It is a mechanism for pooling money by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is diversified because all stocks may not move in the same direction in the sameproportion at the same time. Mutual funds issue units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unitholders.The profits or losses are shared by investors in proportion to their investments. Mutual funds normally come out with a number of schemes which are launched from time to time with different investment objectives. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) before it can collect funds from the public.

Mutual funds offer investors returns in two forms; dividends and capital gains. Dividends are paid out of the profits of the company if any.Investors receive dividends proportional to the number of mutual fund units held by them and the share price appreciation of the companies held by the mutual fund is reflected in the NAV

The price or NAV a unit holder is charged while investing in an open-ended scheme is called sales price. Repurchase or redemption price is the price or NAV at which an open-ended scheme purchases or redeems its units from the unitholders. It may include exit load, if applicable.

Mutual Funds, historically, have proven to be much better investment avenues than other products available to investors. Investments in MF have proven to be more effective because of the following reasons:

Managed by professionals: Fund mangers are high qualified professionals invest in equity and fixed income products invest on your behalf. They are supported by large teams which assist them in analyzing data and dissecting nitty gritty of the markets(macro and micro economic environment, GDP rates, Interest rates and its future outlook, fundamental analysis into each company that they invest or not invest in) which clients as individuals might not be able to do themselves.

Better taxation structures: The government of India offers incentives to customers to invest in mutual funds by providing tax structures. So while your fixed deposit returns are completely taxable, Investment in debt mutual funds come with tax indexation benefits (which can lower your taxation burden to almost as low as 2% as opposed to as high as 30% in Fixed deposits). Investments in equity mutual funds have only 10% tax (on gains withdrawn above ₹1 lakh in an year) compared to 30% taxation on FDs. Gains on equity mutual funds withdrawn up to ₹1 lakh in an year are exempt from tax.

Better Flexibility: Mutual funds are held in units. So you can always redeem your investment partially while keeping the other investment intact and untouched. This is unlike fixed deposits where you have to fully withdraw your investment and pay pre-mature withdrawal charges on the entire amount.
Better liquidity: Open ended mutual funds can be sold anytime. This is unlike investment like Insurance, PPF, NSC, etc. where you have long lock-in periods and large pre-mature withdrawal penalties.

Better Diversification: Mutual funds invest in multiple securities. This diversifies the risk for you much better than other investments.

Mutual funds that invest in equity (also called stocks or shares) are called Equity Mutual Funds. The objective of Equity Mutual Funds is the Capital appreciation of the investments. The returns of these Equity funds are tied to the stock markets. Various types of Equity Mutual funds are Large Cap, Small/Mid Cap, Flexicap and Sector Funds.

Large Cap Mutual Funds are equity funds that invest a bigger proportion of their total assets in companies with a large market capitalization. According to SEBI, large-cap companies fall in the top 100 of the list of companies according to market capitalization. 

Mid cap funds are a type of equity mutual funds that invests in the stock of mid-sized companies. According to SEBI, companies that are ranked from 101 onwards till 250 based on their market capitalization, are categorized as mid cap companies.

Small-Cap Funds invest a major portion of their investible corpus into equity or equity-related instruments of small-cap companies. According to SEBI, small-cap companies as those which are ranked below the 250th rank in terms of market capitalization.

Mutual funds which diversify investments in between large and mid capitalization companies are classified as large and midcap funds. The ratio in which the investment is diversified, between large and mid cap companies, might differ from fund to funds.

These are diversified mutual funds which can invest in stocks across market capitalization.That is, their portfolio comprises of large cap, midcap and small cap stocks. They are relatively less risky compared to a pure mid cap or a small cap fund and are suitable for not-so-aggressive investors.

A value fund is a fund that follows a value investing strategy and seeks to invest in stocks that are deemed to be undervalued in price based on fundamental characteristics.The investments are made to achieve steady growth over a long period of time.

A Contra Mutual Fund invests against the existing market trends and purchases stocks which are not performing well currently.There can be times when certain sectors witness a slump due to the prevalent market conditions. A contra fund invests in stocks of companies from these sectors and holds on to them till the demand increases.

A focused fund is an equity mutual fund scheme which invests at least 65% of its total assets in a limited number of stocks, thereby concentrating its focus. The scheme invests in a limited number of stocks in limited number of sectors. These funds may carry higher risk since their holdings are concentrated on few sector.

Sectoral funds generally invest in one specific sector. It carries high risk as the investment exposre is limited to one sector.

Thematic funds are much broader. They are invested based on a theme. Example : Consumption Fund would invest in FMCG companies, auto companies, entertainment, paints etc.

ELSS funds are equity funds that invest a major portion of their corpus into equity or equity-related instruments. ELSS funds are also called tax saving schemes since they offer tax exemption of up to Rs. 150,000 from your annual taxable income under Section 80C of the Income Tax Act.They have a lock in period of 3 years.

Dividend Yield Mutual Funds are equity funds which invest in equity and equity-related instruments of companies which are known to declare high dividends. Further, a company can declare high dividends only if it makes good profits. Therefore, most of these stocks belong to profit-making companies with an excellent track record.

