What are Mutual Funds and primary role of mutual funds

What are Mutual Funds? Mutual fund is a tool to gather money from various investors. This pooled investment is then allocated into different markets—like equity, debt, or hybrid—and various securities which are managed professionally, all aimed at achieving different financial goals. Primary Role of Mutual Funds The main objective of mutual funds is to help investors earn income or build wealth. By investing in a various opportunity available in the securities markets, mutual funds offer a diversified strategy in order to achieve the financial objectives. Classification of Mutual Funds Mutual funds can be categorized in several ways, mainly based on their investment goals, Risk Appetites, Structure, management style, and regulatory classification. According to the management of Portfolio: • Actively Managed Funds Actively managed funds are the funds where professional fund managers choose and look after the fund\'s portfolio of securities with the goal of achieving alpha by beating the market. This management style demands considerable resources, such as thorough research, analysis, and frequent trading, which inculcate higher costs for the fund compared to passively managed alternatives. The objective of Investors in actively managed funds is that the fund manager will generate better returns by grabbing the market opportunities and generate more than the benchmark index. Also, this fund possess more risk as compare to passive fund as it has of underperformance, high expenses, and depending on the fund manager\'s skills and decisions. • Passively Managed Funds Passive funds also known as index funds, whose investment replicate according to a specific index with the goal of mirroring its performance. For example, A Fund manager of passive fund tracks NIFTY50 and would invest in the same stocks that make up the NIFTY50 maintaining the same proportions as their weight in the index. This helps to removes the necessity for the fund manager to examine and do thorough research and select stocks, leading to much lower fees compared to active managed funds. Since passive managed funds objective is to replicate the index\'s performance, their goal is not to outperform the market but to offer investors a cost-effective and efficient means to engage in overall market growth. Frequent Asked Questions Q. Are actively managed funds guaranteed to outperform the market? Actively managed funds sole objective is to outperform the market returns but it does not guarantee every time as due to macroeconomic conditions, underperformance of market. Q. What risk do passive funds eliminate? Passive funds do not depend on the skills, performance, emotions of the Fund managers and therefore, they eliminate manager risk and bias. Since passive funds mirror the composition of the benchmark index, they also eliminate security selection risk and high turnover risk. Q. Is it better to invest in active funds or passive funds? Both active funds and passive funds has their ow