A mutual fund is an investment wherein investors pool in their money to collectively invest in the stock/debt markets; the money is managed by a professional, called the fund manager.

Each mutual fund has a predetermined investment objective that defines where and how the assets will be invested. The fund manager with his expertise and experience along with resources is better equipped to make informed investment decisions vis-à-vis retail investors.

Often mutual funds are sometimes equated with chit funds. There is a stark difference between the two categories. Mutual funds are professionally managed and regulated by entities like SEBI (Securities and Exchange Board of India) and AMFI (Association of Mutual Funds in India).

Apart from expertise, mutual funds offer another advantage – a wide range of options. Equity funds, debt funds, hybrids like balanced funds, monthly income plans (MIPs) and sector funds/thematic funds are some of the variants on offer.

Based on their structure, investment objective and investment allocations mutual funds offer the following options:

• Based on structure
  • Open-ended funds
    Open-ended funds accept money from all investors on an ongoing basis with no restriction on quantum of investment or time limit. An open-ended fund may choose to go close-ended at a later date.
  • Closed-end funds
    A closed-end mutual fund accepts money only during the NFO (new fund offer) period, not afterwards. A close-ended fund may choose to go open-ended at a later date.
• Based on investments
  • Equity funds
    Equity funds invest money in the stock markets. They can also choose to invest in unlisted companies.
  • Large cap funds
    Large cap funds invest primarily in stocks of companies with a large market capitalization i.e. large cap.
  • Mid cap funds
    Mid cap funds invest primarily in stocks of companies with small to medium market capitalization i.e. small/mid cap.
  • Debt funds
    Debt funds invest in fixed income securities like corporate paper and government securities.
  • Balanced funds
    Balanced funds, also known as hybrid funds, invest in a combination of equities and fixed income securities. Monthly income plans (MIPs) are another hybrid with larger allocations in debt.
  • Exchange-traded funds
    Exchange Traded Funds (ETFs) represent a basket of securities that is traded on an exchange, similar to a stock.
  • Index funds
    An index fund is a mutual fund that aims at replicating the movements of a specific index.
  • Fund of funds
    A fund of funds (FoF) is a mutual fund that holds a portfolio of other mutual funds rather than investing directly in equity and debt markets.