Basics of Mutual Funds

A mutual fund is a trust that collects money from investors to achieve a common financial goal. The proceeds are then invested in different asset types according to the investment objective.. A mutual fund is simply a financial intermediary that was established with the objective of professionally managing the money from large investors. Investors can benefit from economies of scale by pooling their money in mutual funds. They can also purchase stocks and bonds at lower trading costs than direct capital market investing. Diversification, expert stock and bond selection, low costs, flexibility, and convenience are some of the other benefits. A mutual fund investor receives units that are proportional to the amount of money he has invested. These units are an investor's share of the scheme's assets. His liability for any loss to the fund is restricted to the amount he has invested. Mutual funds are best if they pool their resources. Small retail investors can enjoy professional money management, and have access to other markets. The investment requirements for mutual fund schemes are relatively low. Fund Managers are the investment professionals who manage the pooled funds on behalf of scheme investors. Fund managers make investment decisions regarding the selection of securities to invest and the percentage of investments that will be made. These decisions are guided by guidelines that are determined by the investment objective and investment pattern of the scheme. They are also subject to regulatory restrictions. This investment objective and investment pattern guide the investor when choosing the fund that is best suited for his investment goals. There are many mutual funds available in India today that cater to different types of investors. Some schemes provide capital protection to the risk-averse investor while others provide capital appreciation through investing in the small or mid cap segments of the equity market. Because of the diversity of investment goals and mandates, it is possible to sub-classify and classify the schemes. At the asset class level, you can do a broad classification. There are Equity Funds and Bond Funds as well as Liquid Funds and Balanced Funds. These funds can further be sub-categorized into various categories such as mid cap funds and small cap funds or sector funds, index funds, etc.