Are you someone who hesitates to invest just because a friend or family member has lost money in the past?
Do you know the majority of people fail in investment due to a lack of investment knowledge?
They think the investment is too complicated to understand and procrastinate forever to invest anywhere.
But you have chosen to learn about investment; CONGRATULATIONS!
This action will separate you from the large majority of confused investors and make you an INSIDER in the investment world.
If you are planning to begin your investment in Mutual Fund or you have already started off your investment. In both cases, this post will provide you with all the necessary insights into Mutual Fund investment.
Let’s read on and learn…
If you’re wondering “what is a mutual fund in simple words,” this guide will break it down step by step.
1. What is Mutual Fund?
2. How do Mutual Funds work?
3. Advantages and disadvantages of Mutual Funds.
4. Is there any risk in a Mutual Fund investment?
5. How to Invest in Mutual Funds?
6. What are the different types of Mutual Funds?
7. What is Net Asset Value? What is its significance in Mutual Funds?
8. How to select Mutual Funds?
9. How to analyze the performance of Equity Mutual Funds?
10. How to analyze the performance of a Debt Mutual Fund?
11. Taxation of Equity Funds
12. Taxation of Debt Funds
13. How the returns are calculated in Mutual Funds?
14. When to review your investment portfolio?
15. Conclusion
According to the Oxford dictionary, the meaning of the term “Mutual Fund” is, “a company that offers a service to people by investing their money in various businesses”.
In simple words, the mutual fund is a kind of financial vehicle where the group of people or investors pools in money with the intention of generating returns.
The financial corpus so formed is invested in various asset classes.
What are mutual funds: diversified portfolios managed by professionals to spread risk.
A mutual fund is a kind of financial vehicle where a group of people or investors pools in money with the intention of generating returns.
Understanding how mutual funds work in India helps you leverage local regulations and tax benefits.
Mutual Funds invest basically in three types of asset classes, which are:
Stocks: Stocks represent ownership or equity in a company. This asset class has historically outperformed all other asset classes over the long term but tends to be more volatile in the short term.
Bonds: This represents debt from companies, financial companies or government agencies. They provide income in the form of interest payments and principal if held till maturity. There can be price volatility because of interest rate movements and other events in the economy/political scenario.
Money market instruments: These are inter-bank call money, commercial paper, treasury bills, certificate of deposits (CDs), and short-term bonds. They pay interest and are the least volatile of all asset classes. But, over the long term, the returns may not keep up with inflation.
When you invest in any stock, your investment is more focused. If that particular Stock goes up, you will be benefitted; otherwise, you will lose your money. If you want to diversify your stock investment, you need to invest in various stocks independently.
But, by investing in a single mutual fund, you automatically invest in various assets and stocks. If one stock or asset goes down, there are others that may compensate for it.
Your investment in a mutual fund reduces the risk to which you would’ve been exposed by investing in a single stock/bond.
A mutual fund usually invests in a broad cross section of industries/companies (Sector specific funds, as the name suggests, however invest in specified industries).
Because of this, the negative performance of one security will not have as much of an impact on the fund.
When you invest in a mutual fund, your money is managed by professionals who have the experience and resources to thoroughly analyze the economy/markets to spot good investment opportunities which might not be easy or feasible for an individual investor.
Fund managers in mutual funds are highly experienced and qualified professionals, they consistently research, analyze and manage their funds. A mutual fund is a relatively cost-effective way for an investor to get full-time fund managers to make and monitor investments. Fund managers also have better access to fund-related information.
You can buy or sell Mutual Funds anytime and can redeem total or partial investments anytime you want to. Investment can be redeemed in 2-3 working days.
You will be able to get your money back within a short period as compared to other securities.
Investing in a mutual fund involves very little paperwork and helps you avoid many problems such as bad deliveries, delayed payments, and unnecessary follow-up with brokers and companies.
Mutual Fund investments are highly convenient for a beginner investor,
A mutual fund allows investors to reinvest their returns and dividends in additional fund units. Such investment over a period of time will produce compounding interest on your investments.
It is possible to choose a suitable Mutual Fund scheme for your personal and family needs. This could be related to your risk profile and desired investment horizon. We will discuss these factors in greater detail in the upcoming sections.
