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.
Why should it not be bothered by the volatility of mutual funds?
During a long journey, do you worry about your speed or destination and how to get there? Obviously, you don’t count shocks, but you focus on reaching your destination safely over time. The same applies to mutual funds. You should not worry about the daily fluctuations of the NAV, but rather focus on the fact that you are approaching the financial goal in the time you have set for it.
While driving, there are numerous times when your speed drops close to zero, but the vehicle increases speed once you overcome the impact and continue your journey. At the end of the journey, what matters is the average speed you have timed to reach your destination. Similarly, a mutual fund can have numerous short-term bumps, but the longer you stay invested, the impact of these fluctuations decreases and your chances of earning a positive return increase just like the average speed of your car during a long trip.
Every economy and therefore the market goes through periods of growth and recession that affect the performance of your fund, but only in the short term. Over the long term, your fund would go through several bouts of ups and downs, but their impact would be muted because it is the long-term compound total return that will count at the end of your investment journey.