A mutual fund is one of the most popular financial vehicles that diversify investors' portfolios based on risk appetite and objectives. These schemes are offered by Asset Management Companies (AMC) to maximise returns from investments.

To help you better understand mutual funds meaning, here is a detailed discourse on its details, types, benefits, returns, working principles, and more.

A mutual fund can be defined as a fund or trust created with like-minded investors. The AMC invests these funds in money market instruments like equity, debt, and other securities. Investors are given units, which represents a portion of the fund based on money invested.

The income generated from the collective investment is then proportionally distributed among unit holders after deducting fund management expenses. This income is calculated on the Net Asset Value scheme. According to the current NAV value, the investor gets profit or loss.

SEBI has set the mutual funds definition as it is the sole authority to govern the norms and regulations of mutual funds. All such funds in the money market are registered under SEBI, and it protects the interest of all investors.

Each investor's money, irrespective of holding single or multiple units, is professionally managed by an asset manager to earn the best return depending on the scheme's objective. Even with a small capital, the fund is invested in a diversified portfolio to get maximum return, and this is the best part about mutual funds.

The performance of the fund depends on the underlying securities’ performance. Hence, the value of a portfolio depends on the value of securities and accordingly, the investor gets capital gain or a capital loss.

Any person can invest in mutual funds in India with a long-term or short-term financial goal. Mutual funds have plans that can suit and benefit each and every person. Any investor with following perceptions invest in a mutual fund -

• Higher risk-appetite.
• Long-time investment horizon
• Diversified investment goals

There are primarily 3 types of Mutual funds as described below:

• Equity Mutual Funds: Investing 65% of the fund in equity instruments. It can provide the highest return but is subject to higher risk.
• Debt Mutual Funds: Investing primarily in the debt instruments. It is suitable for risk-averse investors as the performance is not dependent on market fluctuations.

• Hybrid Mutual Funds: Investment in both equity and debt fund instruments to balance the risk-reward ratio.

However, each of these types of mutual funds are further categorised into various sub-types which are described in the following table.

The introduction of the mutual fund was devised to enhance the security and versatility of investment. To make the best use, investor should know the features of mutual funds -

• Low Cost: The expense ratio to manage the fund is low and ranges from 0.8% to 2.25%.. Therefore, it gives maximum return on investment.

• Systematic Investment Plan (SIP) Schemes: Through the SIP scheme, an investor can make systematic investment frequency and ticket size.

• Switch Fund Option: Switch funds from one option to another in the existing market based on the performance of the financial instruments.

• The Pre-set Goal of an Investment: Features of mutual funds allow investors to meet their financial goals. It fits every investor's risk profile, investment horizon, and objective of investment.
• Diversification: Mutual funds offer diversification by investing in different classes of assets. Therefore, it balances performance and risk concentration.
• Flexibility: Mutual funds offer a lot of flexibility to the investors through a SIP scheme, versatile investment option, and an open-end period.

• Safety: All mutual funds are regulated under SEBI and RBI. Therefore, investors are safe with their funds.
• Tracking: The fund management companies provide regular transparent updates, making tracking easy and making decisions related to investment.
• Tax Savings: Some of the schemes have tax deductions. ELSS has a higher tax savings option.
• Rupee Cost Averaging: SIP provides the benefits of rupee cost averaging by letting the investor buy more units when the market falls and buy lesser units when the market booms. It makes an average of purchasing units and fair distribution of the fund.

Investing in a mutual fund is very easy. However, before investing, you should know the meaning of mutual fund in detail, which is stated above. 

Now, follow the steps given below to invest in a mutual fund -

• Log on to the website of the mutual fund company.
• Sign up and create your account details.
• Complete the KYC process with necessary data and documents.
• Select your payment mode as SIP or lumpsum.
• Fill up the application form.
• Choose the preferred mode of payment.
• If you choose the SIP option, then select ticket size and frequency of payment.
• Link the bank account to transfer the amount.
• The company will send you a folio number and investment details.

You can also invest via mutual fund distributors registered with AMFI or through Investor Service Centers.

Risk is always associated with an opportunity. Mutual funds create a common fund to invest in the money market and derive the best returns. A lot of risk factors are associated with it. Five main types of risks are -

• Market Risk: Mutual fund returns depend highly on market capitalisation; therefore can decline or hike based on market fluctuation. In such a case, the principal amount invested in a mutual fund may be at risk in case of decline. Equity funds are susceptible to it; however, protects against inflation risk.
• Inflation Risk: Inflation declines the purchasing power; therefore, it undermines the return on investment.
• Interest Rate Risk: The rise in interest rate declines the value of the bond. Therefore, the return also declines.
• Currency Risk: A decline or hike in the exchange rate, i.e. foreign exchange, reflects the mutual fund's return.
• Credit risk: When a bond issuer runs out of the fund and fails to provide interest and redeem the bond for face value, it is called credit risk.

Diversifying their investment portfolio, investors can reduce the negative impact of risk.

Investment period of mutual fund investment can be for short-term or long terms.

• Short-term - 15-91 days duration or 1-3 years
• Medium-term - 3-4 years
• Long-term - 7 years or more

While investing in a mutual fund, you should know what a mutual fund in India is. To clear your concept, we have provided all the necessary details. However, here are things to consider before investing in a mutual fund -

• Fund Manager: The fund manager's portfolio, including his years of experience, helps make wise decisions in diversifying the fund to earn a maximum return.
• Investment Objective: Setting the right financial goal based on risk appetite determines higher return.
• Expense Ratio: It is the amount deducted from the annual earnings from a fund as a cost of fund management. Direct plans have a lesser expense ratio compared to regular plans.
• Return on Investment: No mutual fund investment can assure you of sure returns. However, an investor should check past performance consistency to have a probable idea before investing in a fund.

Mutual funds are highly beneficial money-making instruments to attain your financial objective. It is well managed with a lower expense ratio and exit load.