What is Mutual Fund? Why to Invest in Mutual Fund? Its Types, Advantages

what is mutual fund

Many of us don’t know how to do perfect analysis of any company. So, for investors like us, it is very difficult to take decision which company shares to buy. Mutual Fund helps us to overcome this problem.

If you also don’t know how to do fundamental and technical analysis of companies and you are in confusion to decide which company’s stock to buy then here we have the solution for you. In this article, we will specifically discuss about Mutual Fund. We will also discuss about the types of Mutual Funds, its advantages. Why we should invest in Mutual Fund.

You can buy the shares which mutual funds have bought and also can sell the shares which they have sold. It will be easier to filter a company with perfect fundamentals and will also get some idea about which stocks to buy or sell and when to buy or sell. This is because, mutual fund companies give their big part of time and money for analyzing perfect fundamental stocks for good profit.

After ending of every month, mutual funds publish the total number of shares and total market value (in which they have invested) in Rastriya Dainik Patrika or through their own websites or other share market related news portals.

What is Mutual Fund?

There are two ways for any investor to invest in share market. First is to invest by analyzing stocks themselves which require a lot of time and also money. Second is to invest with the help of others like mutual funds which saves out time and prevent from our money.

Mutual funds collects money from many investors who don’t know to filter the perfect stocks. We called these investors as Unit Holder. They invest in the behalf of all those investors by doing perfect analysis of companies fundamentals in order to get good returns as profit. Mutual fund is also known as Institutional Investor. Mutual funds give profits received from the companies to their Unit Holders. They only gives dividend but not bonus to the unit holders. Mutual fund charges the operational charges and takes their commission amount and rest return back to the unit holders.

The first mutual fund of Nepal is NCM mutual fund which was established in 2050 B.S. So far, there are many mutual funds has been established in the country. Some are in the process of establishment.

Why to Invest in Mutual Fund?

The main aim of mutual fund is to invest in bigger portfolio by collecting small amount of money from many small investors. Small investors don’t have enough money, knowledge about share market and don’t have enough time to do analysis. So, mutual fund helps these small investors to invest their money in the companies shares whose fundamentals are strong.

It is very easier for small investors to invest in mutual funds because here they can get 1 unit per Rs.10. Whereas in IPO, we get 1 unit per Rs.100. Which means if you will invest Rs.1000 in mutual funds then you will get 100 units of shares in mutual funds.

As we discuss, mutual funds helps the small investors in many ways. It doesn’t mean that only small investors should invest in mutual funds.

Suppose, there are some eggs in the bucket. If that bucket will fall down then all eggs will break. But, if we put some eggs in other bucket then this time the eggs of that bucket will break which will fall down. Likewise, we should also not only invest our money in Share Market but also some in Debentures and Mutual Fund. It will prevent us from huge loss of money.

Types of Mutual Fund

Mutual Fund is divided into two types. These are:

  1. Open Ended
  2. Closed Ended
Types of Mutual Fund
Types of Mutual Fund

Let’s see what these mutual funds are and which factor divide these two funds.

1. Open Ended Mutual Fund:

Open Ended Fund is also know as “Khulamukhi”(in Nepali). It is a mutual fund that can buy or sell units anytime or buy units in case if any investor will come to sell units. That is why there is more liquidity in this fund. There is no any fixed time mentioned in this fund. These funds are not listed in the Nepse. That is why we don’t need to visit any broker company in order to buy or sell units. Investors can sell their units by visiting mutual funds.

2. Closed Ended Mutual Fund:

Closed Ended Fund is also known as “Bandamukhi”(in Nepali). In close ended fund, once it opens unit under any plan then it don’t further reopen the unit during the period of that opened plan. But another new plan can be introduced. The fixed maturity date is mentioned for the opened unit in this fund. There is similarities between issuing shares and closed ended fund procedure. This types of unit are listed in Nepse. As many mutual funds are listed in the Nepse, these all are closed ended mutual fund. That is why we can buy or sell these units in secondary market or through brokers.

What is NAV (Net Asset Value)?

NAV is the result that we get after subtracting the liabilities from the total market value of company, in which mutual fund has invested. NAV/unit is the result that we get when we divide the NAV of any company with its total units. NAV/Unit play important role while filtering mutual funds in order to invest in mutual fund. As much the NAV/Unit is more, the more better and strong that mutual fund will be.

