Mutual funds are a good starting point for investing especially when you have little money and not much knowledge about various avenues. Most forms of investment usually need huge outlays, long-term fixed commitment and specialized knowledge to track the progress. With mutual funds, however, you could start with as little as you choose to. You could have a systematic plan to invest a fixed sum every month or you could buy units after accumulating funds in a savings account. You could choose between short-term and long-term maturities. Therefore, mutual funds score high in flexibility, safety and liquidity.

Mutual funds date back to the 1920s and fueled much of the great spurt in industrial growth of the newly independent nation. Several small investors pooled in their resources in trust funds. These funds bought the stocks of companies that were rapidly expanding capacities. Growth soared and many of the mutual fund investors became millionaires. As the market matured, there was product diversification and today we have sophisticated mutual fund schemes that cater to a wide section of investors with different investment objectives.

Mutual funds have a fairly straightforward operating style. First, they closely study the economic environment and investor needs and come up with schemes based on the requirements of the investors. For example, there are equity or debt schemes, sector-wise schemes or market-wise schemes. This is called the New Fund Offer or NFO. The prospectus is submitted to the SEC that vets the details of the scheme. This is to ensure that accurate and adequate information is available to the investors before they make up their mind. The offer is usually open for a limited period and investors can deposit funds through cash, check or direct debit.

In order to have a corporate form of administration and to place fiduciary responsibilities for managing investor funds, mutual funds have asset management companies. These companies perform all the duties connected with managing the schemes. They maintain investor accounts, track performance of the schemes, arrange for mailing of periodic statements and dividend warrants, prepare reports to be submitted to the regulatory authorities and answer queries from investors. Each mutual fund scheme has a fund manager. He or she works with the investment objectives of the scheme in mind and accordingly takes the buy or sell decision with respect to the portfolio of the scheme.

Mutual funds charge administrative fees at a percentage of the net assets of the schemes, to pay for the services of the fund manager and asset management company. The fee charged is subject to a cap depending on the type of scheme.

The investors enjoy transparency and accountability because the SEC places strict regulatory guidelines for operation of mutual funds. The mutual funds also have a self-regulatory autonomous body to monitor their activities.