A mutual fund is a professionally managed company that collects the money of many investors and invests it in securities such as stocks, bonds and short-term debts, equity or bond funds, and money market funds.
Mutual funds are a good investment for investors who want to diversify their portfolio. Instead of focusing everything on one company or sector, a mutual fund invests in different securities to try to minimize portfolio risk
.
The term is typically used in the United States, Canada, and India, while similar structures around the world include the SICAV in Europe and the open-type investment firm in the United Kingdom.
Equity
mutual funds buy stocks while debt funds buy debt fund securities such as bonds for their portfolio. Securities such as bonds are issued by companies such as energy services, banks, real estate financing, and the government. They issue fixed-interest rate bonds to raise funds from the public (investors) instead of taking out a loan for new projects. Bonds are a promise to pay periodic fixed interest to investors who
buy them.
When investors buy bonds with a maturity of a few years, they lend their money to the issuer (say ABC Power Ltd.) for those many years. ABC promises to pay periodic interest to its investors during this period in exchange for the money they invested in its bonds (=money lent to ABC). ABC is the borrower like a customer taking out a home loan. The investor (your mutual fund that invests your money) is ABC’s lender just like the bank is a lender for the home loan customer
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The debt fund invests your money in a basket of bonds and other debt fund securities.
