Understanding mutual funds

A mutual fund is an investment instrument managed by professional fund managers, who pool money from individual investors to create a diversified portfolio of stocks, bonds, or other securities.

Mutual funds are designed to provide investors with a convenient and cost-effective way to access a diversified portfolio of assets. These investment vehicles are best suited for investors who lack the skill to understand market trends themselves or do not have the time and resources to follow the market closely.

Through their portfolio decisions, mutual fund managers aim to generate revenue or capital gains for investors. Therefore, mutual funds make professionally managed portfolios accessible even for small and individual investors.

How does mutual fund investment work?

Here's a step-by-step breakdown of how mutual funds operate:

  • Mutual funds collect money from a large number of investors and use the pooled funds to purchase securities.
  • Mutual funds spread their investments across a wide range of assets, such as stocks, bonds, or a combination of both. Diversification helps in reducing the risk associated with individual securities.
  • Investors can buy or sell mutual fund shares at the fund's NAV price at the end of the trading day.
  • The NAV is the per-share market value of all the securities held by a mutual fund. It is calculated daily after the market closes and reflects the fund's overall performance.

Various types of mutual funds

Here are some common types of mutual funds:

Equity funds

These funds primarily invest in stocks. They can focus on various sectors and market capitalizations such as large-cap, mid-cap, or small-cap. Equity funds offer the potential for relatively better returns but come with higher volatility.

Debt funds

Debt funds allocate the corpus of money in fixed-income securities such as bonds, securities, and treasury bills. They invest in various fixed-income instruments such as fixed maturity plans (FMPs), gilt funds, liquid funds, short-term plans, long-term bonds, and monthly income plans, among others.

Balanced funds

Also known as hybrid funds, these invest in a mix of stocks and bonds to provide a balanced approach to risk and return. They are suitable for investors looking for a middle ground between equities and fixed income.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.