It is an investment company that pools money from its unit holders and invests that money into a variety of securities, including stocks, bonds, and money-market instruments. This represents a way of investing money into a professionally managed and diversified pool of securities that hopefully will provide a good return on unit holders' money.

The primary role of mutual funds is to assist investors in earning an income or building their wealth, by participating in the opportunities available in the securities markets.

Mutual funds address differential expectations between investors within a scheme, by offering various options, such as dividend payout option, dividend re-investment option and growth option. An investor buying into a scheme gets to select the preferred option also.

The investment that an investor makes in a scheme is translated into a certain number of 'Units' in the scheme. The number of units multiplied by its face value is the capital of the scheme - its Unit Capital.

NAV

The value of fund's portfolio at market value less current liabilities divided by the number of units outstanding. Net asset value is normally computed daily or weekly and can be found in the financial section of the daily newspaper.

When a mutual fund scheme is first made available for investment, it is called a 'New Fund Offer' (NFO)

The money mobilized from investors is invested by the scheme as per the investment objective committed. Profits or losses, as the case might be, belong to the investors. The investor does not however bear a loss higher than the amount invested by him.

Investor benefits from mutual funds include professional management, portfolio diversification, economies of scale, liquidity, tax deferral, tax benefits, convenient options, investment comfort, regulatory comfort and systematic approach to investing.

TYPES OF FUNDS

Open-Ended Fund : Open-ended funds are open for investors to enter or exit at any time and do not have a fixed maturity. Investors can acquire new units from the scheme through a sale transaction at their sale price, which is linked to the NAV of the scheme. Investors can sell their units to the scheme through a re-purchase transaction at their re-purchase price, which again is linked to the NAV.

Close-Ended Fund: These funds have a fixed maturity and can be bought and sold in a stock exchange.

Interval Fund: Interval funds combine features of both open-ended and close-ended schemes.

Equity Fund: A scheme might have an investment objective to invest largely in equity shares and equity-related investments like convertible debentures. The investment objective of such funds is to seek capital appreciation through investment in this growth asset. Such schemes are called equity schemes

Debt Fund: Schemes with an investment objective that limits them to investments in debt securities like Treasury Bills, Government Securities, Bonds and Debentures are called debt funds. These debt securities are discussed in Chapter8.

Hybrid Fund: Hybrid funds have an investment charter that provides for investment in both debt and equity. Some of them invest in gold along with either debt or equity or both.