What is a Mutual Fund? Meaning, Types, How It Works & How to Start?

A mutual fund is an investment option where money from many investors is pooled together and invested in assets such as stocks, bonds, money market instruments, commodities, REITs, InvITs or a mix of these, depending on the scheme objective. The pool is managed by professional fund managers, and investors receive units based on how much they invest.

Think of a mutual fund like ordering a thali instead of one single dish. A thali gives you a mix of items on one plate. In a similar way, a mutual fund may give you exposure to a basket of securities through one investment. This may help reduce dependence on one asset class, although the value of the investment can still change with market conditions.

In simple, a mutual fund pools money from multiple investors and invests it according to a defined objective. If the scheme invests mainly in stocks, it is usually called an equity fund. If it invests mainly in bonds and fixed-income instruments, it is usually called a debt fund. If it combines different asset classes, it may be called a hybrid or multi-asset fund.

The working of a mutual fund can be understood in a few steps:

1. You invest in a mutual fund scheme through SIP or lumpsum.

2. Your money is pooled with money from other investors.

3. The Asset Management Company appoints a fund manager to manage the scheme.

4. The fund manager invests as per the scheme objective.

5. You receive units of the scheme.

6. The value of each unit is reflected through NAV, or Net Asset Value.

For instance, if the NAV of a scheme is ₹20 and you invest ₹2,000, you receive 100 units. If the NAV changes later, your investment value will also change based on the revised NAV.

Mutual funds come in different categories because investors have different goals, timelines and preferences. The category you choose should ideally connect with why you are investing and how long you can stay invested.

Related Read: Building Your First Mutual Fund Portfolio: A Step-by-Step Guide for Beginners

A SIP, or Systematic Investment Plan, lets you invest a fixed amount regularly. It can work like a monthly routine for your money. A lumpsum investment means investing a larger amount at one time. This may suit someone who has surplus money, such as a bonus or maturity amount.

Related read: What is the Difference Between SIP and Lumpsum?

• They may provide access to a diversified portfolio through one investment.

• They are managed by professionals as per a defined scheme objective.

• They offer different categories for different goals and time horizons.

• They allow regular investing through SIP, which may help build discipline.

• They provide disclosures such as NAV, portfolio, expense ratio and scheme documents.

Every mutual fund category behaves differently because each one invests in different assets. Equity funds are linked to stock markets. Debt funds may be relatively steadier but can still be affected by credit quality, interest rates and liquidity. Hybrid funds combine equity and debt, while some schemes may also invest in commodities, REITs or InvITs, depending on the scheme objective.

A useful way to think about this is travel. For a nearby destination, you may prefer a smoother route. For a longer journey, you may be more open to changing roads, provided you have enough time and patience. Investing works in a similar way. A short-term goal may need a relatively steadier category, while a long-term goal may allow exposure to market-linked categories, depending on your comfort with fluctuations.

Before investing, check whether the fund category matches your goal, time horizon, liquidity need and ability to stay invested through market changes.

• What is this money meant for?

• When will I need this money?

• How much change in value can I stay comfortable with?

• Does the scheme objective match my goal?

These answers may help you select a category with more clarity instead of choosing a fund only because it appears popular or has performed well in the past.

• Read the scheme objective and category description.

• Check the latest factsheet and portfolio allocation.

• Use a calculator to estimate how much you may need for a goal.

• Understand the difference between SIP and lumpsum.

• Review your investment periodically, especially when your goal or time horizon changes.

• SIP Calculator – Tata Mutual Fund

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• Mutual Fund Glossary – Tata Mutual Fund

1. What is a mutual fund?
A mutual fund pools money from multiple investors and invests it in securities such as stocks, bonds, money market instruments or other permitted assets based on the scheme objective.

2. How does a mutual fund work?
Investors put money into a scheme, the fund manager invests it according to the scheme objective, and investors receive units. The value of those units changes with NAV.

3. Is a mutual fund suitable for beginners?
Mutual funds may be considered by beginners after they understand their goal, investment horizon and comfort with market-linked fluctuations.

4. What is SIP in mutual funds?
SIP is a facility that allows regular investment of a fixed amount in a mutual fund scheme.

5. What is NAV?
NAV, or Net Asset Value, is the per-unit value of a mutual fund scheme.

6. Are mutual fund returns guaranteed?
No. Mutual fund returns are not guaranteed or assured. They depend on market and scheme performance.

7. Can mutual funds invest beyond equity and debt?
Yes, some schemes may invest in asset classes such as commodities, REITs, InvITs or other permitted instruments, depending on the scheme objective.

• AMC: Asset Management Company. It manages mutual fund schemes.

• NAV: Net Asset Value. The per-unit value of a mutual fund scheme.

• SIP: Systematic Investment Plan. A way to invest a fixed amount regularly.

• Lumpsum: A one-time investment amount.

• Units: The portion of the mutual fund scheme allotted to an investor.

• Expense Ratio: The annual cost charged by the scheme for managing the fund.

• Diversification: Spreading investments across different securities or asset classes.

• REITs: Real Estate Investment Trusts. They provide exposure to income-generating real estate assets.

• InvITs: Infrastructure Investment Trusts. They provide exposure to infrastructure assets.

• Commodities: Assets such as gold or other commodities, depending on what the scheme is permitted to invest in.

• Liquidity: How easily an investment can be bought or sold.

• A mutual fund is a pooled investment managed as per a scheme objective.

• Different categories may suit different goals and time horizons.

• SIP and lumpsum are ways to invest, not fund categories.

• Equity, debt, hybrid, index, multi-asset, liquid and overnight funds behaves differently.

• Some schemes may include commodities, REITs or InvITs depending on their objective.

• Before investing, investors should read scheme-related documents and check the latest disclosures.
   

• An Investor Education and Awareness Initiative by Tata Mutual Fund.

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