What is mutual fund and how it works

Mutual fund is a special kind of investment through which you can invest of different types together.You can do diversifies by investing at one place.Asset
management company starts mutual fund.Basically you give your money to asset management company and many people like you do so that company invest all
the money collectively at different places.They have appoint experts and with their suggestion they invest the money.They invest money at different places and the
return rate they get collectively from these different places out of that some small percent of 1-2 %is kept as a profit by the asset company and the rest you get back
as per that return rate.HDFC,HSBC,ICICI,Aditya Birla ,Reliance ,TATA,these are the fex examples of companies and banks who have started their own asset
management company.All the companies starts different kinds of mutual funds in large numbers.For examples ICICI has started more than 1200 mutual funds.
So how risky is your mutual funds and what is the return depends on the mutual funds that you are investing in.Mutual funds can give the return rate of 4% and also
of more than 30% too.It can be of zero risk and also of high risk to.Because all this depends on where the asset management company is investing your money.
If that comapny is investing on stocks then it will be more risky and you will get more returns and if its investing in the goverment bonds then it will be less risky.

Types of mutual fund:-

Different types of mutual funds depends on the basis of the investment done by AMC people.We can divide this in the 3 categories :Equity mutual funds
Debt mutual funds and Hybrid mutual funds

Equity Mutual Fund:-

In equity mutual funds,your money will be invested in the stock market .So naturally in this type of mutual funds generally the risk is more and also the return is high.
Equity mutual funds are various types .We can divide 5 types
1.Large/Small/Mid cap equity funds
In the stock market on which kind of company are you investing ,if its a big company then its called as large cap equity funds.If its a small company then its called
small cap and in the same way mid cap equity funds.Big company does not have much risk as compared to the smaller ones but big companies won’t have growth
rate as high as it can be for the smaller companies.So risk and return both are less in the big compaines.
2.Diversified equity fund
Here the investment is done in the large,medium and small cap or its done in different companies.
3.Equity Linked Saving Scheme
Equity linked saving scheme that is ELSS,this is a special type of equity fund where you can save our tax.
4.Sector Mutual fund
All the companies which are under the agriculture sector,they are invested on.A logistic or transports sector,so there one example for this is UTI transportation and
logistics funds.So the investment is done in that sector.These funds are more risky ,since all the investment is done is one sector so if the sector is going down
everything depends on that.
5.Index funds
Index funds are passively managed funds that is no agent of AMC is looking at where to invest the money here .These are passively managed that is according
to the markets rates up and down they too go up and down .Looking at the price of sensex and nifty it varies.

Debt mutual funds:-

These are those mutual fund which are invested on the debt instrument.Debts instruments are bonds ,debenture,certificate of deposits now these things are exactly
what you can read it for yourselves.Debts mutual funds are various types .We can divide 3 types
1.Liquid Funds
Liquid funds are those mutual funds which can be easily and quicky converted in to cash.Liquid means that actually ,It s not the liquid to drink .In economics
liquid is something which can be easily converted into cash.So this can be converted into cash within a day or two but it has a very low risk ,such low that you can
basically consider this as an altenative to saving accounts.Assest liquid funds is one such example where you will get the return of 7.1 % in a year.
2.Gilt Funds
Gilt funds are those funds where investment are done on the government issued bonds.So technically it has zero risk because its never possible for the government
to not return your money.mostly the interest rate can fluctuate.
3.Fixed Maturity plan
Fixed maturity plans and this can be considered as an alternative to fixed deposits because it has very low risk just like FD and it is done for a fixed time .for a
specific time investment is done here and you can not the money before that.So these are the few of debt funds there are more like junk bond scheme.

Hybrid Mutual Fund:-

Hybrid mutual fund basically its a mixture of a debt and equity mutual funds.Some people wants to invest in the stock market but do not want to invest all the money there and
also invest some amount in the debt instruments,so hybrid mutual funds are for them .If most of the money is invested in a debt fund then it will be called as the balanced saving
funds.

Pros and Cons of Mutual funds

The biggest advantage of mutual fund in a comparison to other investment is that it is already diversified.Your risk gets very low due to diversification.Because you are not
investing at one place so if one thing crashes so it won’t affect ypur money.So in comparison to the stock market ,gold ,real estate ,mutual funds are less risky however
exact risk depends on the mutual fund that you are investing on.One more good advantage is that it is affordable,you do not have to invest a big amount altogether
you can use SIP and invest a small amount evey month and all the investments of the mutual funds done by a professional experts or a fund managers who decided
where to invest and where to not this you do not need to so its again a big advantage that an experts is working for you .But this mutual funds has a disadvantage too.
If you are giving it to an unknown person ,you do not know how its going to perform.however he is an expert but you can not trust 100% that an expert will be right all
the time but the biggest disadvantage that used to be for the mutual funds earlier is that the agent used to take a lot of commission for investing in the mutual funds.

Frequently Asked Question

Conclusion

mutual fund is a collection of investments that pools money from many investors to buy stocks, bonds, and other assets. The fund’s performance depends on the value of its assets.