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What and Why of Mutual Funds...

Look at Mutual Funds as a restaurant; not as a dish
In the strictest sense of the term, mutual fund is not an investment per se. Rather it is a pool of money — created by taking contributions from a large number of investors — that buys investment products. So you could instead look at mutual fund as an indirect investment wherein you hand over your money to a professional fund manager. Then, it is the job of this fund manager to invest and manage your money on your behalf.

They offer veg dishes, non-veg dishes, starters, desserts etc. etc.
Presently, a mutual fund scheme can typically invest broadly in the following markets:
* Share Market: Equity Shares and Derivatives
* Debt Market: Interest bearing instruments such as Bonds, Debentures, Govt. securities, Commercial Paper, Certificate of Deposits, etc. issued by Banks, Companies and Govt. of India
* Other Markets: Gold, International, etc.

It is within each of these broad varieties that you get specific dishes
> Equity funds: Large cap funds, Small cap funds, diversified funds, sector funds etc.
> Debt funds: Long term funds, short term funds, ultra short term funds, floating rate funds, fixed maturity plans, etc.
> Others: Gold ETF, Gold FoF, International funds, etc.

Therefore, when you want to buy a mutual fund, you have to FIRST decide where you want your money to be invested — equity, debt or gold/commodities (and, in future, also maybe real estate, silver etc.). This, in turn, will depend on your Financial Plan.

Mutual funds are
a) managed by highly qualified and experienced professional fund managers,
b) who are supported by equally competent research analysts, and
c) are admirably regulated by SEBI and AMFI, thereby ensuring smooth and transparent functioning of the mutual funds industry.

Further mutual funds
i)   offer high levels of diversification even with very small money
ii)  offer a very wide variety of schemes catering to almost all the needs
iii) are extremely flexible
iv) with high degree of liquidity and
v)  enjoy a favorable taxation policy.

And, very important
Mutual funds are a trust. They hold and invest the money collected in the fiduciary capacity. Since these are trusts, the money is still yours. It is merely being invested by them under strict regulations and supervision of the trustees. They have no right over this money.

And, most important
Mutual funds have delivered admirable performance over the last 10-15 years of existence. Equity Funds offer Investment-Efficiency vis-a-vis Direct Investment in Shares. Debt Funds offer Tax-Efficiency vis-a-vis Direct Investment in debt instruments.

All this make it quite beneficial, safe, convenient and tax-efficient for people to invest in the mutual funds. 

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