mutual fund in my head. Until one day, I had this eureka moment:
When you buy a mutual fund, you are basically saying,
” I have this small pot of money. I have decided that I want to invest it in equity (say), but I don’t know which companies I should be buying. So the next best way is to hire someone to do it for me!”
And that’s basically it! You choose a fund manager, give him some money, and he’s off! You can track how much your money is worth everyday, if you should want to. He’ll give your money back to you on any working day. And best of all, he’s not going to call you up and ask you your opinion of this company or that sector, he’s going to make the decision on your behalf.
As with all good things, nothing comes free. He’s going to charge you his salary, and take it out of the fund itself. There’s a flipside to this as well: he’s going to market this fund to other investors like you, and all of you are going to chip in with the expenses of running the fund.
So that’s how I conceptualize mutual funds in my head! Hope it helped you!