What is Mutual Fund?

What is mutual fund ? 

Imagine a group of friends pooling their money to buy a Bucket Briyani. 

Instead of one person to spend the whole meal for all friends, they combine their money to get a bucket Briyani,and now amount accumulated is more,they buy more items in addition to Briyani and share all among them. 

Now every one can taste many dishes, many tastes , and  at the same  time each one is spending less amount of Money.

You can say A mutual fund also functions like that , but it is for Investment. 

It's a pool of money collected from public, and invested in various income generating financial instruments. 

The decision to buy, which one to buy, when to sell, what to sell   to generate profit out it , every thing is managed by professionals. 

This money is invested in things like stocks, bonds, or other assets.

Basing on the nature of instruments, mutual funds are classified in to 3 categories to reduce the risk for the client. 

1. Debt 

2. Equity

3. Hybrid 

Debt Funds  :

Where collected money is invested in instruments such as Bonds issued by Government or private, treasury bills , Money market instruments etc , These types of funds are less volatile in nature , so Investors have lesser risk invested in these funds. But return from these instruments are normally low to medium. 

Equity Funds 

When collected money is invested in shares of listed companies , those funds are called Equity funds. These funds are high risk ,high return funds. Even though selection funds are carefully done by professionals , due to various external factors including international,price of these funds are highly volatile and has a significant risk associated with it

Hybrid funds 

These type of funds are combination of Debt and Equity at various proportion to gain more return from Equity and to minimise risk by investing in Debt instruments.