A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
Why don’t mutual funds give a fixed rate of return like a savings account or FD?
Returns in a mutual fund portfolio are a function of many things, such as the avenues in which you have invested, the way the various markets move, the capacity of the fund management team and the investment period.
Because many of these factors are uncertain, returns cannot be guaranteed, unlike a fixed deposit where these factors are absent, at least to some extent.
With a fixed deposit: returns are FIXED only for a FIXED period. These returns and the period, both are decided by the issuing company and not by the depositor. So, if you want to invest money for six years and a deposit is available for five years, the returns are known only for the first five years, but not for the entire six-year period. Therefore, investment returns are known only in the case of guaranteed return products, where the maturity of the product and the time horizon of the investor match perfectly.
In all other cases, investment returns are unknown with respect to the investor’s investment horizon.