A mutual fund is formed when capital collected from different investors is invested in company shares, stocks or bonds. Shared by thousands of investors (including you), a mutual fund is managed collectively to earn the highest possible returns. The person driving this investment vehicle is a professional fund manager.
Mutual funds are the starting point for many individual investors because they offer a balanced portfolio in a single investment.
Mutual funds allow individuals to make their money work for them - meaning that they do not need to actively perform tasks for monetary gain. Any amount invested in mutual funds will either grow or shrink depending on market performance and the skill of the fund manager.
Types of mutual funds
a. Equity Funds: The primary focus of equity funds is to invest at least 65% of the total corpus into equity (stocks) and equity related instruments of different companies. Stock market fluctuations affect the performance of these holdings and determine whether they make a profit or not - as such, equity funds are slightly riskier than other types of funds. Diversification of the corpus between companies operating in different sectors of the economy and hands-on expert management serve to mitigate most of the risks involved.
b. Debt Funds: The primary focus of debt mutual funds is to invest a majority of its corpus into fixed-income investments, such as treasury bills, money market instruments, corporate bonds and debentures, commercial papers, gilt, government securities, and other debt securities.
c. Hybrid Funds: The primary focus of hybrid funds is to invest in a portfolio as balanced as it is diverse, by channeling investments proportionally into equity and debt instruments . This is done in order to create long-term capital appreciation at lower risk/ with lower volatility.