A mutual fund can be described as professionally managed form of collective investments that pools money from many investors and invests it into stocks, bonds and other securities.

Mutual funds are a great way for investors with limited resources to participate in the financial market. There are various types of mutual funds including open-ended funds, close-ended funds, equity funds, exchange-traded funds and gold-trading funds. It is important to know about the way these funds operate and the criteria required for choosing the right type of fund so as to become a successful investor.

The foremost factor that needs to be determined while choosing a mutual fund is to know about the financial goals. Depending on this, one can have a fair idea about the type of fund one can invest. Each type of fund has its own share of risks and disadvantages.

1. When the objective is capital growth, funds that invest primarily in stocks are a good option. These are high-risk funds and the prospect of getting high returns is good with these types of funds. However, growth of stocks depends entirely on the stock market trading.

2. When the objective is to have a steady growth involving less risk, funds investing in bonds should be considered. However, the returns are often lower in these funds when compared to growth funds.

3. Investment in money market funds can be beneficial when the objective is to preserve the principal investment amount. These are highly stable funds and do not fluctuate according to the stock market. But these mutual funds generate very little income when compared to bond or growth funds.