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What is a Mutual Fund?

You've heard of mutual funds and you've heard that they can be
smart investments for almost any investor. But what exactly are
mutual funds and how do they work?

Mutual funds are the most popular investment types for the
everyday investor. Why? Because they are simple investments to
understand and they are easy to use -- in many ways, it's "investing
for dummies." In fact, if you're not already one of the millions of
shareholders of mutual funds, you'll only need to take about two or
three minutes out of your day to read this article and you'll be ready
to get started investing

an investor who buys a fund called XYZ International Stock is buying one investment security — the basket — that holds dozens or hundreds of stocks from all around the globe. So without further ado. and can be appropriate for a variety of savings and investing objectives. cash or a combination of those assets. here's what to know about mutual funds to get you started investing. including college and retirement. this can be a good refresher course on this powerful yet simple security type: Mutual Fund Definition A mutual fund is an investment security that enables investors to pool their money together into one professionally managed investment. bonds. hence the "international" moniker. In simpler terms. And if you're already investing. also called a portfolio. Mutual funds can invest in stocks. Each basket holds certain types of stocks. mutual funds are like baskets. For example. versatility and easy-to-understand structure of mutual funds makes for powerful investing vehicles for all kinds of investors. including the pros. Furthermore the simplicity of investing in mutual funds is not just an attractive feature for beginning investors. called holdings. bonds or a blend of stocks and bonds to combine for one mutual fund portfolio. . the accessibility. combine to form one mutual fund. The underlying security types.

(AAPL) among other portfolio holdings. versatility. the advantages of mutual funds can be described in four words — simplicity. For example. time or resources to build their own portfolio of stocks and bonds. diverse portfolio. and accessibility: Simplicity: Most investors do not have the knowledge. if a particular mutual fund includes shares of stock in Apple. The Advantages of Mutual Funds To summarize. the investor can still benefit by the appreciation of shares in AAPL. Diversification helps the investor because it can reduce market risk compared to buying individual securities. not shares of the holdings. buying shares of a mutual fund enables an investor to own a professionally managed. although the investor may have little or no knowledge of investing . Inc. diversity.It's also important to understand that the investor does not actually own the underlying securities — the holdings — but rather a representation of those securities. Since mutual funds can hold hundreds or even thousands of stocks or bonds. investors own shares of the mutual fund. The concept of diversification is similar to the idea of strength in numbers. Stock investors often have extensive knowledge of fundamental analysis or technical analysis. the mutual fund investor does not directly own Apple stock. Instead. the mutual fund investor owns shares of the mutual fund. they are described as diversified investments. However. However.

Therefore. . which means the investor does not need knowledge of investing in capital markets to be successful with them. and then add more mutual funds later to increase diversity in the mutual funds portfolio. financials. And the fact that mutual funds hold dozens. Accessibility: With as little as $100 an investor can get started investing with mutual funds. oil and other natural resources. an investor can gain access to an entire market of investable securities. and even social media. know that putting all of their eggs into one basket is not wise. Professional money managers often use sector funds for this purpose in building client portfolios. This versatility can be used for further diversification as an investor's portfolio grows. a mutual fund investor can break the eggs-in-one-basket rule with mutual funds. many mutual funds offer complete diversification in just one security that can be easily purchased. be sure to read our article on how to get started investing with just one mutual fund. sector funds make it possible for investors to buy into focused areas of the market. Beyond sector funds. However. Mutual funds are professionally managed. This speaks to the wisdom of diversification with mutual funds. such as gold. such as healthcare. an investor may need to buy 20 or more securities to reach sufficient diversification. Versatility: There are so many types of mutual funds that investors can gain access to almost any segment of the market imaginable. For example. at least when getting started. an investor buying shares in one of the total stock market index funds. beginners and pros alike. This returns to the simplicity and diversification of mutual funds. hundreds. To diversify with stocks. technology. Diversity: All investors.000 stocks in just one fund.concepts and strategies. For more on this idea. gains exposure to over 3. or even thousands of other securities. investors can also access other asset types. For example.

