Mutual funds are often call as the safest way to grow money, meanwhile some dismiss them as risky or confusing. But the truth is they can be risky and safe at the same time.
A mutual fund is not a shortcut to wealth it’s simply a structured way of investing where your money joins thousands of others and gets managed professionally.
What is Mutual Fund?
A mutual fund is a pool in which money from different individuals are collected and invested in assets like :
- Shares (equity)
- Bonds (debt)
- Government securities
- Or a mix of all three
Since many people find it risky to buy stocks or bonds so they give their money to mutual fund where fund manager invest their money in stocks or bonds. For your money given to mutual fund you get unit shares. These units represent your share in the total investments made by that fund.
Example – You and 10,000 other people put money into a common pot. That pot is invested according to a fixed plan. Whatever the pot becomes profitable or in loss over the time. But it is shared by everyone based on how much they contributed.
That’s all a mutual fund really is.
How Mutual Funds Work (Money Pooling + Fund Manager)
Understanding how a mutual fund works removes most of the fear around it.
Step 1: Money Pooling
When investors put money into a mutual fund:
- The money is pooled together
- The total pool is called Assets Under Management (AUM)
You don’t own specific shares directly but you own units of the fund, whose value changes daily.
Step 2: Role of the Fund Manager
A fund manager is a professional appointed by the fund house (AMC).
Their job is to :
- Decide where to invest the pooled money
- Follow the fund’s stated objective
- Manage risk, allocation and timing
A fund manager does not have unlimited freedom. They must follow the scheme’s rules, regulatory limits and disclosure norms.
Step 3: NAV (Net Asset Value)
The value of your investment is reflected through NAV, which changes daily based on :
- Market movement
- Interest income
- Expenses of the fund
NAV is not a “price” like a stock, it’s simply the per unit value of the fund’s total assets.
Types of Mutual Funds
Mutual funds come in many categories, but they broadly fall into three :
1. Equity Mutual Funds
- Invest mainly in company shares
- Suitable for long-term goals
- Higher volatility in the short term
2. Debt Mutual Funds
- Invest in bonds, government securities, and fixed-income instruments
- Generally more stable than equity funds
- Returns depend on interest rates and credit quality
3. Hybrid Mutual Funds
- Mix of equity and debt
- Aim to balance growth and stability
- Risk level depends on equity allocation
There are further sub-types, but understanding these three is enough to build a foundation.
Risks Involved in Mutual Funds
Mutual funds are regulated, transparent and structured but they are not risk-free. Below are the risks investors should understand before investing:
Market Risk – Equity oriented funds rise and fall with the market. In short-term losses are possible, especially during economic downturns.
Interest Rate Risk – Debt funds are affected when interest rates change. Rising rates can reduce bond prices.
Credit Risk – Some debt funds invest in lower-rated bonds. If an issuer defaults, the fund can make losses.
Liquidity Risk – In rare situations, a fund may struggle to sell assets quickly without loss.
Behavioral Risk – The biggest risk is not the fund, it’s the investor.
- Panic selling
- Chasing past returns
- Stopping SIPs during market falls
Mutual funds reward discipline, not prediction.
Mutual Funds vs Fixed Deposits
This comparison comes up often and rightly so.
Fixed Deposits (FDs)
Pros
- Predictable returns or Fixed returns
- Capital protection (within limits)
- Simple and familiar
Cons
- Returns may not beat inflation over time
- Interest is taxable every year
- Less flexible for long-term wealth creation
Mutual Funds
Pros
- Potential to beat inflation over long periods
- Wide variety of options
- Tax efficiency in certain categories
Cons
- No guaranteed returns
- Value fluctuates
- Requires patience and understanding
Fixed deposits are about certainty. Mutual funds are about participation in economic growth.
Who Should Consider Mutual Funds?
Mutual funds are not for everyone and that is true because many people have made losses.
They may suit you if:
- You have long-term goals (5+ years)
- You don’t want to manage investments daily
- You are okay with temporary ups and downs
- You prefer systematic investing (SIP)
They may not suit you if:
- You need guaranteed short-term returns
- You panic during market falls
- You invest without understanding the product
Mutual funds work best when use it as a process, not a product.
Common Myths About Mutual Funds
Myth 1: Mutual funds are only for experts
But they exist precisely because most people are not experts.
Myth 2: You need a lot of money to start
Many funds allow SIPs starting with small monthly amounts.
Myth 3: Mutual funds always give high returns
Returns depend on time, market conditions and discipline.
Myth 4: Fund managers always beat the market
Not always as they also make mistakes.
Myth 5: Mutual funds are unsafe
They are regulated, transparent and audited.
Mutual Fund is a Tool, Not a Shortcut
Mutual funds don’t make you rich overnight as they don’t replace hard work or patience.
What they do offer is:
- Structure
- Professional management
- Access to markets in a disciplined way
If used correctly, mutual funds become effective over time and that’s exactly what good financial tools should be.
If you understand what you’re investing in, accept the risks and stay consistent, mutual funds is for you.