A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The

money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

Mutual Fund Operation Flow Chart

Some facts for the growth of mutual funds in India

• 100% growth in the last 6 years.
• Number of foreign AMC's are in waiting to enter the Indian markets.
• Our saving rate is over 23%, highest in the world.
• We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion.
• 'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities.
• Mutual fund can penetrate rurals like the Indian insurance industry with simple and limited products.
• SEBI allowing the MF's to launch Real Estate & Gold mutual funds..
• Introduction of Financial Planners who can provide need based advice.

Advantages

The advantages of investing in a Mutual Fund are:

• Diversification: The best mutual funds design their portfolios so individual investments will react differently to the same economic conditions. For example, economic conditions like a rise in interest rates may cause certain securities in a diversified portfolio to decrease in value. Other securities in the portfolio will respond to the same economic conditions by increasing in value. When a portfolio is balanced in this way, the value of the overall portfolio should gradually increase over time, even if some securities lose value.
  
• Professional Management:Most mutual funds pay topflight professionals to manage their investments. These managers decide what securities the fund will buy and sell.
  
• Regulatory oversight: Mutual funds are subject to many government regulations that protect investors from fraud.
  
• Liquidity: It's easy to get your money out of a mutual fund. Write a check, make a call, and you've got the cash.
  
• Convenience: You can usually buy mutual fund shares by mail, phone, or over the Internet.
  
  
• Low cost: Mutual fund expenses are often no more than 1.5 percent of your investment. Expenses for Index Funds are less than that, because index funds are not actively managed. Instead, they automatically buy stock in companies that are listed on a specific index
  
• Transparency
• Flexibility
• Choice of schemes
• Tax benefits Well regulated