You can track the performance of your fund on a regular basis and you can easily compare the different mutual funds with each other to analyze their current performance and take your call to sell the existing fund or increase your investment in your existing scheme.
The expense ratio represents all of the management fees and operating costs of the fund. You must check this factor before you choose to invest in any fund (Equity, Debt or Liquid Fund). Look for the lowest range of expense ratios in your chosen fund category.
Some mutual funds charge the Exit Load. An exit load is a penalty; in case you choose to redeem your investment before a certain timeframe.
For different mutual fund schemes, the exit load levied is different, it can be as much as 2% of the total redemption amount, and also it can be 0%. You should check this factor before you invest.
Even though different Mutual funds carry a different risk profile, none of them could give you guaranteed returns as provided by bank FDs or PPF. Mutual funds are subject to market risks.
A Fund Manager has better control over the funds and you must trust his/her judgment, without any control in your hand.
Based on the above-mentioned advantages and disadvantages, it is true that the returns on mutual fund investments are not guaranteed and are subject to market risk. But mutual funds are the most transparent, efficient and convenient way of investment. If you do a careful analysis before your investment, YOU WILL GET GOOD RETURNS!
You must consider taking advice from an experienced investment planner before making a final investment decision. They will give you the best advice in choosing your suitable Mutual Fund.
Also, you can choose to book a “30-min FREE Consultation” call with us, to take our advice in making your investment decision.
As the banks are supervised by Reserve Bank of India (RBI), in a similar way, the Mutual funds are also regulated and supervised by regulatory agencies like the Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI).
The license to run a Mutual Fund company is not much different than the license given to a bank to do its operation. They are given the same level of screening and diligent monitoring for their smooth functioning. Therefore, mutual funds are fully secure and there is absolutely NO risk in terms of losing all your money.
To address all your fears and anxieties regarding Mutual Funds, you can further read this article on “How safe are your Mutual Funds?”
To start investing in Mutual Funds, you need to have a bank account, PAN card, and KYC documentation.
To do your KYC, you need to submit the following documents:
You can submit the above documents directly to the fund house or you can submit it through CAMS/Karvy. KYC is a one-time process and once KYC is done, you can invest in any Mutual Fund of your choice.
There are several ways in which you can invest in the mutual fund, there are online as well as offline ways and each method has its own pros and cons. Let’s read the description below:
You can visit any fund house office and open your mutual fund account. If your KYC is done, your account can be opened online, as well.
The only problem with this method is that you can invest in the schemes of only one fund house. In order to have multiple schemes, you need to have separate multiple accounts with different login details for each fund.
You can also invest through AMFI (Association of Mutual Funds of India) registered distributors who can give you the basic advice on your investment and can do all the paperwork, as well as send reports, etc.
It is a convenient method and it can take away a lot of your headache regarding any queries or paperwork.
The possible risk with this method is: “the distributor may be biased toward certain schemes depending on the commission they would provide”.
So you must be aware and do your proper research before choosing a suitable financial advisor. You can this detailed article on The definite ways to find a trustworthy Investment Advisor.
Most of the banks also act as mutual fund distributors, they sell various Mutual funds to their customers.
So, choose between direct vs regular mutual funds based on your cost and advisory needs.
Through CAMS and Karvy you can get free online access to many AMC schemes. Through this option, you can invest in direct schemes as well. A mobile app is available for easy access to all information. However, currently, not all AMCs are registered with these platforms.
We at “Holistic Investment Planners”, offers you the best advice in your Mutual Fund investment. Click the link below to get started with your investment:
In nutshell, the Mutual funds can be subdivided into different types depending upon various different characteristics:
1. Depending upon the fund schemes, the Mutual Funds are classified as:
In this fund, you can enter or exit anytime.
These funds do not have a fixed maturity period.
Open-ended mutual funds offer flexibility and liquidity, making them ideal for SIP investors.
Closed-ended funds issue a fixed number of units that are traded on the stock exchange.
They are launched through New Fund Offer (NFO) to raise money and then traded in the secondary market similar to stocks.
These funds also have a fixed maturity period.
After the closure of the initial offer, new investors cannot enter, nor the existing investors could exit until the term of the scheme ends.
Its functionality is more similar to ETFs.
