{"id":4207,"date":"2021-08-27T17:53:30","date_gmt":"2021-08-27T12:23:30","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=4207"},"modified":"2022-05-25T18:48:44","modified_gmt":"2022-05-25T13:18:44","slug":"mutual-funds","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/mutual-funds\/","title":{"rendered":"What Is Mutual Fund \u2013 2022 Guide on Overview, Types and How MFs Work"},"content":{"rendered":"\n<p>A mutual fund is a type of investment option in which a pool of money, collected from a number of investors who share a common investment objective, is invested in assets with the goal of capital appreciation.<\/p>\n\n\n\n<p>A <a href=\"https:\/\/www.tickertape.in\/blog\/advantages-disadvantages-of-mutual-funds\/?utm_source=blog&amp;utm_medium=article\">mutual fund<\/a> is managed by a professional fund manager who is tasked with <a href=\"https:\/\/www.tickertape.in\/blog\/why-is-asset-allocation-one-of-the-most-important-aspects-of-portfolio-construction\/\">asset allocation<\/a> and performing risk management while attempting to maximize the gains from the investments. Each investor owns units of the fund which represent their portion of the holdings. Any income earned from the collective investment is distributed among the investors in proportion to the units or shares held by them. In this blog, we dive deep into what is a mutual fund and how it works.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-funds\/#How-do-mutual-funds-work\" title=\"How do mutual funds work?\">How do mutual funds work?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-funds\/#How-to-pick-the-right-mutual-fund\" title=\"How to pick the right mutual fund?\">How to pick the right mutual fund?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-funds\/#How-can-an-investor-earn-from-a-mutual-fund\" title=\"How can an investor earn from a mutual fund?\">How can an investor earn from a mutual fund?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-funds\/#What-is-the-Net-Asset-Value-NAV-of-a-mutual-fund\" title=\"What is the Net Asset Value (NAV) of a mutual fund?\">What is the Net Asset Value (NAV) of a mutual fund?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-funds\/#Types-of-Mutual-Funds\" title=\"Types of Mutual Funds\">Types of Mutual Funds<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-funds\/#Equity-Funds\" title=\"Equity Funds\">Equity Funds<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-funds\/#Debt-funds\" title=\"Debt funds\">Debt funds<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-funds\/#Liquid-funds\" title=\"Liquid funds\">Liquid funds<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-funds\/#Hybrid-Funds\" title=\"Hybrid Funds\">Hybrid Funds<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-funds\/#Index-Funds\" title=\"Index Funds\">Index Funds<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-funds\/#Advantages-of-investing-in-mutual-funds\" title=\"Advantages of investing in mutual funds\">Advantages of investing in mutual funds<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/www.tickertape.in\/blog\/mutual-funds\/#Disadvantages-of-mutual-funds\" title=\"Disadvantages of mutual funds\">Disadvantages of mutual funds<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\" id=\"how\"><span class=\"ez-toc-section\" id=\"How-do-mutual-funds-work\"><\/span><strong>How do mutual funds work?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>You can <a href=\"https:\/\/www.tickertape.in\/blog\/why-should-you-prioritise-investing\/\">invest<\/a> in a <a href=\"https:\/\/www.tickertape.in\/blog\/these-new-tools-make-evaluating-mutual-funds-better\/?utm_source=blog&amp;utm_medium=article\">mutual fund<\/a> in two ways. The first method is through a one-time lump sum investment. The second option is through a Systematic Investment Plan or <a href=\"https:\/\/www.tickertape.in\/blog\/choose-best-date-for-sip\/?utm_source=blog&amp;utm_medium=article\">SIP<\/a> in which you invest in a mutual fund at fixed intervals, for example, monthly or quarterly.&nbsp;<\/p>\n\n\n\n<p>A fund manager invests the pooled capital in various asset classes &#8211; generally <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/\">equity<\/a> and debt &#8211; depending upon the objective of the fund. The goal remains to provide the investors with capital appreciation. A benchmark <a href=\"https:\/\/www.tickertape.in\/blog\/stock-market-index\/\">index<\/a> is made the basis for returns comparison and fund managers attempt to beat the market index to secure above-market returns in actively managed funds, and returns at par with the market in passively managed funds.