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What is Mutual Fund and why to invest in Mutual Fund

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Click Here for Understanding terms (Glossary) of Mutual Fund (MF)

Mutual Fund Category or Classification of a Scheme

What is Mutual Fund and why to invest in Mutual Fund

When we do not possess knowledge of legal matters, we go to a lawyer for legal advice & a doctor when we need medical advice. In that way; mutual funds is a investment tool managed by professional fund managers. And unless one really possess the skills to invest in equities directly, it is recommend to use this option for investing.

There are many terms to understand about mutual fund and reasons for investing in mutual fund schemes.

What is a Mutual Fund

A mutual fund is collection of stocks or bonds. Investments may be in stocks, bonds, money market securities or some combination of these. This happens when a large number of people give their money to professionals, to manage and invest, with the aim of achieving a return. These qualified and experienced professionals invest in instruments according to the objective of the fund. Each investor holds a pro rata share of the portfolio -- entitled to any profits /losses when the securities are sold or redeemed, subject to the net assest value as on that day.

For the individual investor, mutual funds provide the benefit of having someone else manage your investments and diversify your money over many different securities that may not be available or affordable to you otherwise. Now a days, the amount of investment requirement on many funds are very low enough that even the smallest investor can get started in mutual funds on single investment or regular interval basis (like SIP).

A mutual fund, by its very basic nature, is diversified/sector specific -- its assets are invested in many different securities. Beyond that, there are many different types of mutual funds with different objectives and levels of growth potential, providing one's selection to diversify & specify in a sector.

Why Invest in Mutual Fund

Investing is becoming more complex & Mutual fund investing is very easy & hassle free.

Professional investment management

The prime benefits of mutual funds is that an investor has access to professional fund management with an qualified research team for monitoring the companies they have chosen to invest in than one can, unless one have time to do the job and not having all the related information on researching the companies to select for their portfolio. That is why Mutual funds hire full-time, high-level investment professionals. Funds can afford to do so as they manage large pools of money. The managers have real-time access to crucial market information and are able to execute trades on the largest and most cost-effective scale to meet the funds' stated investment objectives.

Risk diversification

Diversification of a portfolio is amongst the primary tenets of portfolio structuring. by mutual fund. Diversification is essential in order to reduce the level of risk assumed by the portfolio holder. Therefore, a crucial element in investing is asset allocation. It plays a very big part in the success of any portfolio. Moreover, small investors do not have enough money to properly allocate their assets. By pooling your funds with others, you can quickly benefit from greater diversification. Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security. Mutual fund unit-holders can benefit from diversification techniques.

Hence would be better off leaving that to a professional. Mutual funds represent one such option.

Flexibility and Convenience

Mutual funds investing has it's own convenience. While investor own just one security rather than big portfolio, he still enjoy the benefits of a diversified portfolio and a wide range of services. Fund managers decide which securities to trade, looks the interest/dividends due on portfolio securities are received and all rights exercised. It also uses the services of a high quality custodian and registrar. Another big advantage is that investor can move his funds easily from one fund to another within a mutual fund family. This allows investor to easily change his portfolio to respond significantly fundamental r economic changes.


In open-ended schemes, investor can get money back promptly at net asset value after exit load factor of schemes; if any applicable to that particular scheme with period of investment.


Under regulations for mutual funds have made the industry very transparent. Investor can track the investments that have been made on his behalf and the specific investments made by the mutual fund scheme to see where his money is going. In addition to this, investor get regular information on the value of his investment.


There are number of mutual fund in market and investor can find a mutual fund that matches just about any investing strategy he selects. There are funds that focus on blue-chip stocks, technology stocks, bonds or a mix of stocks and bonds. The greatest challenge can be sorting through the variety and picking the best.

Well regulated

A key factor in investment in mutual fund is the ability to analyse and evaluate their track record.

Investor are advised to keep in mind that nothing comes for free from mutual fund and some kind of charges are charged by mutual fund houses. So look after the charges are being charged by the Mutual fund before selecting a fund for investment and his tract record for managing your money.

Types of Mutual Funds

There are number of types of options available for investment in Mutual Fund. One must know the different types of funds that cater to investor needs, whatever the age, financial position, risk tolerance and return expectations. The mutual fund schemes can be classified according to both their investment objective (like income, growth, tax saving) as well as the number of units (if these are unlimited then the fund is an open-ended one while if there are limited units then the fund is close-ended).

Open-ended schemes

Open-ended schemes do not have a fixed maturity period. Investors can buy or sell units at NAV-related prices from and to the mutual fund on any business day. These schemes have unlimited capitalization, open-ended schemes do not have a fixed maturity, there is no cap on the amount you can buy from the fund and the unit capital can keep growing. These funds are not generally listed on any exchange.

Open-ended schemes are preferred for their liquidity. Such funds can issue and redeem units any time during the life of a scheme. Hence, unit capital of open-ended funds can fluctuate on a daily basis. The advantages of open-ended funds over close-ended are as follows:

Any time exit option,

An open-ended fund allows one to enter the fund at any time and even to invest at regular intervals.

Close ended schemes

Close-ended schemes have fixed maturity periods. Investors can buy into these funds during the period when these funds are open in the initial issue. After that such schemes can not issue new units except in case of bonus or rights issue. However, after the initial issue, you can buy or sell units of the scheme on the stock exchanges where they are listed. The market price of the units could vary from the NAV of the scheme due to demand and supply factors, investors' expectations and other market factors

Categorization according to investment objectives

Mutual funds can be further classified based on their specific investment objective such as growth, safety, regular current income. tax-exempt income.

Risk vs Reward

Mutual Fund investment risk links with volatility of market -- the up and down activity in the markets and individual issues that occurs constantly over time. This volatility can be caused by a number of factors -- interest rate changes, inflation or general economic conditions, & Changes in the Government Policy. It is this changeability and uncertainty that causes investors to worry. Different types of mutual funds have different levels of volatility or potential to earn profit on their investment and chance of losing.

Choosing a fund

Mutual fund is the best investment tool for the retail investor as it offers the twin benefits of good returns and safety as compared with other avenues such as bank deposits or stock investing. Having looked at the various types of mutual funds, one has to now go about selecting a fund suiting his requirements or keeping money in a bank fixed deposit. Please Keep in mind the major points listed below beofre selecting a fund for investment:-

Past performance

Know the fund manager

Your risk appetite

Any specific period for investment

Read the prospectus for new launch

Diversification of your portfolio

What it costs you (Load factor and charges of funds) Contents Highlights