A mutual fund is a pool of money that is invested according to a common investment objective by an asset management company (AMC). The AMC offers to invest the money of hundreds of investors according to a certain objective - to keep money liquid or give a regular income or grow the money long term. Investors buy a scheme if it fits in with their investment goals, like getting a regular income now or letting the money accumulate over the long term. Investors pay a small fraction of their total funds to the AMC each year as investment management fees.

Investors with small portfolios may not have the necessary expertise nor get the required diversification across debt and equity products. For example, equity-seeking investors may find their money insufficient to buy enough companies to spread their risk. Or they may find funds insufficient to spread between cash, debt and equity products. Mutual funds offer a way out, for as little as Rs 1,000, an investor can approach most schemes and get well-diversified portfolios, across product classes and instruments. The money is invested by market experts. As markets mature, funds begin to customise products according to need.

There are two ways of making money from a mutual fund - through dividend or through capital appreciation. Mutual funds do not guarantee performance or returns. Risk depends on the type of fund bought and its performance. So, a debt fund is less risky than an equity fund. But within equity, an index fund is less risky than a sector fund.

The mutual fund industry is well regulated in India. The market regulator, the Securities and Exchange Board of India (SEBI) has ensured that a repeat of the vanishing companies does not happen here. Therefore, mutual funds in India are in the form of a Trust. This means that the money belongs to the investors and is only held in the name of the Trust. Investors need to take the risk of volatility or bad management and money can grow or lose value depending on the market and investment decisions.

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