<\/p>\n\n\n\n<p>What investors get is units of the mutual fund scheme that can be traded in the <a href=\"https:\/\/www.tickertape.in\/blog\/how-to-invest-in-shares\/\">stock market<\/a>.&nbsp;<\/p>\n\n\n\n<p>As the value of the securities that the fund invests in grows, the per-unit cost of the fund (Net Asset Value or NAV) grows in line. An investor makes a profit when the <a href=\"https:\/\/www.tickertape.in\/blog\/mutual-fund-nav\/?utm_source=blog&amp;utm_medium=article\">NAV<\/a> they redeem the mutual fund units at is higher than the price they bought it for.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"to\"><span class=\"ez-toc-section\" id=\"How-to-pick-the-right-mutual-fund\"><\/span><strong>How to pick the right mutual fund?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>While picking mutual funds, here are three important pointers for consideration:<\/p>\n\n\n\n<ul><li>Pick a mutual fund that meets your short and long term financial objective.<\/li><li>Pre-decide how much money you want to invest and for how long<\/li><li>Consider the risks and <a href=\"https:\/\/www.tickertape.in\/blog\/volatility\/\">volatility<\/a> involved.<\/li><\/ul>\n\n\n\n<p>Making the right pick from the plethora of funds and fund <a href=\"https:\/\/www.tickertape.in\/blog\/information-on-tax-saving-mutual-funds\/?utm_source=blog&amp;utm_medium=article\">schemes<\/a> can seem daunting. There are various parameters that one may use to assess the suitability of a mutual fund to their portfolio. Some of them are as below:<\/p>\n\n\n\n<ul><li>Historical returns<\/li><li>Performance rating<\/li><li>Performance against benchmark and peers<\/li><li>Consistency in returns<\/li><li>AUM&nbsp; size<\/li><li>Cost of investment<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"an\"><span class=\"ez-toc-section\" id=\"How-can-an-investor-earn-from-a-mutual-fund\"><\/span><strong>How can an investor earn from a mutual fund?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Mutual funds create wealth in two ways. The first is through dividends. The second way is through capital gains. If the selling price of a security held by an investor is greater than the purchase price of the security, then the investor earns profit in the form of capital gains.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"is\"><span class=\"ez-toc-section\" id=\"What-is-the-Net-Asset-Value-NAV-of-a-mutual-fund\"><\/span><strong>What is the Net Asset Value (NAV) of a mutual fund?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Investing in a mutual fund is not the same as buying a stock of a company. Unlike stock owners, mutual fund investors do not receive voting rights with the company. This is because your portion of a mutual fund represents an investment in many different securities instead of the holding of a company share.&nbsp;<\/p>\n\n\n\n<p>The value of a <a href=\"https:\/\/www.tickertape.in\/blog\/close-ended-mutual-funds\/?utm_source=blog&amp;utm_medium=article\">mutual fund<\/a> is denoted by its Net Asset Value or NAV. NAV is the <a href=\"https:\/\/www.tickertape.in\/blog\/market-value\/\">market value<\/a> of all the securities held by the mutual fund divided by the total number of units or shares of the fund. The NAV of a mutual fund does not fluctuate during market hours, rather it is settled at the end of each trading day, although the funds can be purchased and redeemed as needed.&nbsp;<\/p>\n\n\n\n<p><strong>NAV = (Value of all the assets \u2013 the expense of running the mutual fund)\/number of units<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"of\"><span class=\"ez-toc-section\" id=\"Types-of-Mutual-Funds\"><\/span><strong>Types of Mutual Funds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Equity-Funds\"><\/span><strong>Equity Funds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Equity funds are the most common type of mutual funds. As the name implies, equity funds primarily invest in equity or stocks. There are various types of equity funds.<\/p>\n\n\n\n<p>On the basis of the market capitalization of the companies invested in, equity funds can be divided into Large Cap funds (top 100 companies in terms of <a href=\"https:\/\/www.tickertape.in\/blog\/market-capitalization\/\">market capitalisation<\/a>), Mid Cap funds (101<sup>st<\/sup> to 250<sup>th<\/sup> companies in terms of market capitalisation) and Small Cap funds (companies less than 250<sup>th<\/sup> in terms of market capitalisation). A Multi Cap fund invests in Large, Mid and Small Cap companies.