Closed-ended mutual funds are better suited for investors with a defined investment horizon.
These funds combine the characteristics of both of the above; closed as well as open-ended funds.
These funds do not permit regular buying and selling as these remain closed most of the time but open for a time interval predefined by the fund, wherein a new unit can be bought and existing units can be redeemed.
Interval funds may be suitable for investors seeking moderate liquidity with potential for higher returns.
2. Depending upon the management of funds, the Mutual Funds are classified as:
These are the funds, in which the fund managers actively pick securities based on their own research and analysis.
In India, most of the Mutual Fund investments are done in actively managed funds as fund managers consistently beat the benchmark and create the returns over and above the predicted ones.
Actively managed mutual funds are ideal for investors seeking alpha or market-beating returns.
Passive fund management involves the creation of a portfolio intended to track the returns of a particular market index or benchmark as closely as possible.
Fund Managers select stocks listed on an index and apply the same weightage.
In the passive fund management, a fund manager attempts to mimic some benchmark, replicating its holdings and the performance.
Passively managed mutual funds, such as index funds and ETFs, offer low-cost investing aligned with benchmark returns.
For your long term investment, an Actively Managed Fund is better as compared to passively managed funds. Active fund management is when fund managers actively pick investments in an effort to outperform some benchmark, usually a stock market index.
Whereas, the purpose of passive portfolio management is to generate a return that is the same as the chosen index, instead of outperforming it.
3. Depending upon the Asset Class, the Mutual Funds are classified as:
Equity funds invest their assets in the Stock Market. These are also known as Stock Funds. Below are the core benefits of investing in the equity fund:
Equity mutual funds are best suited for long-term capital appreciation and wealth creation.
These types of Mutual Funds invest their assets only in Debt (Fixed Income) instruments such as corporate bonds, debentures, Government Securities, etc. The overall risk profile of the debt fund is low.
These funds invest their assets in low maturity money market instruments such as treasury bills, Certificate of Deposit, etc. they have maturity span of 1 to 180 days. They are the least risky type of Mutual Funds.
Liquid mutual funds are commonly used for parking surplus cash for short-term goals.
4. Depending upon the investment style, the Mutual Funds are classified as:
These are equity-based funds that invest primarily in Stock Markets.
The fund managers handling these funds, preferably invest in the stocks that have low dividend yield and high growth potential.
Growth mutual funds are designed for aggressive investors seeking capital appreciation over time.
These funds are known for the safety of the principal.
Income mutual funds cater to retirees and risk-averse investors focused on generating steady cash flows.
5. Few of the special Mutual funds are:
Index funds, as the name suggests, invest in an index.
These funds purchase all the stocks in the same weightage as in a particular index (Sensex or Nifty).
Index funds are ideal for investors who are risk-averse and expect predictable returns.
These are the passively managed funds. Index funds are not meant to outperform the market, but mimic the performance of the index.
However, if you wish to earn market-beating returns, then you can opt for actively-managed funds.
The returns of index funds may match the returns of actively-managed funds in the short run. However, the actively-managed fund tends to perform better in the long term.
Index mutual funds offer broad market exposure at a low expense ratio, making them attractive for beginners.
For example, Banking, Technology, Pharma, Infrastructure, etc.
Sectoral mutual funds carry higher risk and are suitable for investors with strong views on specific industries.
They will allow you to invest in foreign markets and give you the exposure of global companies.
International mutual funds offer diversification beyond Indian markets and hedge against domestic volatility.
Net Asset Value (NAV) is a mutual fund’s price per unit. In simple terms, it is the value of a single unit of a mutual fund.
For example, If a mutual fund has a NAV of ₹50, it means the single unit cost of this fund is Rs. 50. And, if you invest ₹10000 in a mutual fund with a Net Asset Value of ₹50, then you will get (10000/50) = 200units of that fund.
NAV is calculated by dividing the total value of all assets such as stocks/bonds, minus all liabilities and expenses, divided by the total number of units of the mutual fund. It is represented using the formula given below:
As the value of the stocks, bonds and deposits change every working day; NAV also gets updated on a regular basis.
NAV is not an indicator of a Mutual Fund Performance. Lower NAV does not mean the better performance of a Mutual Fund.