A debt mutual fund (also known as a fixed-income fund) invests a significant portion of your money in fixed-income securities like government securities, debentures, corporate bonds and other money-market instruments. By investing money in such avenues, debt mutual funds lower the risk factor considerably for investors. This is a relatively stable investment avenue that could help to generate wealth.

Overnight Funds are a sub-category of debt mutual funds that invest only in 1-day maturity papers/securities.

Corporate bonn funds are funds that invest in corporate bonds only across different rating scales.

Long duration funds are those funds that invest in securities that mature over 7 years. 

Liquid funds are also income schemes and their aim is to provide easy liquidity, preservation of capital and moderate income.These schemes invest exclusively in short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. returns on these schemes fluctuate much less compared with other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.

Ultra short term are a type of debt mutual funds that invest debt securities with average maturity of less than 1 year.

Low duration funds are those funds that invest in securities maturing within 6-12 months

Short duration funds are those funds that invest in securities 1-3 years maturity.

Medium duration funds are those funds that invest in securities that mature in 3-4 years.

Medium to long duration funds are those funds that invest in securities that mature between 4 and 7 years.

Gilt funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.

These funds invest only in debt portfolios of banks and PSUs.

These funds invests in corporate bonds across various ratings. Such as AAA,AA,A,A+ etc

Floating rate funds are a sub-category within debt mutual funds that invest in floating rate debt securities(In these securities the interest rate changes because of changes in interest rate by central bank)

A fixed maturity plan is a closed ended debt fund which comes in with a fixed lock in period and a limited investment window by an asset management company.

Dynamic bond funds invests in debt securities across maturities.

Hybrid funds are a combination of equity and debt investments which are designed to meet the investment objective of the scheme. Each hybrid fund has a different combination of equity and debt targeted at different types of investors.

Conservative hybrid funds are those which  have the following investment criteria, investment in equity & equity related instruments- between 10% and 25% of total assets; investment in debt instruments between 75% and 90% of total assets.

The aim of balanced schemes is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.

Aggressive hybrid funds are those which have the following investment criteria, equity & equity related instruments- between 65% and 80% of total assets; debt instruments- between 20% 35% of total assets.

Balanced advantage funds are those funds that invests in equity/ debt that is managed dynamically (no specific % to equity or debt is pre decided) by the asset management company.

Multi asset allocation funds are those that invests in at least three asset classes with a minimum allocation of at least 10% each in all three asset classes.

Arbitrage funds are hybrid mutual funds that generate returns by using the strategy of simultaneously buying and selling of securities in different markets to take advantage of different prices. No stock market risk as the buying and selling price of a stock is known to fund manager.

Equity savings fund invest the total fund amount between equity funds, debt funds and arbitrage funds.

Retirement funds, are investment options that allow an individual to save a certain portion of their income for their retirement. These funds offer a regular source of finance after one retires; a retiree receives annuity on their investment until their demise. It is an  An open ended retirement solution oriented scheme having a lock-in of 5 years or till retirement age (whichever is earlier). 

Children’s fund is a form of mutual fund with specific child-related goals and terms. These are a commonly availed investment option, acting as solution-oriented plans for the rising cost of education and other essential expenses. Most mutual fund child plan invests in both equity and debt portfolios.These mutual funds come with a minimum lock-in period of 5 years, whereas they can be extended until the child becomes an adult. 

An international mutual fund invests in companies in foreign countries. Hence, these funds are also called Foreign Mutual Funds or Overseas Funds. 

Fund of funds is a Mutual Fund which utilises its pool of resources to invest in various other kinds of mutual funds available in the market. Fund of funds MFs is an open ended fund of fund scheme investing in an underlying fund. The minimum investment in the underlying fund shall be 95 percent of total assets.

Index Mutual Fund invests in stocks that imitate a stock market index like the NSE Nifty, BSE Sensex, etc. These are passively managed funds which means that the fund manager invests in the same securities as present in the underlying index in the same proportion and doesn’t change the portfolio composition. These funds endeavor to offer returns comparable to the index that they track.

An exchange traded fund (ETF) is a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same as a regular stock.An exchange traded fund (ETF) is a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same as a regular stock.

Market Segment based funds invest in companies of a market size. Equity stocks may be segmented based on market capitalization as large-cap, mid-cap, and small-cap stocks.

Usually different debt mutual funds have different tenure, Mostly as the tenor increases the return increase with a increase in the risk.

Strategy-based Schemes have portfolios that are created and managed according to a stated style or strategy. Some of the examples of strategy based funds are credit risk funds, floater funds, fixed maturity plans, dynamic bond funds.

There are different participants who issue debt instruments in the market, for example: government, companies, etc. Hence different mutual funds invest in funds issued by different participants.

Strategy-based Schemes have portfolios that are created and managed according to a stated style or strategy. Some of the examples of strategy based funds are focused funds, value funds, thematic funds etc,.