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What Is an Investment Fund Meaning & Types
In summary
An investment fund allows multiple investors to participate in a professionally managed pool of capital. The structure, eligible investors, assets, liquidity, and regulations depend on the type of fund.
- Investment funds pool capital from multiple investors.
- Mutual funds are regulated collective investment vehicles in India.
- ETFs combine pooled investing with exchange-based trading.
- AIFs are privately pooled vehicles for specified investors.
- Open-ended funds allow ongoing subscriptions and redemptions.
- Fund costs, risks, liquidity, and objectives vary by structure.
As of August 2026, SEBI reported 1,935 open-ended and 48 close-ended mutual fund schemes in India.
What is an investment fund?
An investment fund is a pooled investment vehicle that collects money from multiple investors and invests it according to a defined strategy.
Instead of buying every security individually, you purchase units or shares of the fund. The pooled money may then be invested across stocks, bonds, money-market securities, commodities, or other permitted assets.
For example, suppose 1,000 investors each contribute money to an equity fund. The fund manager can combine those amounts and build a portfolio across several companies rather than each investor having to select and buy every share separately.
This can make diversification and professional portfolio management more accessible.
However, an investment fund does not guarantee profits. Its value can rise or fall depending on the performance of the assets it holds.
How does an investment fund work?
An investment fund works by pooling investor money, creating a portfolio and dividing ownership of that portfolio into units or shares.
The broad process is:
- Investors contribute money to the fund.
- The fund invests according to its stated objective.
- A fund manager or investment process manages the portfolio.
- Investors receive units or shares representing their interest.
- The value of those units changes with the underlying portfolio.
- Costs and expenses are deducted according to the fund structure.
In a mutual fund, the value per unit is represented by the Net Asset Value, or NAV.
NAV broadly reflects the value of the scheme's assets after deducting liabilities and expenses, divided by the number of outstanding units.
The exact buying and selling process depends on whether the investment vehicle is an open-ended fund, close-ended fund or exchange-traded product.
What are the main types of investment funds?
Investment funds can take several forms, with mutual funds, ETFs and Alternative Investment Funds being important examples in India.
Mutual funds
Mutual funds pool money from investors and invest according to a stated scheme objective.
Depending on the scheme, they may invest in:
- Equity shares
- Debt securities
- Money-market instruments
- Gold or silver
- A combination of asset classes
- Units of other funds
Mutual funds can therefore serve very different investment goals and risk profiles.
Exchange-traded funds
ETFs are funds whose units trade on stock exchanges.
Many ETFs track an index, commodity, or other benchmark. Their exchange price can change during the trading day based on demand and supply.
ETFs can offer diversification and exchange-based trading. Their costs vary by scheme, and investors may also face brokerage, bid-ask spreads and other transaction costs.
Alternative Investment funds
Alternative Investment Funds, or AIFs, are separate pooled investment vehicles governed by a different SEBI regulatory framework.
Category III AIFs can use complex trading strategies and may use leverage or derivatives. Hedge-fund-style strategies are generally associated with this segment rather than ordinary retail mutual funds in India.
AIFs typically have much higher investment thresholds and different risk, liquidity and disclosure structures.
What is the difference between open-ended and close-ended funds?
Open-ended funds allow ongoing purchase and redemption, while close-ended funds generally have a fixed maturity period.
Open-ended funds
Open-end mutual funds remain available for subscriptions and redemptions on an ongoing basis, subject to scheme rules.
Investors usually transact with the fund at the applicable NAV.
Their main features include:
- No fixed number of units
- Ongoing purchase opportunities
- Ongoing redemption facility
- No fixed maturity in most cases
- NAV-based transactions
Close-ended funds
Close-ended funds generally have a specified maturity period and accept subscriptions during the initial offer period.
Their units may be listed on a stock exchange to provide an exit route.
Because units can trade on an exchange, their market price can sometimes differ from the underlying NAV.
