By Moneyvesta posted on November 1st, 2023

An Overview of Mutual Fund

Mutual Fund:  It is in the form of a “trust” that collects money from a number of investors who share a common investment objective & invest the same in different securities like equity, bonds & other securities.

Role & Functions of Mutual Funds:

Diversification- Mutual funds invest in a diversified portfolio of securities as it benefits investors by participating in the growth of diverse sectors/companies while limiting the risks associated with investments. Since mutual funds are pooled investment vehicles, investors get access to a wider pool of investment avenues with money of as low as Rs. 500 which might not be possible in direct securities, particularly if the invested amount is low.

Professional Management- Mutual Funds are managed by qualified & experienced fund managers who are responsible for researching, analysing, and investing in various securities.

Liquidity- Mutual funds offer ample liquidity to investors as in most mutual funds, investors can redeem their units on any business day.

Advantage of Mutual Funds:

Mutual fund investment simplifies the process of investing & holding securities.

1. Affordable Portfolio Diversification- An investor can get proportionate ownership in a diversified investment portfolio even for an investment as low as Rupees 500.

2. Tax Benefits- ELSS gives an investor the benefit of taxable income deduction of up to Rs. 1,50,000 in a financial year under section 80C, thereby reducing the tax liability.

3. Regulatory Oversight- SEBI strictly regulates the functioning of mutual funds and related intermediaries in the interest of investors.

4. Systematic Approach to Investment- Mutual funds offers various facilities that help investor invest/withdraw/transfer amounts regularly through SIP, SWP, and STP respectively. Such arrangements help investors by inculcating discipline in their financial journeys.

5. Transparency- Investors have the right to access information about their investments in mutual funds and can refer to scheme-related documents anytime to have detailed insights about a particular scheme.


Types of Mutual Funds:

Mutual Funds can be categorized on the basis of organization structure, asset class, investment objective, risk appetite, etc.

1. Mutual Fund based on Structure

a. Open-ended Funds- Investors can enter & exit these schemes on all business days at the current net asset value.

b. Close-ended Funds- Such funds have a fixed maturity. Investors can buy units of close-ended schemes only during the NFO period (New fund offer) & redeem the units only after the tenure of the scheme is over. However, these funds are listed on stock exchanges to provide investors an exit route during the running period.

2. Based on Asset Class

a. Equity Funds- Equity funds invest money in shares of companies and their return depends on the stock market performance and performance of the business of portfolio companies over time. These funds come under the category of high risk and high reward. These funds can be further categorized into different categories such as Large Cap, Mid Cap, Small Cap, Multi Cap, Flexi Cap funds, etc.

b. Debt Funds- Debt funds invest money in fixed-income securities like government securities, treasury bills, corporate bonds, etc. These funds have low risk compared to equity funds while providing investors with a fixed stream of income. They can be further categorized into corporate bond funds, banking & PSU funds, Gilt funds, etc.

c. Hybrid Funds- Such funds endeavour to provide investors with a fixed stream of income with the potential of capital appreciation. Hybrid funds are an optimum mix of debt and equity. These funds are further categorized into conservative, balanced, aggressive, balanced advantage funds, multi-asset allocation funds, arbitrage funds, etc.
d. Solution-Oriented Funds- These funds help you to invest for specific goals like retirement purposes, marriage, or children’s education. These types of funds are usually close-ended and have a lock-in period of at least 5 years.

e. Other Schemes- There are some other schemes as well in which you can invest like Index funds, fixed maturity plans, Infrastructure debt funds, etc.

3. Based on Investment Objective

a. Growth Fund- Investors invest in these types of funds for their high potential for capital appreciation. These funds come under the category of high risk.

b. Income Funds- Income funds generally invest in debt instruments like government securities, Commercial papers, corporate bonds, etc. These schemes invest with the objective to give investors a regular stream of fixed income.

c. Tax-Saving Fund (ELSS)- Equity-linked saving schemes help investors to save tax under section 80C of the Income Tax Act,1961. It has a lock-in period of 3 years.

d. Liquidity-based funds- These types of funds invest in fixed–income instruments like commercial paper, treasury bills, certificates of deposits, etc. with up to 91-days maturity period.

4. Based on Specialty

a. Sectoral Funds- These funds invest in particular sectors such as real estate, banking, Automobiles, etc. The returns depend on the performance of respective sectors.

b. Index Funds- These funds invest in stocks to mimic the performance of benchmarks such as Sensex, Nifty, etc.

c. Global Funds- These funds can invest in companies located anywhere in the world.

5. Based on Risk Appetite

a. High Risk- Equity funds come under the category of high risk with a potential of high capital appreciation.
b. Medium Risk- Such funds are a mix of equity and debt which provide a fixed income stream while providing a scope of capital appreciation.

c. Low Risk- Such funds invest in debt markets like government securities which are very safe instruments.

How do Mutual Funds work?

New Fund Offer (NFO) launch- The subscription offer to a new mutual fund scheme is released for the first time by an Asset Management Company (AMC). The fund houses use the NFO to raise money from the general public, which it then uses to buy a variety of securities including shares and debt instruments.

Pooling Money- Money is gathered by mutual funds from a large number of investors who make smaller investments.

Investment in Securities- Depending on the fund's strategy, the portfolio manager subsequently invests the money in various asset classes like stocks, bonds, commodities, etc. These investments are made using their knowledge, thorough research, and analysis based on a plan designed to achieve the stated objective of the scheme.

Returns to investors- The Net Asset Value (NAV) of a mutual fund scheme is used to evaluate its performance. It represents the total market value of the securities that the plan owns. The market value of securities fluctuates every day, which causes the NAV of a plan to alter daily. Mutual funds may distribute investor rewards or reinvest them back into the fund.

Redemption- Investors can sell or buy back their investment in a mutual fund. The fund manager uses the portfolio’s cash balance to compensate investors for their investment repurchase.



Mutual funds are a very useful investment option with the capacity of wealth creation. In Addition, mutual funds offer various kinds of schemes. There are many benefits like diversification of securities, low cost, and flexibility when investing in smaller amounts.

Play Store App Store Instagram Linkedin Whatsapp
Whatsapp Logo

Typically replies within an hour