Where will we get Financial Report of Mutual Fund?

After end of every month, mutual fund publishes their reports on newspaper or on their websites or through different share market related news portal websites. The reports contains the details like, profit, loss, NAV, companies in which mutual fund has invested, in how many units share they have invested and their total market value.

Advantages of Mutual Fund

1. Helps to Beat Inflation

Mutual fund helps to beat inflation rate. In the context of Nepal, generally, the inflation rate is more than 10%. If we deposit our money in saving accounts in bank then generally, it only gives us interest less than 5%. In case of fixed deposit, generally, we get interest near to 9%. But these interest are not enough for us to beat the inflation rate of Nepal.

Suppose, we get a product at Rs. 1 lakh today then after 1 year that same product price will not be same anymore. It will be increased by the inflation rate of the country. The interest that we get from saving accounts or fixed deposit account will also not make us able to buy that same product.

So, we should invest our money in some other place too. In case of mutual fund, there are chances of getting returns that helps us to beat inflation. There is low risk of losing money in mutual fund.

2. Professional People Manage our Investments

In mutual fund, professional people manages our invested money. There are team in the mutual funds that works to do research and analysis where to invest to get good returns. Although we don’t have the idea and time for investing in share market, that professional people helps to invest our money in companies having good fundamental.

3. Large Investment is not Required

Large investment is not required while investing in mutual funds. In the context of Nepal, we have to buy at least 100 units of mutual funds at the rate of Rs.10 per unit. Which means we need at least Rs.1000 to start investing in mutual funds.

Suppose, you want to buy the shares of any blue chip company (Best companies in share market since long time). The share price of that company is Rs.5000. But, you have only Rs.1000 then you can’t directly buy the shares of that company through share market. But through mutual fund, they collect money from many investors like you and able to buy the shares of that blue chip company. And the able to distribute the returned profit to everyone whose money was invest in that company.

So, although you have less money, you can also invest in the blue chip company through mutual fund.

4. Helps in Managing Diverse Portfolio through Small Investment

When we invest in mutual fund then our invested money will not go into only one or few sectors. Our invested money divides and invested into many different different sectors. Mutual fund not only helps us to get started in investment field with small amount but it also helps us to invest that small amount in different sectors too. This helps in the diversification of our portfolio which decreases the risk on money loss.

5. Government also Prefer Mutual Fund

When any new IPO will open then before giving shares to the public, 5% of shares are reserved for the mutual fund. This reserved percentage of shares may be different in different countries but in the context of Nepal, it is 5%. Government also prefer mutual fund. At the same time, Nepal’s legislative board for mutual fund is SEBON. And SEBON also implement rules for mutual fund that are in the favor of mutual fund. These SEBON’s rules are implemented, so that our invested money will be safe, will not be mismanage, will get benefits from securities market.

6. Liquidity

Another advantage of mutual fund is, there is more liquidity. Liquidity means, it is flexible to convert our invested units into cash. Likewise, we buy or sell stocks in secondary market, we can also buy or sell our mutual fund units whenever we want.

Disadvantages of Mutual Fund

1. High Expense Ratios and Sales Charges

You should also pay attention towards the expense ratios and sales charges of mutual fund. These fees result in reduction of overall investment returns.

2. Tax Inefficiency

When it comes to capital gains payout, investors do not have a choice. investors typically receives distributions from the fund which are uncontrollable tax event, because of turnover, redemptions, gains, and losses in security holdings throughout the year.

3. Market Downtrends Cannot be Avoid

When we individually invest our money by own, we can invest more in bullish trends and stay on cash during bearish trends or trend reversals. Whereas, mutual funds have to stay invested at all times.


So, we have discussed about Mutual Fund in detail. If you don’t want to takes risk in investing then we think you should go with mutual fund. If you don’t have enough knowledge and time to analyze stocks to directly invest in any stocks in secondary market then you should invest through mutual funds. It will be more comfortable for you. We hope you have understood about mutual fund. All your doubts regarding mutual fund have cleared.

If you still have any question in your mind then feel free to ask with us in the comment section below. You can also ask your doubts in our Forum. We will surely answer your question. Visit Forum.

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Disclaimer: This article is only for educational purpose. We have share our opinions regarding the topics discussed in this article. We don’t force you to do investment same as we are saying. Do your own research before investing.

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