What Is a Mutual Fund ?

Well although i know most of us already know what is a mutual fund but i just thought for all those new to the investment scene who like to ask this question a lot, so maybe i can explain the basics of Mutual funds and who knows maybe all of you who have been investing in mutual funds may also learn a thing or two about them.

Mutual Fund is basically a company that brings together a group of investors(people like us), and invests their money in equity securities etc. Each person holds a share in the company which represents some part of the total corpus that has been invested.

How can we make money from Mutual Funds? Well there are three ways....

1. Dividends and interests : The dividend of the stocks held by the mutual fund or the interest that it earns from holding bonds is one way of earning money from a mutual fund.

2. Capital Gain : If the mutual fund sells of any part of the equity held by it, due to increase in price value of the equity, the money earned is divided among the investors, and is call capital gain.

3. Sell off : If you decide to sell of your share of the mutual fund after the price value of share has risen for a profit.

Why to invest in a Mutual Fund ?
Let me below list down some of the advantages of investing in a Mutual fund....

1. Your Money of managed by professionals and for a very low cost to the individual investor.

2. Your risk is more spread out, due to the fact that mutual funds will own a variety of shares instead of just you owning a single type of share, hence diversification can lower your chances of risk.

3. Lower cost of transaction to the investor due to the fact that a mutual fund may be doing bulk trading.

4. Your money is mostly liquid due to the fact that these funds allow you to exit any time and take your money.

5. Ease of buying a mutual fund, since its all about issuing a cheque and filling up a form which has been made more easier by online availibility.

Types of Mutual Funds

Although there are many types of mutual funds but some of the main genres are listed below :

1. Bond / Income Fund : The basic purpose of the income fund is to provide a steady income. These type of funds usually hold Government debt etc. Similarly Bond funds mainly depend on where they invest and carry a certain amount of risk.

2. Balanced Funds : The basic purpose of these kinds of funds is to provide safety, income and appreciation of the invested amount. They usually balance there incomes by investing some portion of there corpus in government securities and some in equity.

3. Equity Funds : The most common type of funds and invest in equity. The basic idea being to provide the investor with long time capital growth and income. There are many different types of equity funds depending on their ideology.

4. Global / International Funds : The kind of funds which invest in other countries aside from the home country.

5. Specialty Funds : These are the type of funds which don't diversify too much and only focus on a specific sector/ segment like telecoms, IT or maybe regional like say latin america, China etc...

6. Index funds : These type of funds focus on a specific index of the stock market. They basically replicate what is hapening in the particular type of index they are focusing on.

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