In order to know the actual performance of a Mutual Fund, other performance factors must be taken care of. They are described in the next section.
Don’t confuse low NAV with cheap valuation—performance depends on returns, consistency, and fund management.
The NAV of a Mutual fund is more useful in understanding how the fund performs on an everyday basis.
You can check the NAV of any mutual fund from any financial website such as amfiindia.com.
Based on the types of Mutual funds there are different factors that describe the performance of a Mutual fund.
In this section, performance analysis of Equity Funds and Debt Funds are described in sufficient detail, because these funds are more popular as compared to other funds.
Knowing the key mutual fund performance parameters helps investors choose the best mutual funds in India suited to their goals.
The first step to select an Equity oriented fund is to categorize your goals into the short, mid and long term and then choose the fund type, as shown below:
When you’re learning how to select mutual funds, matching your investment horizon with the right fund type is crucial for optimizing returns.
Your investment depends on 2 factors:
i). Your financial goals (Short term, Midterm and Long Term)
Define your investment needs by asking yourself these simple questions
What do I require money for?
Once you determine your financial goals, you can make a financial plan and stick with it. For example
When do I require the money?
If you have a longer time frame in your mind, you should consider those schemes which will be the best performers in the long term, notwithstanding the fluctuations over the short term.
On the other hand, if you require the money in less than a year, you should consider a money market scheme.
Understanding your financial goals and time horizon is a key part of mutual fund selection tips that every investor should follow.
ii). Your Risk-taking appetite
How much risk am I willing to take?
Before making an investment decision, you will have to ascertain your feelings about risk. Will you be comfortable with the short-term fluctuations in the share price or not? If you do not want to take the risk, you can opt for an income scheme/money market scheme.
Your risk appetite plays a significant role in deciding which mutual funds are right for you, making it an essential mutual fund performance parameter.
After choosing the right fund based on your investment horizon, now look for the right schemes under large-cap OR multi-cap, OR mid/small-cap.
Once you have determined the type of scheme which would suit your investment objectives, evaluate different schemes on the following parameters:
These evaluation criteria are vital mutual fund selection tips for picking the best mutual funds in India.
The parameters described below will help you select the right scheme.
Based on the above fundamental analysis, now its time to filter the schemes by analyzing their Key-ratios and other factors, as described below:
Alpha measures whether the fund has outperformed its predicted returns. Look for higher alpha.
Beta is an indicator of the volatility of the fund. A beta of greater than 1, say 1.15, means that the fund is more
A lower beta indicates that the fund is less volatile and more stable. Lower beta is advisable to consider but other factors must also be considered along with beta.
For more details on Alpha and Beta, read this detailed post on “Statistical tools to select a rewarding Mutual Fund”.
It measures the returns with respect to the risk taken. A good fund will high Sharpe ratio, as there will be better returns with the amount of risk.
It is the total market value of the investments that are managed by the Mutual Fund companies. AUM increases when more assets are bought in or the value of the asset increases. And, AUM decreases when assets are withdrawn or the value of the assets decreases. You can reject the schemes with very low AUM as their volatility, expenses and risk profile could be higher.
As described earlier, it is a fee charged for handling your money in your investment. You should avoid schemes with a very high expense ratio. As per industry standards, the expense ratio of 1.5% is a good deal. The average expense ratio of equity funds varies between 1.5-2.2%.
In the event of an early withdrawal from the plan before the pre-defined lock-in period, the investors are required to pay the exit load. Exit load varies between 1%-3%. An exit load of 1% under the duration of 1 year is a common norm in 80% of the cases.
Though the equity fund investment is for the long-term, still you should avoid the funds with high exit loads (above 1%). Let us say, you want to withdraw from the fund because of its bad performance or any other valid reason, you must not lose money in such cases.
Nowadays there are many 3rd party agencies that give fund ratings online such as Morningstar, CRISIL, and value-research; here you can get some idea of the fund performance based on the ratings given to them, by these parties. But you should not over-depend on these ratings.
All the performance parameters of Mutual Funds mentioned above should be taken together into consideration and only after understanding them well, the investment decision must be taken.
Understanding and analyzing these mutual fund quantitative performance parameters will help you select the right fund.
