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What is Mutual Funds? | How Mutual Funds Work, Definition

A mutual fund is a pool of money that are professionally managed by fund managers. Mutual Fund allows you to invest in various asset classes like equity, debt, and more.

  • Oct 30, 2023
Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors


Mutual funds help you invest your funds in different classes such as equity, debt, and other assets. The scheme provides liquidity, accessibility, flexibility, and expert management benefits. Moreover, it is the best tax-saving option which is safe and transparent.

Increasing inflation rates have made investment a necessity to become financially secure. Several investment vehicles, such as Stocks, Bonds, Mutual Funds, Real Estate, etc., are available in the financial market. Though multiple options are available, we often plan to begin investing but stop due to insufficient time or knowledge. This is where mutual funds come into play. Mutual funds are considered one of the best investment options as your portfolio is diversified and managed by experts.

So, what is a mutual fund scheme, and what are the features of mutual funds?

Keep reading to understand the same.

What are Mutual Funds?

Mutual funds are like a basket of your funds allocated differently and managed by professionals. But what is mutual fund investment? Mutual funds scheme is a financial tool in which your money is invested in various assets such as equity, debt, and/or other money-market instruments. Investors can choose a short-term, mid-term, or long-term investment plan according to their preferences. Since the returns and capital gains directly depend upon the market volatility, a solid allocation strategy is required to minimize the risk. The funds are allocated in different securities according to the risk-taking appetite of the investor. The funds are managed by the fund manager (investment advisor).

What are the benefits of Mutual Funds?

1. Liquidity

Unlike conventional investment options like fixed deposits, mutual fund schemes provide liquidity. As a result, one can redeem their units quickly at any point in time. However, an appropriate penalty or exit load is applicable on the withdrawal.

2. Diversification

Most people hesitate to invest due to the instability created by market fluctuations and volatility. However, putting all the eggs in one basket is never a piece of wise advice. To minimize the risks of losses, mutual funds are generally diversified in various securities depending upon the plans and terms you opt for. In addition, mutual funds are pretty flexible as you can choose from multiple fund options such as equity, debt, other classes, or a hybrid scheme.

3. Expert management

Experts manage mutual funds with a deep understanding and thorough market knowledge. They know where to put your money for the safest and maximum outcomes. In addition, the fund managers take care of timely exit and new investments.

4. Flexibility and accessibility

There is enormous flexibility available to the investor regarding their investment, even when investing a comparatively low amount. One can invest monthly or quarterly using the Systematic Investment Plan (SIP) as per your convenience. Mutual funds can be easily traded when needed in a brief period. The excellent combination of low cost and ease of use makes mutual funds quite accessible. You can begin investing from anywhere in the world through brokerage firms, Asset Management Companies (AMC), or online investing platforms.

5. Transparency

Your financial advisors go through the statistics, financial statements, and other crucial understanding of the company before investing so that you can rest assured. In addition, however, you can track the performance of your funds using regular Net Asset Value (NAV) updates and monthly fund factsheets.

6. Tax benefits

What’s the fun of earning loads of money when a huge chunk is taken as a tax amount from your income? If you are smart enough, you can legally and ethically save yourself from the massive burden of income tax if you invest in mutual funds. Yes, you can avail tax benefits under Section 80C of the Income Tax Act for investments in Equity Linked Saving Schemes or ELSS. This is because the government wants its citizens to be financially secure and encourage the investment culture, following which these tax benefits are provided not only on the amount invested but also on the amount earned as mutual funds returns. This is a win-win for the investor, where your money sits in mutual funds, makes profits, and saves you taxes.


Investing in mutual funds is an excellent choice as you can put your money to work and grow wealth with even novice market knowledge. Also, as experts manage the funds, you do not have to worry about understanding mutual funds and the financial market. In addition, you are provided transparency, liquidity, the lowest lock-in period, and tax benefits with the mutual funds.

In this policy, the investment risk in the investment portfolio is borne by the policyholder.

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- A Consumer Education Initiative series by Kotak Life