What are Mutual Funds?
5paisa Research Team
Last Updated: 09 Jun, 2025 03:03 PM IST

Content
- Introduction to Mutual Funds
- What are the Types of Mutual Funds?
- Ways of Investing in Mutual Funds
- What Are The Documents Required To Invest In Mutual Funds?
- How Are Returns Calculated for Mutual Funds?
- Benefits of Investing in Mutual Funds
- How Much Return Can Mutual Funds Offer?
- Taxation of Mutual Funds
- Quick Tips on Investment
- How Are Mutual Funds Priced?
- Terms Used in Mutual Funds
- Conclusion
Introduction to Mutual Funds
Mutual Funds are not as complicated as it looks to beginners, instead, it's one of the best options contrary to keeping money in fixed deposits or in a bank account where a person gets limited gains. Mutual funds allow you to mitigate the risks associated with direct stock investment and give you the opportunity to earn higher returns in the long term.
When you’re planning to invest in mutual funds you must know what mutual fund means? what are the types of mutual funds and how to invest in mutual funds? So, let’s understand what is mutual fund investment?
Mutual fund investment means buying fund units that represent the value of the actual holdings. Mutual fund investment is highly liquid, you can enter and exit the fund anytime you wish to. Mutual funds work by pooling money from various investors and investing it in stocks, and other market instruments that are called holdings. The collection of a variety of such holdings is the fund’s portfolio.
Every type of mutual fund have specific charactersitics. For example, ELSS mutual funds offer tax benefits to investors. In ELSS, the invested amount is locked in for a minimum period of three years. You cannot withdraw money till maturity and if you withdraw before maturity, heavy penalty charges are applicable. But these funds offer tax benefits of up to ₹1.5 lakh annually.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing. For detailed disclaimer please Click here.
Frequently Asked Questions
Capital gains and dividends are two alternative methods to profit from mutual fund investments. Based on the market earnings of the purchased equities, the invested funds pay dividends. You get this sum if you decide to accept these dividends.
Risk is something that all investments have. Due to the potential decline in the worth of securities owned by a fund, making an investment in mutual funds has the risk of losing any or all of your money.
Investment redemption is the refund of the investment funds to the security holders by the issuer prior to the maturity date. Investors have the option to redeem all or a portion of their assets.
Those wishing to diversify their portfolios may find mutual funds to be a beneficial investment. The choice of investing in mutual funds relies on your particular circumstances, but they provide convenience and diversification at a reasonable price.
Depending on your specific objectives and level of risk tolerance, you should decide whether mutual funds or stocks are preferable for your portfolio. When building a long-term retirement portfolio, when diversification and lower risk may be more crucial, it can sound right for several investors to choose mutual funds.
Investors must also pay any purchase-related costs, such as sales loads, in addition to the mutual fund’s per-share net asset value. Shares of mutual funds are “redeemable,” which means investors could sell them to the fund at any moment.