A mutual fund is all about investing in stocks and bonds. In this, money is collected from a group of people and is invested in stocks, bonds and other securities on behalf of the investor. Each investor holds shares and contains a portion of the holdings in the fund. In a mutual fund, money is earned through dividends on stocks, interests on bonds, capital gains and by selling mutual funds shares for a profit. Investments are professionally managed and judiciously invested in mutual funds. Since the money is invested in diverse portfolios, the risk of loss is spread out in a mutual fund. Transaction costs are lower in a mutual fund. While it is convenient to buy a mutual fund, they also provide the option of liquidity at any time.

However, there are certain disadvantages of mutual funds also. Not all mutual funds are suitable for personal tax saving.  Apart from that, there are several types of costs included in the mutual funds that are not disclosed to the investors. Most of the time, investors don’t know whether the fund manager has the required professional ability to manage the fund or not. Another disadvantage is dilution of funds or excessive diversification. Hence, investors need to have a clear understanding about the fund before investing in one.