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A mutual fund is a professionally-managed investment that offers diversity, liquidity and convenience. Each mutual fund is made up of individual stocks, bonds, or money market securities. Because a mutual fund pools the money of many individuals, it has the buying power to invest in hundreds of different securities at once. In exchange for your money invested in a mutual fund, the fund gives you units in the fund that represent your participation in the fund.
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Types of Funds
Funds can have different investment objectives such as long-term growth, high current income or stability of principal. Depending upon its objective, a fund might invest in cash investments, bonds or equities, or in some cases a combination of these. Equity funds: Invest in common shares of companies Bond or Debt funds: Invest in the fixed income securities of companies or the Government of India Money market funds: Hold cash investments like short-term commercial paper issued by companies Other terms that describe types of funds are:
Closed end fund: Usually for three or more years. You can buy this fund only during the NFO period and these cannot be freely bought or sold thereafter. Sometimes, close end fund can convert into open end funds after the initial period of three to five years
Open end fund: Unlike closed end funds, these can be bought and sold freely and they do not have any limitation on the holding period
Growth funds: Do not have an income option, because often they are invested in companies that do not pay or pay less dividends because they are on a high growth path that need cash to be re-invested in the business itself