A mutual fund is a financial vehicle that pools assets from a wide variety of shareholders to invest in a portfolio of securities, like money market instruments, bonds and equities, for example. This pool of assets is managed by professional money managers, who define and adhere to specific investment objectives that are clearly outlined for each and every mutual fund.

One of the key benefits of investing in a mutual fund is that full-time investment professionals manage your money for you. Therefore, if you don’t have the time or inclination to research and select your own individual investments, mutual funds are a great way to leave all of that to the professionals who have a team of experts to focus on this each and every day. Mutual funds are divided into several kinds of categories, representing the kinds of securities they invest in, their investment objectives, and the type of returns they seek.

There are thousands of mutual funds available, and each one has a specific focus. For example, there are a large variety of equity mutual funds which invest primarily in equities or stocks. Some equity mutual funds may focus on investing in large-cap companies, whereas others may be focused on aggressive growth or investing in emerging markets, for example. Similarly, there is a wide variety of income, money market, balanced and other types of specialty mutual funds.

Every mutual fund must have a detailed prospectus, which is a document that describes, in detail, how the money manager intends to invest your money, all fee information, management background and experience, past performance, and other important details that you need to know about your mutual fund. It’s important to review the prospectus to ensure the mutual fund meets your needs prior to investing your hard-earned money. With the wide selection of mutual funds, not only are you diversifying within each mutual fund that you invest in, because the funds invest in numerous instruments, thus reducing risk, but you can further diversify and reduce risk by investing across a selection of mutual funds with differing investment mandates.

This means that you can diversify by type of investment, like stocks or bonds; or geographically, like a domestic versus an international fund, for example, or even by investment approach, like value versus growth equity investing. One mistake that some investors make is that they acquire too many mutual funds that are closely related and, as a result, lose the benefits of diversification.

In addition to diversification, having access to full-time, professional money managers, and the wide variety of mutual funds available to meet a wide variety of investor needs, mutual funds also provide easy access to your money. The price of a mutual fund is called the net asset value (or NAV), which is derived by dividing the total value of the securities in the portfolio by the total amount of outstanding shares.

The NAV is determined at the end of each trading day. This means that your mutual funds are priced daily, thus leaving you with fairly quick access to your money if, and when, you need it. Mutual fund managers also benefit from economies of scale because they are buying and selling large amounts of securities at one time, thus lowering transaction costs. And, as an investor purchasing mutual funds, you are able to put your money into a wide variety of securities at a much lower cost than if you were to buy them individually because the costs are shared across all of the mutual fund shareholders.

Another key advantage of mutual funds is that there are low minimal investment requirements so almost everyone can afford to start investing with mutual funds. As with any investment, it’s important to familiarize yourself with any possible disadvantages of mutual funds as well. Make sure you do your homework when it comes to fees, commissions and other expenses, as some mutual fund fees can be quite high. If the fees are too high, they will reduce your returns. It’s also important that you are familiar with the investment strategy and holdings of your mutual funds to ensure that they meet your investment needs.

You also want to ensure that the cash holdings are not too high as they, too, can eat into your returns. In general, however, mutual funds can be a very important, convenient and cost-effective investment option for almost every investor. An Investor Education and Awareness Initiative of Aditya Birla Sun Life Mutual Fund.

All investors have to go through a one-time KYC (Know Your Customer) process. Investors to invest only with SEBI registered Mutual Funds. For further information on KYC, list of SEBI registered Mutual Funds and redressal of complaints including details about SEBI SCORES portal, visit link: bit.ly/Birla KYC for further details. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.