Mutual funds are investment vehicles that pool money from multiple investors to purchase a diversified portfolio of securities, such as stocks, bonds, or a combination of both. Here's how mutual funds work:

1. Pooling of Funds: Investors contribute money to a mutual fund, which is then pooled together with funds from other investors. This pooling of funds allows investors to benefit from economies of scale, as the mutual fund can achieve a diversified portfolio even with relatively small individual investments.

2. Professional Management: Mutual funds are managed by professional portfolio managers or investment management companies. These managers are responsible for selecting the securities held within the fund's portfolio, based on the fund's investment objectives and strategy.

3. Diversification: Mutual funds typically invest in a diversified portfolio of securities across different asset classes, industries, and geographic regions. This diversification helps spread risk and reduce the impact of any single security's performance on the overall portfolio.

4. Investment Objectives: Each mutual fund has specific investment objectives, such as capital appreciation, income generation, or a combination of both. Investors can choose mutual funds that align with their investment goals and risk tolerance.

5. Types of Mutual Funds: There are various types of mutual funds catering to different investment preferences and goals. Common types include:

   • Equity funds: Invest primarily in stocks.
   • Bond funds: Invest primarily in bonds and other fixed-income securities.
   • Balanced funds: Invest in a mix of stocks and bonds to achieve a balance between growth and income.
   • Index funds: Aim to replicate the performance of a specific market index, such as the S&P 500.
   • Sector funds: Concentrate investments in a specific sector, such as technology or healthcare.
   • Money market funds: Invest in short-term, low-risk securities such as Treasury bills and commercial paper.

6. Net Asset Value (NAV): The value of a mutual fund's assets minus its liabilities is known as the net asset value (NAV). NAV per share is calculated by dividing the total NAV of the fund by the number of shares outstanding. Mutual funds are bought and sold at NAV, which is calculated at the end of each trading day.

7. Liquidity and Redemption: Mutual fund shares can typically be bought or sold on any business day at the fund's current NAV. Investors can redeem their shares by selling them back to the mutual fund, subject to any applicable fees or restrictions.

Overall, mutual funds provide investors with a convenient way to access professional management, diversification, and a range of investment options to help achieve their financial goals