Mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested into a variety of securities, including stocks, bonds, and money-market instruments. Each scheme of a mutual fund can have different character and objectives. Mutual funds issue units to the investors, which represent an equitable right in the assets of the mutual fund. Thus a mutual fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.How it works
A mutual fund is a collection of stocks, bonds, or other securities owned by a group of investors and managed by a professional investment company. For an individual investor to have a diversified portfolio is difficult. But he can approach to such company and can invest into shares. Mutual funds have become very popular since they make individual investors to invest in equity and debt securities easy. When investors invest a particular amount in mutual funds, he becomes the unit holder of corresponding units. In turn, mutual funds invest unit holders money in stocks, bonds or other securities that earn interest or dividend. This money is distributed to unit holders. If the fund gets money by selling some stocks at higher price the unit holders also are liable to get capital gains. A mutual fund is quite simply a collection of stocks, bonds, or other securities owned by a group of investors and managed by a professional investment company. Thus the mutual funds are not the depositing instrument that has guarantee of getting certain amount but it is like any other securities where the investor can have capital gains or loss.
The primary advantage of funds (at least theoretically) is the professional management of your money. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments.
By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. In other words, the more stocks and bonds you own, the less any one of them can hurt you (think about Enron). Large mutual funds typically own hundreds of different stocks in many different industries. It wouldn't be possible for an investor to build this kind of a portfolio with a small amount of money.
Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than you as an individual would pay. Liquidity - Just like an individual stock, a mutual fund allows you to request that your shares be converted into cash at any time.
Buying a mutual fund is easy! Pretty well any bank has its own line of mutual funds, and the minimum investment is small. Most companies also have automatic purchase plans whereby as little as Rs 1000 can be invested on a monthly basis.