Mutual Fund

A mutual fund is an investment fund in which pool of money is created from many investors which are then invested in securities like stocks, bonds, money market instruments and other assets.
All invested securities forms a portfolio. It is managed by professional also known as portfolio manager.
The price of the mutual fund, also known as its net asset value (NAV) is determined by the total value of the securities in the portfolio, divided by the number of the fund’s outstanding shares. This price fluctuates based on the value of the securities held by the portfolio at the end of each business day.
Investors are issued shares of the fund. The value of total holdings by an investor is determined by the number of shares they held multiply by the NAV of the shares. 
How does mutual fund work?
Mutual Fund as described creates a pool of money from different investors. The pool of money is then managed by professionals who uses it to buy various securities. 
So if an investor have a share in a mutual fund, he/she will also be indirectly investing in the various securities included in the mutual fund owned by him/her.
So how does mutual fund generate income or create value for its investor?
>Income for the fund is generally the dividends from the shares, interest on bonds or loan securities held in the fund’s portfolio.
>Value appreciation of the shares and securities held in fund’s portfolio leads to increase in value of the shares held by investors.
Mutual fund can either distribute the income or value appreciation to the investor and reinveste it in other securities. This leads to increase in NAV of the shares (price of the shares of mutual fund). 
The fund might as well may distribute its earinings in forms of returns to investor. It may also choose to distribute a portion of its earinings while investing remaining portions in other securities.
In summary  
Final Gain to investors = Increase(decrease) in Value of share + Income distributed by Mutual Fund
Types of Mutual Fund
There are two types of mutual fund, they are Closed-end mutual fund and Open-end mutual fund.
Closed-end mutual fund is mutual fund having fixed number of shares which are cannot be redeemed. In other words, after the shares are issued by the fund, no trading can be done by the fund (primary market). However, trading between investors is possible (secondary market). This type of fund generally offer higher returns or better income than open-end mutual fund. Closed-end mutual fund is generally listed in on exchanges.
Open ended mutual fund is mutal fund which does not have fixed number of shares. In other words, it can issue and redeem shares at any time. Investors will generally purchase or sell such shares form the fund (MF company) itself. This leads to fluctuating capital. Open-end shares do not trade on exchanges and are priced at their portfolio’s net asset value (NAV) at the end of each day.
Based on investment philosophy, mutual funds can be categorized into equity funds, fixed-income funds, bonds funds or a combination of all of them i.e. hybrid funds.
Advantages of Mutual Funds
>It reduce risk of portfolio by diversifying funds in different kinds of securities.
>Such funds can easily be traded in exchanges providing better liquidity.
>Since mutual fund is managed by professional, investors enjoys professional money management.
>Investors can invest is such fund with minimal investment
Disadvantages of Mutual Funds
>Sometimes commision and management fees charged are high.
>There is risk that instead of gains, investors may suffur loss.
>Such fund are subject to tax
>There is no transparancy in the securities held by the fund
>It is difficult to compare it with other investment funds.