What Are Mutual Funds: Types and Benefits
Ananya Gupta18 Nov, 2025
What Are Mutual Funds: Starting your investment journey can feel complicated, but it doesn't have to be. One of the simplest and most popular ways to begin is by investing in Mutual Funds. Imagine a large investment basket where thousands of people put their money together. This combined money is then managed by a financial expert to buy various assets like company shares and bonds.
What Are Mutual Funds?
Have you ever thought about investing your money but felt it was too difficult or confusing? What mutual funds are is a common question for beginners. Think of a mutual fund as a large, shared money pot where many people, like you, pool their savings together.
This collected money is then invested by an expert, called a professional fund manager, in different places. These places can be company shares, bonds which are like loans to a government or company, or other financial instruments. The main idea is that all the investors share the profit or loss from these investments based on how much money they put in. This makes it an easy way for a common person to invest.
How Mutual Funds Work for You?
Mutual funds are a powerful and accessible investment tool especially for beginners. They work in three key ways to simplify and strengthen your investment strategy:
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Pooling Money: Many investors put their savings into the fund. You buy units of the fund with your money.
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Professional Management: A qualified fund manager decides where to invest this total money. They are the experts who continuously research and monitor the market.
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Diversification: The manager does not put all the money into one stock or bond. They invest it across various companies and sectors. This act is called diversification.
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Sharing Returns: Any earnings the investments make are shared among all unit holders after deducting small management fees.
The value of your investment changes daily. This value is known as the Net Asset Value or NAV per unit.
Different Types of Mutual Funds
Types of mutual funds are grouped based on where they invest the money. Here are three main categories:
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Equity Funds: These funds primarily invest in the shares of different companies. Their main aim is to grow your money over a long period. They involve a comparatively higher risk.
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Debt Funds: These funds invest in bonds and other fixed-income instruments. They are considered less risky than equity funds and are suitable for short-term goals or steady income.
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Hybrid Funds or Balanced Funds: These funds keep a mix of both stocks and bonds. They aim to balance risk and returns.
Benefits of Mutual Funds
Investing in mutual funds offers several major advantages especially for students and new investors:
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Expert Management: You do not need to spend time researching the market. Your money is managed by full-time professional managers.
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Risk Diversification: Because the fund invests in many different securities, the risk is spread out. If one investment performs poorly others may do well to cover the loss.
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Affordability: You can start investing with a very small amount. This makes it accessible to almost everyone.
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Liquidity: In many types of mutual funds, you can sell your units and get your money back easily when you need it.
Mutual Funds vs Stocks
When learning about investing, people often compare mutual funds vs stocks. The difference is simple:
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Mutual Funds vs Stocks |
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Feature |
Stocks (Shares) |
Mutual Funds |
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What you own |
A small part of one specific company. |
A small part of a large, diverse portfolio of many investments. |
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Management |
You must do all the research and buying/selling yourself. |
Managed by a professional fund manager. |
|
Risk |
High risk, as your success depends only on one company's performance. |
Lower risk, due to the benefit of diversification across many investments. |
|
Required Money |
You often need a larger amount to buy shares in various companies. |
You can start with a very small amount, even as low as a few hundred rupees (SIP). |