How Mutual Funds Work
A mutual fund collects money from many investors like you and invests it in shares, bonds and other securities. A professional fund manager takes care of what to buy and sell. You own “units” of the fund and benefit from the growth of the underlying investments.
What happens when you invest in a mutual fund?
When you invest, you’re not just “putting money into an app”. There is a clear structure behind it. Understanding this structure helps you feel more confident and avoid common mistakes.
1. Your money goes to the fund house
You invest through an app or distributor, but your money ultimately goes to the Asset Management Company (AMC) that runs the mutual fund.
Example: HDFC AMC, SBI MF, etc.2. You get units at a price (NAV)
The fund’s total value divided by the number of units gives the NAV (Net Asset Value). Your investment amount divided by NAV = number of units you receive.
Similar to “price per unit”3. Your units move with the market
As the underlying investments rise or fall, the NAV changes. The value of your investment = current NAV × number of units you hold.
Portfolio value changes dailyHow mutual funds actually work, step by step
Here is the basic mechanism simplified for you:
1. Pooling of money
Thousands of investors contribute different amounts. This pooled money forms the total fund corpus. You are one of the co-owners of this pool.
2. Investment according to a mandate
Each fund has a clear objective (for example, “large-cap equity” or “short-term debt”). The fund manager must invest according to this stated mandate.
3. Professional research & monitoring
A team of analysts and the fund manager decide which securities to buy, hold or sell, based on research and risk management.
4. Daily valuation & reporting
At the end of each business day, the market value of all holdings is calculated and NAV is updated. This NAV is published publicly.
• Total fund value: ₹500 crore
• Total units: 25 crore
• NAV = 500 / 25 = ₹20 per unit
If you invested ₹2,00,000, you get 10,000 units. If NAV later becomes ₹26, your value becomes ₹2,60,000 (10,000 × ₹26), excluding any taxes or exit loads.
Who are the key players in a mutual fund?
Several regulated entities work together to protect investor interest. You are not dealing with just one company or app.
Asset Management Company (AMC)
The company that runs the mutual fund. It appoints fund managers, analysts and operations teams to manage your money.
Example: ICICI Prudential AMCTrustee & Custodian
The trustee oversees that the AMC is working in line with regulations. Custodians hold the actual securities on behalf of the fund.
Checks & balancesSEBI & Registrar
SEBI regulates mutual funds. Registrars keep records of your units, KYC and transactions across different platforms.
Regulated & trackedWhy understanding this matters after 45
At this stage, most investors move from aggressive growth to a mix of growth and safety. Knowing how mutual funds work helps you use them in the right way for retirement and income planning.
Choose the right type of fund
Equity, debt, and hybrid funds behave differently. Understanding the basics helps you avoid over-taking risk or being too conservative.
Set realistic expectations
Mutual funds move with markets. They do not give fixed interest like FDs. Knowing this helps you avoid panic in temporary market falls.
Link funds to specific goals
You can use different funds for different goals — retirement corpus, children’s needs, or future income via SWP.