September 20, 2023

Functions of Mutual Fund

Functions of Mutual Funds

The important function of mutual funds is that it allows people to invest in a variety of securities, such as common stocks, preferred shares, debt instruments, and gold, and provide investors with several benefits, including the opportunity to participate in the growth of the fund’s underlying investments and earn inflation beat returns in the long run. 


What Is Mutual Fund?

A mutual fund is an investment vehicle that pools money from many investors and invests in various securities, including stocks, bonds, gold, and other investments. Mutual funds are offered by AMC (Asset Management Company), and the funds are managed by professionals with expertise in the financial market and significant experience in the financial markets. 

They do adequate research and invest in stocks and other assets based on fundamental analysis and other macroeconomic factors. The goal is to provide the best returns to the fund’s investors. 

When investing in a mutual fund, you must pay an expense ratio charged for managing the fund. The expense ratio can vary from fund to fund. 

Mutual funds can be very helpful when it comes to investing your money. They allow you to invest in various securities and diversify your risk while still gaining the potential for consistent returns. Also, one can invest in mutual funds for as less as Rs. 500, making them an affordable option for most people.

Functions Of Mutual Funds

The most important function of mutual funds is that it provides investors access to a diversified portfolio of securities. By pooling money from multiple investors, mutual funds can invest in various assets, including stocks, bonds, commodities, and real estate. This diversification helps reduce the risk associated with investing in a single security.

  • Pooling of Money

Once the mutual fund company releases the NFO, interested investors can invest their money in the mutual fund scheme. The mutual fund company collects the money from these investors and invests in various stocks, bonds, and other securities. Investors can buy mutual fund units according to their investment capacity. Make sure to research the fund’s objective and reputation of the fund. 

  • Professional Management

Mutual funds are managed by experienced and qualified fund managers who make investment decisions. These fund managers conduct research, analyze market trends, and actively manage the portfolio to achieve the fund’s investment objectives.

  • Liquidity

Mutual funds offer liquidity to investors as they can buy or sell mutual fund units on any business day. Investors can redeem their units at the fund’s prevailing Net Asset Value (NAV). This liquidity feature provides flexibility and ease of access to the invested capital. 

  • Return 

Investors earn returns when the NAV of the mutual fund increases in value. There are different ways to earn from mutual funds: One such way is to invest in dividend mutual funds, where the dividends are shared among the investors. Another way is to invest in growth mutual funds, where the returns are invested back into the fund. 

Objectives Of Mutual Funds

The primary objective of Mutual funds is to invest in securities that can increase in value over time, leading to capital gains for investors. They focus on capital appreciation by investing in stocks of companies with growth potential. 

  • Inflation beat returns

The mutual fund scheme should be able to give inflation-beat returns over time. If the returns on your investment fail to beat inflation, you are losing your investments’ value. However, mutual funds or other financial instruments may not give good when there is negative sentiment in the market or due to a pandemic. 

  • Preserve capital

Some mutual fund schemes, including debt mutual funds and money market mutual funds, help you preserve your capital and simultaneously give better returns than fixed deposits. These funds are suitable for those about to retire or with less risk appetite. 

  • Growth 

Investing in mutual funds helps you to grow your wealth over time. For example, growth mutual funds focus on growth stocks as they have the potential to grow in the coming years. Hence, it gives higher returns than other mutual fund schemes. 

  • Generate income

Mutual funds types like Dividend stocks focused mutual funds help you earn regular income. Generally, dividend stocks are stable, and there is less risk involved. This mutual fund is suitable for those looking to earn regular income. 

  • Diversification benefits

Most people invest in mutual funds to get diversification benefits. A diversified portfolio protects your investment during market volatility or any economic downturn. 

Scope Of Mutual Funds

  • The scope of mutual funds has grown tremendously over the years. With the emergence of new AMC (Asset Management Companies) and the development of innovative mutual fund products, investors now have a wide range of mutual fund schemes to choose from. 
  • Mutual funds play an important role for those without time to research the stock market and track their investments regularly. 
  • Investors can choose from various types of mutual funds that offer different investment objectives and levels of risk. For example, Equity or stock funds invest in publicly traded stocks, while bond funds invest in government and corporate bonds. Money market funds invest in short-term, low-risk securities, while balanced funds invest in a mix of stocks and bonds. You can choose based on your needs. 
  • Some specialized mutual funds invest in specific sectors such as healthcare, IT, FMCG, Green energy, or gold. For example, if you are optimistic about the IT sector and believe it will grow in the coming years, you can invest in an IT thematic mutual fund. 
  • Nowadays, one can invest in a global mutual fund from India. Global mutual funds like S&P 500 and NASDAQ allow you to invest in international companies. 
  • With the vast array of options available, investors must carefully evaluate before selecting a mutual fund. Proper research and consultation with a financial advisor can help investors make informed decisions and maximize their returns.

