What Are Mutual Funds?

A mutual fund is a pool of money managed by a professional Fund Manager. It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities. And the income / gains generated from this collective investment is distributed proportionately amongst the investors after deducting applicable expenses and levies, by calculating a scheme's "Net Asset Value" or NAV. Simply put, the money pooled in by a large number of investors is what makes up a Mutual Fund.

Advantages of investing in Mutual Funds

  • Professional Management - 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.
  • Risk Diversification - Buying shares in a mutual fund is an easy way to diversify your investments across many securities and asset categories such as equity, debt and gold, which helps in spreading the risk - so you won't have all your eggs in one basket.
  • Affordability & Convenience - For many investors, it could be more costly to purchase directly from stock market all of the individual securities held by a single mutual fund. By contrast, the minimum initial investments for most mutual funds are more affordable.
  • Liquidity - You can easily redeem (liquidate) units of open ended mutual fund schemes to meet your financial needs on any business day.
  • Low Cost - Due to huge economies of scale, mutual funds schemes have a low expense ratio.
  • Well-Regulated - Mutual Funds are regulated by the capital markets regulator, Securities and Exchange Board of India (SEBI) under SEBI (Mutual Funds) Regulations, 1996.
  • Tax Benefits - Investment in ELSS upto ₹1,50,000 qualifies for tax benefit under section 80C of the Income Tax Act, 1961. Mutual Fund investments when held for a longer term are tax efficient.

Categorization of Mutual Fund Schemes

  • Equity Schemes
  • Debt Schemes
  • Hybrid Schemes
  • Solution Oriented Schemes - For Retirement and Children
  • Other Schemes - Index Funds & ETFs and Fund of Funds
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