Mutual Fund Definition : or What is a Mutual Funds and How does these work?

Mutual Fund Definition: A mutual fund is made up of money that is pooled togeth
er by a large number of investors who give their money to a fund manager to inve
st in a large portfolio of stocks and / or bonds
Mutual fund is a kind of trust that manages the pool of money collected f
rom various investors and it is managed by a team of professional fund managers
(usually called an Asset Management Company) for a small fee. The investments
by the Mutual Funds are made in equities, bonds, debentures, call money etc., d
epending on the terms of each scheme floated by the Fund. The current value of
such investments is now a days is calculated almost on daily basis and the same
is reflected in the Net Asset Value (NAV) declared by the funds from time to ti
me. This NAV keeps on changing with the changes in the equity and bond market.
Therefore, the investments in Mutual Funds is not risk free, but a good manage
d Fund can give you regular and higher returns than when you can get from fixed
deposits of a bank etc.
Why Should I Invest in a Mutual Fund when I can Invest Directly in the Same Inst
ruments :
We have already mentioned that like all other investments in equities and debts,
the investments in Mutual funds also carry risk. However, investments through
Mutual Funds is considered better due to the following reasons :-
Your investments will be managed by professional finance managers who are in a b
etter position to assess the risk profile of the investments;
Your small investment cannot be spread into equity shares of various good compan
ies due to high price of such shares. Mutual Funds are in a much better positio
n to effectively spread your investments across various sectors and among severa
l products available in the market. This is called risk diversification and ca
n effectively shield the steep slide in the value of your investments.
Thus, we can say that Mutual funds are better options for investments as they o
ffer regular investors a chance to diversify their portfolios, which is somethin
g they may not be able to do if they decide to make direct investments in stock
market or bond market. For example, if you want to build a diversified portfol
io of 20 scrips, you would probably need Rs 2,00,000 to get started (assuming th
at you make minumum investment of Rs 10000 per scrip). However, you can invest
in some of the diversified Mutual Fund schemes for an low as Rs.10,000/-.

WHAT ARE VARIOUS TYPES OF MUTUAL FUNDS

A common man is so much confused about the various kinds of Mutual Funds tha
t he is afraid of investing in these funds as he can not differentiate between v
arious types of Mutual Funds with fancy names. Mutual Funds can be classified i
nto various categories under the following heads:-
(A) ACCORDING TO TYPE OF INVESTMENTS :- While launching a new scheme, every Mut
ual Fund is supposed to declare in the prospectus the kind of instruments in whi
ch it will make investments of the funds collected under that scheme. Thus, the
various kinds of Mutual Fund schemes as categoried according to the type of inve
stments are as follows :-
(a) EQUITY FUNDS / SCHEMES
(b) DEBT FUNDS / SCHEMES (also called Income Funds)
 (c ) DIVERSIFIED FUNDS / SCHEMES (Also called Balanced Funds)
(d) GILT FUNDS / SCHEMES
(e) MONEY MARKET FUNDS / SCHEMES
(f) SECTOR SPECIFIC FUNDS
(g) INDEX FUNDS
B) ACCORDING TO THE TIME OF CLOSURE OF THE SCHEME :- While launching a new sche
mes, Mutual Funds also declare whether this will be an open ended scheme (i.e. t
here is no specific date when the scheme will be closed) or there is a closing d
ate when finally the scheme will be wind up. Thus, according to the time of clo
sure schemes are classified as follows :-
(a) OPEN ENDED SCHEMES
(b) CLOSE ENDED SCHEMES

C) ACCORDING TO TAX INCENTIVE SCHEMES :- Mutual Funds are also allowed to float
some tax saving schemes. Therefore, sometimes the schemes are classified acco
rding to this also:-
(a) TAX SAVING FUNDS
(b) NOT TAX SAVING FUNDS / OTHER FUNDS
(D) ACCORDING TO THE TIME OF PAYOUT :- Sometimes Mutual Fund schemes are classi
fied according to the periodicity of the pay outs (i.e. dividend etc.). The cat
egories are as follows :-
(a) Dividend Paying Schemes
(b) Reinvestment Schemes
The mutual fund schemes come with various combinations of the above categories.
Therefore, we can have an Equity Fund which is open ended and is dividend payin
g plan. Before you invest, you must find out what kind of the scheme you are b
eing asked to invest. You should choose a scheme as per your risk capacity and
the regularity at which you wish to have the dividends from such schemes.
Various Types of Mutual Funds based on allocation of funds : These days asset m
anagers give very attractive names to some of their schemes, which may just anot
her type of the above referred schemes. Some of the most popular type of Mutual
Funds these days are "Aggressive Growth Fund"; "Balanced Fund"; "Blend Fund";
"Capital Appreciation Fund"; "Crossover fund"; "Global Fund"; "Growth and Income
Fund"; Money Market Fund"; "Liquid Fund"; "Prime Rate Fund"; "Hedge Fund"; "Ind
ex Fund"; "International Fund".
Association of Mutual Funds in India : It is popularly known as AMFI (www.amfind
ia.com). The site provides valuable information about mutual fund industry in I
ndia. For getting the details of the latest NAVs of various Mutual Fund schemes
in India, you can click on link provided at the top.
SOME OF THE TERMS USED IN MUTUAL FUNDS
Net Asset Value (NAV)
Net Asset Value is the market value of the assets of the scheme minus its liabil
ities. The per unit NAV is the net asset value of the scheme divided by the numb
er of units outstanding on the Valuation Date.
Sale Price : It is the price you pay when you invest in a scheme and is also c
alled "Offer Price". It may include a sales load.
Repurchase Price : - It is the price at which a Mutual Funds repurchases its un
its and it may include a back-end load. This is also called Bid Price.
Redemption Price : It is the price at which open-ended schemes repurchase their
units and close-ended schemes redeem their units on maturity. Such prices are N
AV related.
Sales Load / Front End Load : It is a charge collected by a scheme when it sell
s the units. Also called, Front-end load. Schemes which do not charge a load at t
he time of entry are called No Load schemes.
Repurchase / Back-end Load :
It is a charge collected by a Mufual Funds when it buys back / Repurchases the
units from the unit holders.