When you buy a mutual fund, your money is combined with that of thousands of other investors and managed as one large portfolio. You own units, and the value of each unit — its NAV — rises or falls with the underlying holdings.
Funds are grouped by what they invest in: equity funds hold shares, debt funds hold bonds, and hybrid funds mix both. This built-in diversification means one bad stock has limited impact on your total investment.
For example, an equity fund might hold 50 different companies. If you put the same money into a single stock, one company's collapse could wipe you out; in the fund it is just one holding among many. You can invest through a SIP or a one-time lumpsum.