What are Mutual Funds and why to invest in Mutual Funds?

A mutual fund is a pool of money provided by various participants and then invested into equity, fixed income markets or any other form of investments with the objective to provide safety of capital and returns to investors. The pool is managed by on behalf of the investors by a team of specialized individuals, commonly known as fund managers or investment advisors. When you buy a mutual fund unit, you are pooling your money with a number of other investors, which in turn enables you (as part of a group) to pay a professional manager to select specific securities for you. Mutual funds are all set up with a specific strategy in mind, and their distinct focus can be nearly anything: large stocks, small stocks, government bond, corporate bonds, and bank deposits, money market instruments, stocks in certain industries, stocks in certain countries, and the list goes on. The main idea being that the fund invests according to a certain investment strategy which has been laid down at the time of initial launch of the fund which enables the investors’ of the fund to earn a return on their investment.

There are two types of Mutual funds: Open Ended and Closed End.

Open-End Fund:

An open end Fund does not have a fixed pool of money and it continuously offers its units to the public. Investors can buy and sell units anytime they want at Net Asset Value (NAV) related prices. The Fund is set up as a Trust, with an independent Trustee, who has custody of the assets of the Trust.  Each share of the Fund is called a Unit and its Fund Manager is known as the Asset Management Company (AMC). The Fund, itself, is called a Unit Trust.

Closed End Fund:

A Closed-end Fund is a Mutual Fund that has a fixed pool of money which is collected from the investors when the Fund is set up [Initial Public Offering (IPO)]. Thereafter, the Fund Manager invests the money in accordance with the declared Investment Policy of the Fund and distributes returns to the investors, from time to time, in the shape of Cash Dividends or Bonus Certificates. Each share of the Fund is called a Certificate and its Fund Manager is also known as the Investment Advisor. If an investor wants to sell his Certificates, he can do so on the Stock Exchange the fund is listed on, through a stock broker, at the prevailing price, just like selling Shares of a listed Company. The said price, of course, is determined by the demand and supply of those Certificates at that given time.