A mutual fund is essentially a common pool of money in which investors put in their contribution. This collective amount is then invested according to the investment objective of the fund.
The money could be invested in stocks, bonds, money market instruments, gold and other similar assets. These funds are operated by money managers or fund managers, who by investing in line with the specified investment objective attempt to create growth or appreciation of the amount for investors.
For example, a debt fund will have its specified objective to invest in fixed income instruments or products like bonds, government securities, debentures, etc. Similarly, an equity fund will invest in stocks and other equity instruments.
Some common categories of mutual funds are:
- Equity funds – funds that invest only in stocks and other equity instruments
- Debt funds – funds that invest only in fixed income instruments
- Money market funds – funds that invest in short-term money market instruments
- Hybrid funds – funds that divide investments between equity and debt to create a balance