A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
What is absolute return?
You’ve heard people talk about their real estate investments: “I bought that house for $30,000 in 2004. Today it is worth 120 thousand euros! It has grown 4 times in 15 years.” This is an example of absolute return.
When comparing the final value of an investment with the price at which you invested in it, the growth experienced over time is a measure of absolute return.
For example, you invested Rs. 5000 in a fund, say 5 years ago. If the value of your investments is Rs. 6000 today, you have made a gain of Rs.1000 equal to an absolute return of 20% on your initial investment of Rs. 5000.
The disadvantage of absolute yield is that it does not take into account the time period. In the above case a 20% yield sounds good. But when you get it in 5 years, does it look attractive? But if you calculate the average annual return for the 5-year period (CAGR), it is only 3.7%. Absolute return is used to calculate returns from funds that are less than a year old. In all other cases, the annualized return (CAGR) is used, which provides the average annual return earned by an investment over a given period of time.
