What is a mutual fund

Mutual Funds : Definition, Importance and Benefits

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Do you want to start investing here is the simplest and best way of starting investment in mutual funds. If you are a beginner, intermediate or pro mutual funds are for everyone.

Let’s start with knowing mutual funds.

What Is a Mutual Fund?

A mutual fund is an investment option where money from many people is pooled together to buy a variety of stocks , bonds and other securities .This mix of investments is managed by a professional money manager.

When investors invest in mutual funds, you are investing in multiple areas instead of putting your large sum of money in one share or bond. Mutual fund companies have their agents through which you can invest in mutual funds.  

Table Of Contents

1. What is a Mutual Fund

2. Characteristics of Mutual Funds

3. Importance of Mutual Funds

4. Classification of Mutual Funds

5. How to check the information about the Mutual Funds

6. Investment modes in Mutual Funds

7. Conclusion


 There are two characteristics of mutual fund  

1. These are run by professional money managers who decide which securities to buy ( stocks, bonds , etc.)

2. They have low investments and are traded at NAV (Net Asset Value) at the end of the day.


DIVERSIFICATION : The main advantage of investing in mutual funds is diversification.

TAX BENEFIT : Both equity and debt funds carry their own unique tax benefits.

PROFESSIONAL MANAGEMENT :When you buy a mutual fund ,you are also choosing a professional money manager.

MARKET LIQUIDITY: Liquidity means the ability of an asset to be converted into liquid cash. 

LOW COST : A small amount is charged from investors.



(i) Open ended fund 

-No fixed maturity date.

-Accept continuous sale and repurchase requests 

-Transaction are NAV- based 

-Unit capital is not fixed

(ii) Close ended funds

-Run for a specific period 

-These funds are offered in an NFO but cannot purchase further 

-Purchases after NFO

-Unit capital is kept constant 

(iii) Internal funds 

-Variant of closed-ended funds

-Becomes open-ended at specific intervals 

-Have to be mandatorily listed


(I) Debt funds 

– Invest in short and long term debt instruments 

– Aim to provide regular income 

(ii) Equity funds 

– Invest in equity securities 

– Equity funds provide growth and capital appreciation over long term 

(iii) Hybrid funds 

– Hybrid funds invest in a merger of equity and debt securities. 

– Proportion may vary in equity and debt. 

– Aim to provide for both income and capital appreciation. 


(I) Passive funds 

– Replicate a market index 

– In Passive fund, the proportion is the same as that of the index and they invest in the same securities. 

– No active selection of any stock/sector 

– Expenses are lower 

– When the index proportion changes, the portfolio is modified.

(ii) Active funds 

– Invests  in securities and sector that may offer a better return than the index 

– Active funds manage the allocation of market securities and cash. 

– It can perform better or worse than the market index 

– Incur a higher cost than passive funds 


(i)  Large Cap Funds

– Companies under 100 come under Large Cap Funds.

– Large Cap Mutual Funds have Low risk.

– Lower return then Small cap and Mid cap.  

(ii) Mid Cap Funds

– Companies between 101 to 250 come under Mid Cap Funds.

– Mid Cap Mutual Funds have higher risk than Large Cap Funds.

– Higher return than Large Cap Funds.

(iii) Small Cap Funds

– Except top 250 companies, small cap mutual funds invest in all companies in terms of market capitalization.

– Small Cap Funds have high risk.

– Higher return in Long term.

How to check information about the mutual funds?

1) Statement of additional information (SAI)

– Contain generic and statutory information of mutual fund 

– Contains financial information of mutual fund 

– Lays down rights of investor

– Other additional information 

2) Scheme information document (SID)

– Scheme type (open ended or close ended)

– Investment objective 

– Asset allocation 

– Investment strategies 

– Terms with regard to liquidity 

– Fees and expenses 

– Other information relating to the scheme 

Investment Modes in Mutual Funds 

(i) Lump-Sum  investment 

– One time investment 

– In Lump-Sum a large sum of money is invested.

– Investor faces risk of volatility in markets 

(ii)  Systematic Investment Plan  (SIP)

– Staggered Investment 

– Period of commitment -6 months, 1/3/5 years 

– Specific intervals -monthly, quarterly, half-yearly 

– Made on specific  dates e.g. 1st , 5th ,10th, 15th of  every month               


Mutual Funds are available for every type of investor to make their investment better. It gives a chance to every investor to invest for short and long term to make good profits.

Mutual Fund has multiple options to invest and diversify investor portfolio. In mutual fund investors can start investing from a low amount and can go upto a large sum of money. Mutual Funds are easy to buy and sell and it is a good option for investors.

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