Open-ended and close-ended therefore describe fund structure, not asset class. An equity, debt or another strategy can operate under different structures where regulations allow.
What are the benefits of investment funds?
Investment funds can make diversification and professional portfolio management easier for individual investors.
Potential benefits include:
Diversification: A fund can spread money across several securities rather than relying on one investment.
Professional management: Fund managers research securities and manage the portfolio according to the scheme's objective.
Access: Investors can gain exposure to different asset classes without buying every asset individually.
Convenience: The fund handles portfolio selection, valuation, accounting and other operational requirements.
Economies of scale: Pooling investor money can spread certain operating costs across a larger asset base.
However, none of these benefits removes investment risk. Diversification can reduce dependence on one security but cannot prevent losses when markets fall.
What risks do investment funds carry?
Investment funds carry risks based on the assets, strategy and structure of the individual fund.
Common risks include:
Market risk: The value of stocks, bonds or commodities can fall.
Credit risk: A bond issuer may fail to make required payments.
Interest-rate risk: Changes in interest rates can affect debt-security prices.
Liquidity risk: Some investments may be difficult to sell quickly at a reasonable price.
Concentration risk: A fund focused on a narrow sector or theme can depend heavily on a small part of the market.
Manager risk: Active management decisions may not produce the expected result.
Tracking risk: An index fund or ETF may not exactly match its underlying benchmark.
Your risk tolerance should therefore be considered before selecting any investment fund.
How should you choose an investment fund?
You should choose an investment fund by matching its objective, risk and costs with your own financial goal.
Consider:
Investment goal: Decide whether your objective is long-term growth, income, capital preservation or another financial need.
Time horizon: Match the fund's underlying assets with how long you can remain invested.
Risk: Check how much volatility or loss you can tolerate.
Portfolio: Understand where the scheme invests.
Costs: Compare expense ratios and other applicable charges.
Liquidity: Check how easily you can redeem or sell the investment.
Performance: Review past performance in context, but do not treat it as a guarantee of future returns.
Fund manager and AMC: Understand the investment process and the role of the relevant Asset Management Companies.
Your goal is not simply to choose the fund with the highest recent return. It is to select one that fits your overall investment portfolio.
Conclusion
Investment funds pool money from several investors and invest it according to a defined strategy. Mutual funds, ETFs and Alternative Investment Funds are different structures, while open-ended and close-ended describe how certain funds operate.
Before investing, check the fund's objective, assets, risk, liquidity and costs. You can compare the mutual fund options on the Bajaj Broking website and choose schemes that match your financial goals and risk tolerance.
Last reviewed: September 2026
Mutual funds are subject to market risk. Please read the scheme-related documents carefully before investing.
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Do investment funds make money?
Investment funds can earn returns through capital appreciation, interest, income or other gains generated by their underlying assets. Returns are market-linked and can also be negative, so investment funds do not guarantee that investors will make money.
What are the two types of investment funds?
When mutual funds are classified by maturity structure, the two broad types are open-ended and close-ended funds. Investment funds can also be classified in many other ways, such as mutual funds, ETFs and Alternative Investment Funds, so open and close-ended are not the only investment-fund categories.
What is the minimum investment amount for investment funds?
There is no universal minimum because the amount depends on the type of fund and individual scheme. Retail mutual funds may accept relatively small investments, while AIFs generally require a much larger minimum commitment subject to regulatory exceptions.
What fees are charged by investment funds?
Investment funds may have an expense ratio, exit load and other permitted costs depending on the structure of the fund. Exchange-traded funds can also involve brokerage and bid-ask spreads when units are bought or sold on an exchange.
How do value fund managers identify stocks trading below their estimated intrinsic value?
Value fund managers study factors such as earnings, cash flows, debt levels, assets, management quality, competitive position, and valuation ratios to estimate a company's intrinsic value. They may consider a stock undervalued when its market price is below this estimate, although the assessment can prove incorrect.
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