What is a Mutual Fund?

Find out What Are Mutual Funds in Stock Market, how they work, why they can be a smart investment option. Learn the basics and benefits of mutual funds today

Mutual Funds let you Pool Your Money with other Investors to “Mutually” buy stocks, bonds, and other Investments.

They offer a wide variety of investment strategies and styles.

They’re run by professional money managers who decide which securities to buy (stocks, bonds, etc.) and when to sell them.

You get exposure to all the investments in the fund and any income they generate.

Understanding Mutual Funds

A mutual fund is a type of investment vehicle that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. Managed by professional fund managers, mutual funds achieve specific investment objectives, such as growth, income or a balance of both.

Types of Mutual Funds:

Equity Funds : An Equity Fund is a Mutual Fund Scheme that invests predominantly in shares/stocks of companies. They are also known as Growth Funds.
Liquid Funds: Liquid funds are a type of Debt Mutual Funds that mainly invest in short-term debt securities, offering fixed returns.
Index Funds: An index fund is a type of mutual fund that aims to replicate the performance of a specific stock market index (such as Nifty 50 or Sensex).
Thematic Funds: Thematic Funds are the kind of mutual funds that are invested in stocks of a particular theme. This theme could be anything – international stocks, multi-sector stocks, commodity stocks, rural India, infrastructure stocks, etc.
Bond Funds: A bond-fund, also known as debt fund, is simply a mutual fund that only invests in bonds. It can be a more efficient way of investing in bonds than to purchase individual bond securities. They have a maturity date for repaying principal. The interest payment must be made on a monthly basis.
Money Market Funds : Money Market mutual funds are short-term debt funds. They invest in various money market instruments and endeavour to offer good returns over a period of up to one year while maintaining high levels of liquidity. The average maturity of these funds is one year.
Hybrid Funds : Hybrid mutual funds are an investment fund that spreads its assets across various sectors.
Sector Funds: A sector fund is an investment fund that invests in one type of industry or sector.
Tax saving Funds : Tax saving mutual funds like ELSS are similar to any other mutual fund scheme with an added advantage of saving tax.
Gilt Fund : Gilt funds are a debt mutual fund that invests almost entirely in government bonds, sometimes known as G-Secs. G-secs, or Government securities, are sovereign papers issued by the Government of India. Therefore, investors have less credit risk on the principal amount deposited.
Gold Funds : A gold fund is a type of investment fund that holds assets related to gold. The two most common types of gold funds are those holding physical gold bullion, gold futures contracts, or gold mining companies. Gold funds are popular investment vehicles among investors who wish to hedge against perceived inflation risks.
Pension Funds : A pension fund is a financial entity established by an employer to provide retirement benefits to employees.
International Funds: International mutual funds are mutual funds that invest in foreign markets. These funds invest in stocks, bonds, and other securities of companies listed outside India. The objective of these funds is to provide investors with exposure to foreign markets and diversify their portfolio.
Asset allocation Funds : Asset allocation is the mix of different asset classes e.g. equity, debt, gold etc. in an investment portfolio.
Growth Funds : A growth fund is a mutual fund or exchange-traded fund (ETF) that includes companies primed for revenue or earnings growth at a pace that is faster than that of either industry peers or the market overall. Growth funds are separated by market capitalization into small-, mid-, and large-cap.
Banking and PSU Fund : A banking and PSU debt fund is one of the most popular types of mutual funds, as it has nominal risk associated with the total investment.
Money Market Funds : Money Market Funds are debt funds that lend to companies for a period of up to 1 year. These Funds are designed in a manner that allows the fund manager to generate higher returns while keeping risk under control through adjustment of lending duration. Higher loan tenure usually comes with higher returns.

Why Invest in Mutual Funds?

Diversification:

Mutual funds let you access a wide mix of asset classes, including domestic and international stocks, bonds, and commodities.

Mutual funds invest in a wide array of stocks and sometimes other securities (like bonds or cash) to spread risk. For instance, an equity mutual fund might invest in companies across various sectors, regions, and market capitalizations.

Low costs

Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are typically lower than what you would pay as an individual investor.

Convenience

Buying mutual funds can be straightforward. Many banks and brokerage firms, including Schwab, have their own line of proprietary mutual funds as well as access to thousands of third-party funds.

Professional Management

You get the benefit of having a professional manager reviewing and researching the fund’s portfolio on an ongoing basis.

Fund managers actively decide which stocks to buy, hold, or sell based on research, market conditions, and the fund’s investment objectives. This professional oversight can be beneficial to investors who may not have the time or expertise to manage a diversified stock portfolio.

Pooling Capital

Investors buy shares of a mutual fund, and the fund manager uses this pooled capital to buy a variety of securities, including stocks. This allows individual investors to participate in a diversified portfolio without purchasing each stock separately.

Benefits of Investing in Mutual Funds

Professional Management — Investors may not have the time or the required knowledge and resources to conduct their research and purchase individual stocks or bonds. A mutual fund is managed by full-time, professional money managers who have the expertise, experience and resources to actively buy, sell, and monitor investments. A fund manager continuously monitors investments and rebalances the portfolio accordingly to meet the scheme’s objectives. Portfolio management by professional fund managers is one of the most important advantages of a mutual fund.
Diversification
- Spread Risk: Mutual funds invest in a wide range of securities, such as stocks, bonds, or other assets, which helps spread risk. This diversification reduces the impact of any single investment’s poor performance on the overall portfolio.
- Access to Various Assets: Investors can achieve diversification across different sectors, industries, and geographic regions, which can lead to more stable returns.
Cost Efficiency
- Economies of scale: By pooling money with other investors, mutual funds can access investments and resources that may be costly for individual investors to acquire on their own.
- Lower transaction costs: The fund’s management handles the buying and selling of securities, often resulting in lower transaction costs than managing the portfolio independently.