How To Purchase Mutual Funds?

You can start your investment in mutual funds via Alice Blue online and offline. If you don’t have a Demat account, open your account in 15 minutes today and begin your investment journey. 

1. Understand your investment goals

Before making any investment decision understand your investment horizon, risk tolerance, and investment objectives. For example, if your goal is to grow wealth over a long period, consider investing in index funds. On the other hand, if you are looking to invest for the short term, consider investing in debt mutual funds, or if your goal is to save tax, you can consider investing in ELSS mutual funds. 

2. Decide whether you want to invest in direct or regular mutual funds.

Direct mutual funds allow you to invest directly in mutual funds, and they charge less expense ratio as no intermediary or distributor is involved. On the other hand, when you invest in regular mutual funds, you invest through a distributor or intermediary. This is the reason regular mutual funds charge a higher expense fee. You can invest in direct mutual funds via Alice Blue.

3. Research and select a mutual fund

Different types of mutual funds are available in the market, such as equity funds, debt funds, hybrid funds, tax saving funds, and sectoral funds. You should research and select a mutual fund that aligns with your investment goals. Make sure to check the past performance of the fund, its expense ratio, and the fund manager’s experience. 

4. Open a Demat account

If you don’t have a Demat account, you need to open one with Alice Blue. A Demat account is an account that holds your securities in an electronic form. All you need to do is visit its website. 

5. Choose the Mutual Fund 

Once you open an account with Alice Blue, log in with your credentials at, choose the mutual funds you want to invest in, and place the order.

6. Track your investment

After you have invested in the mutual fund, you should track your investment performance regularly. You can check the NAV (Net Asset Value) of the mutual fund from time to time. You also receive statements from the mutual fund house periodically that provide details of your investment and stay updated on the market and the economy to make informed investment decisions.

Do you want to expand your knowledge about mutual funds? We’ve got a list of must-read blogs that will help you do just that. Just click on the articles to find out more.

Mutual Fund Charges
Mutual Fund Houses In India
What Is Mutual Fund In Simple Words
Regulation of Mutual Fund
LIC Vs Mutual Fund
What is Debt Mutual Fund?
Types of Mutual Funds

Functions of Mutual Funds – Quick Summary

  • The main function of mutual funds is that it provides investors access to a diversified portfolio of securities. Another function of a mutual fund is that it is managed by experienced and qualified fund managers who make investment decisions.
  • Mutual funds are investment vehicles that pool money from multiple investors and invest in various securities.
  • The main objective of mutual funds is to invest in securities that can increase in value over time, leading to capital gains for investors. Also, they should be able to give inflation-beat returns over time.
  • The scope of mutual funds has grown tremendously as investors can choose from various types of mutual funds that offer different investment objectives and levels of risk. 
  • Before purchasing mutual funds, understand your investment objectives, what type of investor you are, and the type of mutual funds. Make sure to do proper research about the fund, such as the fund manager’s experience, past performance of the fund, and the expense ratio. 

Functions of Mutual Funds – Frequently Asked Questions

1. What Are The Functions Of Mutual Funds?

  • Mutual funds collect money from investors and invest in various securities such as stocks, bonds, cash, etc. 
  • Investors can redeem their mutual fund’s units (except ELSS funds) whenever they want to. Hence, it is highly liquid. 
  • Investors can start investing in mutual funds at Rs. 100. 

2. What are the five categories of mutual funds?

  • Equity mutual fund schemes
  • Debt mutual fund schemes
  • Hybrid mutual fund schemes
  • Solution-oriented mutual fund schemes (for retirement)
  • Other mutual fund schemes (index funds and ETFs)

3. What are the three objectives of mutual funds?

  1. The main objective of mutual funds is to help you grow your capital over time. 
  2. Mutual Funds allocate the funds into different asset classes to minimize the risk. 
  3. Mutual Funds try to beat the benchmark index and give you inflation-beat returns. 

4. What is the main function of fund managers?

The fund managers of a mutual fund scheme manage the fund and allocate the money to assets that can potentially give high returns. So, whenever you invest in a mutual fund, check the experience of the fund managers and past performance. 

5. What are 3 characteristics of mutual funds?

  • Mutual funds are properly regulated by the watchdog of the SEBI stock market, which protects investors. 
  • One can invest in mutual funds through a lump sum investment or SIP (Systematic investment plan). 
  • Mutual funds allow you to get diversification benefits as they invest in various stocks with different market caps, bonds, cash, etc. 

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