What is a Mutual Fund?

A mutual fund is an investment company which collects money from public by issuing its units, use the collected money to invest in securities, and pass the profit earned back to the investors.

The units of a mutual fund are similar to the shares of a company. Its value goes up when the underlying securities’ value is increased. The underlying securities could be equity shares, bonds, money market instruments, or future contracts etc or a combination of these financial instruments.

The main objectives of mutual funds are

To provide an opportunity to common public to invest in diversified portfolios with small capital base.
To cater to the needs of different kinds of people to provide growth opportunity, safety, reduced risk and high liquidity.

Mutual funds charge a fixed percentage of the assets they manage. The profit of a mutual fund is the income earned through the fees less administrational and operational charges.

The following diagram illustrates the basic functioning of mutual funds.