A Mutual Fund is a trust Fund established with the intention of investing a pool of savings in various type of securities for the benefit of investors. A small investor is unable to diversify his portfolio simply because of inadequate amount available for investment. A mutual fund provides a means of diversification of investment to small investors. Initially a mutual fund collects the funds from small investors and then they are invested into the securities of different types, thus diversifying the portfolio. The Mutual Fund serves as a link between the public and the capital market. The income earned through these investment are shared by its holders in proportion to the number of units owned by them. Due to diversification of investment and professional management, investing through mutual fund carries lesser risk then investing individually.

The concept of Mutual Fund was developed in early nineteenth century. However, the first modern day mutual fund was opened in America in 1924. The growth of the mutual fund industry stalled due to great depression of 1930s like many other economic activities. Mutual Funds became mainstream investments in the USA and the world in 1990s. The number of mutual fund in the world stood at over 53500 at the end of June, 2003 of which maximum of 59% were in America followed by 32% in Europe and 9% in Africa and Asia Pacific. By type of fund, 42% were equity funds, 31% were debt fund and 21% were balanced/mixed fund, the rest 6% were unclassified fund.

Open-ended mutual funds are those Funds where subscription and redemption of units are allowed on a continuous basis. These schemes do not have a fixed maturity period. Investors can buy or repurchase the units at any time at NAV /NAV based prices declared by the fund manager on daily or weekly basis.

Closed-end mutual funds are those Funds where the shares are initially offered to the public and are then traded in the secondary market.

Over a period of time, the fund managers have developed a variety of products to cater to the needs of the investors. They are:

This fund offers potential for appreciation in share value, rather than the dividend. Such funds invest in stocks and have tendency to outperform other funds and other modes of savings over a period of time.

This funds, offers lucrative dividend but very little potential for growth. This fund mainly invest in government paper, bonds issued by municipal or local bodies, corporate debts and in stocks which offer regular dividend.

The balanced funds offer prospects of both moderate appreciation in share value as well as current income. The fluctuation in share price may be low. Such funds invest in stocks, corporate debts and Government paper.

Such funds have an objective of taking advantage of the volatility in interest rates in the money market instruments. The funds are invested in certificate of deposits, inter-bank call money market, commercial papers, T-bills and Short-term securities with a maturity period of less than one year.

The objectives of these Funds are to increase the value of the portfolio in line with the benchmark index. The funds are invested in the shares of companies as included in the benchmark index in the same proportion.

These funds have an objective of increasing the value of the portfolio and benefit the shareholders by gains exceeding the cost of funds. The funds are invested in speculative and risky investments like short sales to take advantage of declining market.