Do you know what, over Rs 47 lakh crore is invested in mutual funds by Indians today? It is one of the most trusted and easiest ways to grow wealth.

But what makes mutual funds so favourable, even for beginners?

In simple terms, a mutual fund picks money from many investors and invests it in stocks, bonds, or both, managed by masterminds. Moreover, you can invest at regular intervals with SIP, or with a lumpsum, a large amount of money all at once. 

Now, let us find out. how exactly do mutual funds work? 

 What are Mutual Funds?

In simple words, mutual funds are financial vehicles that invest money from multiple retail investors who want to diversify their portfolio with assets such as stocks, bonds, or a mix of both. MFs means bringing shares that combine the money of all the investors. These funds are managed by mastermind fund managers who make investment decisions on behalf of investors, aiming to get higher returns while managing risk.

Mutual funds are ideal for beginners or seasoned investors. Salaried employees or individuals who want to build discipline can start with the minimum amount of SIP. 

In simple terms, mutual funds offer an easier, low-effort way to grow your money over time.

 How Do Mutual Funds Work?

Here are the major points about mutual fund work:

• Pooling of Money: Investors put their money into a mutual fund. This money merges into a large pool.
• Managed by Experts: A professional fund manager utilizes this pooled money to buy a mix of assets like stocks and bonds. According to the funds strategy.
• Diversification: The diversification spreads money across different assets to mitigate risk. Even with a small amount, you get access to a diversified portfolio.
• Returns & NAV: As the funds are subject to market risks, the value of your investment changes with the net asset value NAV of the fund.
• Investor Earnings: Investors can earn returns when the value of the fund's investments increases as capital gains, or if the fund distributes income from its holdings, investors get better returns.

 Different Types of Mutual Funds

Mutual funds are classified based on how they invest and their investment objectives. Here is a type of mutual fund.

1. Equity Mutual Funds

• This fund mainly invests in stocks or equity shares.
• Primary goal for high growth over the long term.
• Aligns best with long-term wealth creation or aggressive investors. For large, mid and small cap funds, ELSS is for tax savings.

2. Debt Mutual Funds

• Invest in fixed financial instruments like bonds, government securities and treasury bills.
• It offers stable but low returns with less risk.
• Suits conservative or short-term goals of investors. such as liquid funds, short-duration funds, and gilt funds.

3. Hybrid Mutual Funds

• Initially, this fund invests in a mix of equity and debt.
• Hybrid offers balance, growth and stability.
• Suitable for moderate investors are aggressive hybrid funds, conservative hybrid funds and balanced advantage funds.

4. Index Funds & ETFs 

• An index fund is for tracking a market trading index such as the Nifty 50 & Sensex.
• These funds are managed passively with lower fees.
• Long-term investors who want broad market exposure.

5. Solution-Oriented Funds

• Crafted for specific goals like retirement or a child’s education.
• Have lock-in periods for discipline.
• Ideal for investors having financial goal-based investing with a long horizon.

 Benefits of Investing in Mutual Funds

Here are the reasons it becomes favourable among investors:

1. Easy for Beginners

It is beginner-friendly, and you just need to invest simply. You do not need to be a finance expert; the fund manager takes care of your hard-earned money.

2. SIP

You can start with as little as Rs 100 to 500 through the best SIP. Even small investments give you access to a wide range of stocks or bonds to fulfil your dreams.

3. Professional Management

Your money is managed by experts who track and analyse the markets and aim to grow your investment smartly.

4. Diversification 

The mutual funds invest in many companies, so even if one underperforms, others can balance by spreading the risk, as the saying goes, Don’t put all your eggs in one basket.

5. Market Timing

You do not need to sit for long hours to track the stock market daily. It does not need market timing to invest.

6. Flexible and Liquid

You can invest or withdraw whenever you want in most funds, except some funds making it easy to access your money.

7. Tax Benefits

Some mutual funds like ELSS, offer tax deductions under Section 80C of the Income Tax Act, which helps to get benefits from tax.

 Best Mutual Funds for SIP in India

Here are the best mutual funds to start with SIP in India:

 Factors to Consider While Investing in Mutual Funds

Before investing, consider these factors to get long-term benefits from returns:

1. Investment Goals

Before start to investing, know your investment purpose or goal, for long-term goals like retirement, child's future or want to just growing money. Short-term goals like buying new car or for vacation.

2. Risk Tolerance

Risk tolerances are different for each investor, such as small cap investors handle the aggressive nature and hold their investment for the long term, while large cap investors want a safer return over the short term.

3. Fund’s Past Performance

Track the fund's performance and its consistency over the last few years. It helps to estimate overall returns. Observe that past performance does not ensure future results.

4. Expense Ratio

This is the fee charged by the fund to manage your invested money. A lower expense ratio means more savings means you get more returns over time.

5. Fund Manager’s Experience

In the mutual fund, the expert grows your money smartly through their research and knowledge. Check if they have a strong track record and have handled ups and downs well.

6. AUM

The higher the AUM, the more people trust in that fund. AUM shows the size of the fund and the money handled by the manager. Its consistency shows the stability of the fund.

Conclusion

To wrap up, a mutual fund is the simplest and most effective way to begin a financial journey. It can offer you flexibility, professional management & risk reduction through a range of investments, regardless of your knowledge or interest, as mutual funds diversify your investments. Additionally, you do not have to track market timing.

With a simple SIP, even a small amount you invest every month can grow over time and help you build long-term wealth.