<\/p>\n\n\n\n<p><a href=\"https:\/\/www.tickertape.in\/blog\/what-are-equity-shares-meaning-types-features-limitations-and-more\/?utm_source=blog&amp;utm_medium=article\">Equity<\/a> funds can also be divided based on the growth prospects of invested stocks. <a href=\"https:\/\/www.tickertape.in\/blog\/cash-dividend-vs-stock-dividend\/\">Dividend<\/a> funds invest primarily in <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-dividend\/\">dividend<\/a> yielding stocks. Value funds <a href=\"https:\/\/www.tickertape.in\/blog\/how-to-invest-in-the-stock-market-beginners-guide\/\">invest in stocks<\/a> that are undervalued and show potential for growth in the future. Contra funds invest in stocks that are not performing well \u2013 either over performing or underperforming \u2013 and have thus been shunned by other investors. The fund manager believes that over the long term, the price of these stocks will normalise and demand will increase.<\/p>\n\n\n\n<p>In a focused fund, a fund manager invests in a few stocks (maximum 30) that they have carefully researched and that they believe will perform well. Sectoral or <a href=\"https:\/\/www.tickertape.in\/blog\/what-are-thematic-funds\/\">thematic funds<\/a> invest in different types of companies in specific sectors of the economy like energy, healthcare, infrastructure etc.<\/p>\n\n\n\n<p><a href=\"https:\/\/www.tickertape.in\/blog\/how-to-invest-in-elss\/\">ELSS funds<\/a> are an equity-linked saving scheme with a statutory lock-in of 3 yrs and tax benefit of upto Rs 1.5 lakh under Section 80C of the <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-income-tax\/\">Income Tax<\/a> Act.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Debt-funds\"><\/span><strong>Debt funds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><a href=\"https:\/\/www.tickertape.in\/blog\/what-are-debt-funds\/?utm_source=blog&amp;utm_medium=article\">Debt fund<\/a>s are considered to be less risky than equity funds because they invest in securities with fixed incomes and maturity periods like <a href=\"https:\/\/www.tickertape.in\/blog\/government-securities\/\">government securities<\/a>, corporate bonds, treasury bills and so on, and are not affected by fluctuations in the market. Although their risk is low, <a href=\"https:\/\/www.tickertape.in\/blog\/what-are-debt-funds\/\">debt funds<\/a> also usually offer less returns than equity funds. There are several types of debt funds too.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Liquid-funds\"><\/span><strong>Liquid funds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><a href=\"https:\/\/www.tickertape.in\/blog\/what-are-liquid-funds\/\">Liquid funds<\/a> are good for short term investments since they invest in instruments having a maturity of a maximum of 91 days. Similarly, money market funds invest in instruments with a maximum maturity of 1 yr. A dynamic bond fund invests in instruments across maturity periods depending on interest rates by altering portfolio allocations between short-term and long-term bonds.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Hybrid-Funds\"><\/span><strong>Hybrid Funds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><a href=\"https:\/\/www.tickertape.in\/blog\/top-hybrid-funds\/\">Hybrid funds<\/a> are a combination of equity and debt funds and have different combinations of the two asset classes depending on the objective of the fund.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Index-Funds\"><\/span><strong>Index Funds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>While most funds try to beat the market\u2019s benchmarks and need to be actively managed, <a href=\"https:\/\/www.tickertape.in\/blog\/index-funds-2\/?utm_source=blog&amp;utm_medium=article\">index fund<\/a>s simply track a market index and are thus, are passively managed. An index mutual fund will imitate a market benchmark like <a href=\"https:\/\/www.tickertape.in\/blog\/national-stock-exchange\/\">NSE<\/a> Nifty or BSE <a href=\"https:\/\/www.tickertape.in\/blog\/sensex-companies\/\">Sensex<\/a> and will not outperform or underperform it. It will just match its performance and return the earnings minus costs.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"mutual\"><span class=\"ez-toc-section\" id=\"Advantages-of-investing-in-mutual-funds\"><\/span><strong>Advantages of investing in mutual funds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul><li>Mutual funds provide a relatively safer avenue for investors who seek exposure to equities for higher returns but are wary of the risks or have no time or understanding of <a href=\"https:\/\/www.tickertape.in\/blog\/stock-analysis\/\">stock analysis<\/a>.