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Home | Investor Education Articles | What is a Mutual Fund

What is a mutual fund?

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders.

The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.

Here are some of the basic terms that are associated with mutual funds:

Units of mutual funds

Units represent the extent of an investor’s share in the assets of the scheme.

NAV or Net Asset Value

Open-ended Fund/ Scheme

Close-ended Fund/ Scheme

Mutual fund is an investment vehicle, wherein investors pool funds against allotment of units and then such funds are invested in various securities in line with the investment objective