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What is a Mutual Fund?

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What is a Mutual Fund?

A mutual fund is a vehicle, set up and managed by a fund company, to facilitate a group of investors to come together and invest in stocks, bonds or any other security. Investors own units of the mutual fund, which represent the assets of the fund.

Open end Mutual Fund

In an open-end fund, the units of a mutual fund are bought and sold by the fund company. The price at which an investor buys the fund is usually higher than the price at which he sells the fund to the fund company.

Closed end Mutual Fund

Unlike the buying and selling of funds conducted by the fund company in an open-end fund, the units of close-end funds are traded on a stock exchange.

Mutual Fund NAV - Net Asset Value (NAV)

This is the underlying value of a unit of mutual fund, calculated as the market value of its assets minus its liabilities divided by the number of units.

Mutual Fund Load

This is the price of buying a unit. Most funds sell units at a premium to its underlying net asset value, and purchase them at the net asset value. When the fund company charges a load when it sells units, it is called entry load. When it charges a load at the time of buying the units back from an investor, it is called exit load.

Mutual Fund Dividend option

The fund earns income from the profit it makes from investing in securities as well as from earning dividends on those securities. Fund companies offer investors the option of earning some of the earnings by way of dividends.

Mutual Fund Growth option

The fund earns income from the profit it makes from investing in securities as well as from earning dividends on those securities. In growth option, the investor leaves the earned profits in the mutual fund, which gets invested in earning more returns.

Equity Mutual Funds

An equity fund invests most of its assets in stocks of companies. The fund earns returns from investing in stocks in the form of capital gains (the difference between buying and selling stocks) as well as dividends earned from these investments. This type of fund is riskier than balanced funds and debt funds.

Debt Mutual Funds, Income Mutual Funds and Bond Mutual Funds

Such a fund invests in interest bearing securities mainly government securities and corporate bonds. This fund earns returns for its investors from interest income on its investments and profits on trading securities. In terms of risk, this type of fund is the least risky.

Hybrid Mutual Funds

This fund type invests in equity shares of companies as well as debt securities. It earns income in the form of dividends and interest as well as buying and selling securities. This is riskier than debt fund and less risky than equity funds. 

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