Bond funds are primarily categorized by the duration of the bonds. which can be described as passively-managed funds. Basic Types of Mutual Funds There are thousands of mutual funds in the investment universe but they can be divided into a few basic types and categories of funds. Treasury bonds. The two primary types of mutual funds are stock funds and bond funds. For example. and U. mid-cap. They are then broken into sub-categories of corporate bonds.Although investing concepts and strategies are rarely taught in schools. stock funds can be further broken into three sub- categories of capitalization — small-cap. municipal bonds. which are described as short-term. and large-cap. the beginning investor can find easy tips about how to buy mutual funds online or in bookstores and get started investing within minutes or just a few hours. or growth and income. the categories of funds get more specialized and diverse. Stocks can also be classified as international. Most mutual fund categories can be purchased as index funds. From there. . value. all of which have similar objectives.S. such as the S&P 500 index or the Dow Jones Industrial Average. global or foreign. Beginners often start with one of the best S&P 500 Index funds. intermediate-term. This means that the portfolio manager does not actively buy and sell securities but rather matches the holdings of a benchmark index. They are then categorized further as either growth. or long-term.

From there. it's best to get an idea of your risk tolerance. and mutual funds all involve some level of market risk. there are short periods. Although receiving a negative return like this over a 10-year period is extremely rare. where your stock mutual fund can decline in value by as much as 30 to 40 percent. Understanding the Risks of Investing in Mutual Funds Stocks. And more importantly. However. diversity and low-cost. . Index funds often have hundreds of holdings and offer investors the greatest features of mutual funds — simplicity. it is possible. investors can learn more about the various types of mutual funds.000 for 10 years and end up with $950. It is more reasonable to expect an average of return of somewhere between 7 and 10 percent for stock investments. you could have gains of more than 50% in one year. including stock mutual funds. and how to build a portfolio of mutual funds around that core investment. such as 1 year. how you will react in the brief but inevitable extremes? Will you sell your mutual funds if they lose 10% in 3 months? Before you begin investing. you need to have some reasonable expectations about how the stock market behaves. Similarly. for periods of 10 years or more. So whether you're investing in individual stocks or a stock mutual fund. you could invest $1. which is the possibility of fluctuation in value or even the loss of principal (the amount you originally invested). For example. such as those mentioned here. bonds.

but it accelerated from the year 1987 when non-UTI players enteredthe Industry.In the past decade. Though t hegrowth was slow. Indian mutual fund industry had seen a dramatic improvement. it reached the height if Rs. 1540 billion. Before. the Assets Under Management (AUM) was Rs67 billion. Each phase is briefly described as under. The privatesector entry to the fund family raised the Aum to Rs. at t he ini tiative of t he Government of I ndi a and Reserve Bank. 470 billion in March 1993 and tillApril 2004. First Phase – 1964-87 .The Mutual Fund Industry is obviously growing at a tremendous space with the mutualfund industry can be broadly put into four phases according to the development of thesector.HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY The mutual fund industry in India started in 1963 with the formation of Unit Trust of I ndia. bothqualities wise as well as quantity wise. the monopoly of the market had seen anending phase.

47. public sector mutual funds set up by public sector b a n k s a n d L i f e I n s u r a n c e C o r p o r a t i o n o f I n d i a ( L I C ) a n d G e n e r a l I n s u r a n c e Corporation of India (GIC).The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensiveand . Bank of India (Jun90).6.At the end of 1993. LIC established its mutual fund in June1989 while GIC had set up its mutual fund in December 1990. Second Phase – 1987-1993 (Entry of Public Sector Funds) 1987 marked the entry of non.UTI. except UTI were to be registered and governed. At the end of 1988 UTI had Rs.004 crores. Third Phase – 1993-2003 (Entry of Private Sector Funds) 1993 was the year in which the first Mutual Fund Regulations came into being. The erstwhileKothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. SBI Mutual Fund was the first non.7 0 0 c r o r e s o f a s s e t s u n d e r management. themutual fund industry had assets under management of Rs. Bank of Baroda Mutual Fund (Oct 92). Indian Bank Mutual Fund (Nov 89). I n 1978 UTI was de-li nked f rom the RBI and t heI n d u s t r i a l D e v e l o p m e n t B a n k o f I n d i a ( I D B I ) t o o k o v e r t h e r e g u l a t o r y a n d administrative control in place of RBI.UTI Mutual Fundestablished in June 1987 followed by Canbank Mutual Fund (Dec 87). under which all mutual funds. The first scheme launched by UTI was Unit Scheme 1964.Unit Trust of India (UTI) was established on 1963 by an Act of Parliament by theReserve Bank of India and functioned under the Regulatory and administrative controlof t he Reserve Bank of I ndi a. Punjab NationalBank Mutual Fund (Aug 89).

21. As at the end of January 2003. The industry now functions under theSEBI (Mutual Fund) Regulations 1996. 1. Fourth Phase – since February 2003 .805 crores.revised Mutual Fund Regulations in 1996. there were 33mutual funds with total assets of Rs.