A mutual fund is an investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the funds capital and attempt to produce capital gains and income for the funds investors. A mutual funds portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Mutual funds raise money by selling units of the fund to the public, much like any other type of company can sell stock to the public. Mutual funds then take the money they receive from the sale of their units (along with any money made from previous investments) and use it to purchase various investment vehicles, such as stocks, bonds and money market instruments.
In return for the money they give to the fund while purchasing units, unitholders receive an equity holding in the fund and, indirectly, in each of its underlying securities. For most mutual funds, unitholders are free to sell their units at any time, although the price of the unit in a mutual fund will fluctuate daily, depending upon the performance of the securitiesheld by the fund.
Benefits of mutual funds includes diversification and professional money management. Mutual funds offer choice, liquidity, convenience and often require a minimum investment.
There are many types of mutual funds but broadly they are divided into two main categories- open ended funds and closed ended funds. Going by the further diversification an investor has a long list of choices like, equity diversified funds, balanced funds, asset allocation funds, index funds, fund of funds, gold funds, bond funds, income funds, gilt funds etc.
Though a long bouquet of fund is available, but each have a different designated vision to comply with. A right asset allocation and investors thorough analysis will only enable an advisor to advise some among the above.