&nbsp;<\/li><li>Being managed by a fund manager, mutual funds are a great way for individual investors to get access to professionally managed portfolios.&nbsp;<\/li><li>Mutual funds provide investors with an opportunity to capture entire markets or market segments at a fraction of the cost.<\/li><li>Mutual funds help investors diversify their portfolio through a single investment since mutual funds invest across different stocks or sectors or even across different types of securities depending on the type of the fund scheme.<\/li><li>Mutual funds are easy to enter because, unlike the stock market which requires a great amount of time and analysis, the professional fund manager has already done the analysis.<\/li><li>Mutual funds are liquid investments that can be redeemed and converted to cash quickly.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"funds\"><span class=\"ez-toc-section\" id=\"Disadvantages-of-mutual-funds\"><\/span><strong>Disadvantages of mutual funds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul><li>Mutual funds are subject to market risk and may experience volatility in the short term.&nbsp;<\/li><li>The mutual fund manager is in charge of your fund and takes the decision on avenues for investment on your behalf.<\/li><li>The cost of investment may be higher than in direct equity as there is an <a href=\"https:\/\/www.tickertape.in\/blog\/information-on-expense-ratio\/\">expense ratio<\/a> &#8211; towards fund management &#8211; and some funds also levy an entry and exit load over and above the administration charges.<\/li><\/ul>\n\n\n<span class='bctt-click-to-tweet'><span class='bctt-ctt-text'><a href='https:\/\/twitter.com\/intent\/tweet?url=https%3A%2F%2Fwww.tickertape.in%2Fblog%2Fmutual-funds%2F&#038;text=Mutual%20Funds%20are%20incredible%20financial%20vehicles%20with%20which%20you%20can%20diversify%20your%20portfolio%20with%20a%20single%20investment%20while%20also%20fetching%20you%20exposure%20to%20the%20stock%20markets&#038;via=TickertapeIN&#038;related=TickertapeIN' target='_blank'rel=\"noopener noreferrer\">Mutual Funds are incredible financial vehicles with which you can diversify your portfolio with a single investment while also fetching you exposure to the stock markets <\/a><\/span><a href='https:\/\/twitter.com\/intent\/tweet?url=https%3A%2F%2Fwww.tickertape.in%2Fblog%2Fmutual-funds%2F&#038;text=Mutual%20Funds%20are%20incredible%20financial%20vehicles%20with%20which%20you%20can%20diversify%20your%20portfolio%20with%20a%20single%20investment%20while%20also%20fetching%20you%20exposure%20to%20the%20stock%20markets&#038;via=TickertapeIN&#038;related=TickertapeIN' target='_blank' class='bctt-ctt-btn'rel=\"noopener noreferrer\">Click To Tweet<\/a><\/span>\n\n\n<p>Mutual funds are great investment avenues that help you to diversify your portfolio through a single investment while also fetching you exposure to the stock markets. There are many <a href=\"https:\/\/www.tickertape.in\/blog\/types-of-mutual-funds-a-quick-overview\/\">types of mutual funds<\/a> to suit the varying requirements of investors. Choose the right fund to invest in using the criteria mentioned in the article and do not forget to undertake risk profiling before investing in mutual funds.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Interested in knowing about mutual funds and how they work? Click here to know all about mutual funds including meaning, types, features and how to invest.<\/p>\n","protected":false},"author":54,"featured_media":4160,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"no","_lmt_disable":"no","footnotes":""},"categories":[8],"tags":[630,632,626,633,623,619,629,631,624,618,371,625,622,79,620,339,628,627,621],"acf":[],"modified_by":"Neera Bhardwaj","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/08\/MF-2-2.png?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/4207"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/54"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=4207"}],"version-history":[{"count":5,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/4207\/revisions"}],"predecessor-version":[{"id":8858,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/4207\/revisions\/8858"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/4160"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=4207"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=4207"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=4207"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}