All the performance parameters of Mutual Funds mentioned above should be taken together into consideration and only after understanding them well, the investment decision must be taken.
You should choose to invest in a scheme that has a very good long-term track record against your peers.
Though it is true that historical performance is not a guarantee of future performance. But it definitely gives a key insight into the scheme.
We recommend you find the details of the funds in Mutual Fund Factsheets and look for the funds which have consistently outperformed in the market over the medium and longer terms (3, 5, and 10 years).
Equity funds are conducive to long-term investment only. Therefore, the focus should be on Long term performance, instead of looking into weekly, monthly, or quarterly performances!
When analyzing past returns, it is also helpful to compare the fund’s performance against relevant benchmarks such as the Nifty 50 or Sensex to understand relative strength.
The major credit for the outperformance or underperformance of any mutual fund scheme lies with the fund manager.
All Mutual Fund Companies look after good fund managers to manage their funds.
You should look at whether the Mutual Fund Company is able to retain a good Fund Manager in their company for a long time.
If a company is able to retain a good Fund Manager for a Long time, it means the company is active and performing well in its investment strategy!
Therefore, you should consider investing in such companies.
Fund Manager stability often translates into consistent fund management style, which is a crucial factor in reducing portfolio volatility and improving risk-adjusted returns.
The investment process in some Mutual Fund Companies are run totally by the Fund Manager’s experience; they are free to take all the major investment decisions.
Whereas in other companies, part of the investment process is already established, based on the investment process, which is proven and evolved over a period of time. Fund managers have to follow the defined process of investment in such companies, along with implementing their own investment strategies.
Fund managers are humans; some are more experienced, whereas others are less experienced. Therefore, it is possible for them to make some mistakes, if the entire responsibility of the investment process is given to them.
So, companies with a defined and evolved investment process develop an added layer of safety and allow their Fund Managers to do their tasks vigilantly. In this process, the Fund Manager is able to concentrate well on the top-level activities.
Therefore, you should choose Mutual Fund Companies having a defined investment process.
Such companies are considered better.
A structured investment process often incorporates risk management frameworks that help safeguard investors’ capital during market downturns.A Mutual Fund Company must always be consistent in its investment strategy. Also, there are various schools of thought followed by different Mutual Fund companies, when it comes to their investment strategy.
It doesn’t matter, which investment strategy a Mutual Fund Company may choose, it should stick to ONE investment strategy and must not be tempted to acquire another investment strategy in the mid-way.
For example, some Mutual Fund companies follow the Market-Timing Strategy, it implies the ability to get into and out of sectors, assets or markets at the right time. Generally, they try to get into the sector when the market is low and then sell their assets when the market is high.
Other Mutual Fund Companies do not time the market and remain fully invested regardless of the market opportunity.
So, the core idea is that a Mutual Fund Company must stick to its originally adopted investment strategy and it should not be tempted to acquire the different investment strategies by seeing varying results produced by different Mutual Fund companies in the market.
Consistency in strategy also helps investors understand the fund’s risk profile better and align it with their own investment goals.
Debt funds are usually short-term investments. You should consider the points given above for choosing a good fund manager and a Mutual Fund Company to invest in. In addition to the points mentioned above, you should also consider the key ratios as applied to debt funds, as described below:
It refers to the weighted average time until all securities in a debt portfolio in a mutual fund get mature. The lower the average maturity; the better it is in terms of the interest rate risk and lower volatility.
The higher the average maturity of a debt fund, the longer it will take for each security to mature in the portfolio and vice-versa.
Before investing in debt funds, it is advisable to have a look at the average maturity of the fund. For example, if you want to invest in the debt fund for 2 years, then choose the fund with an average maturity of 2 years. Similarly, if you want to invest for 5 years, choose the fund with the average maturity of 5 years and so on.
It reflects the sensitivity of the debt security price when the scenario of the interest rate changes. Particularly this parameter helps in understanding the volatility of the fund. Lower the MD, lower the volatility.
It refers to the expected rate of returns anticipated on a debt portfolio if the investments are held until maturity. For example, if a fund has a YTM of 8.5% and an average maturity of 4 years, it means, the fund will give approx 8.5% returns if you remain invested for at least 4 years.
Apart from the above 3-factors, you should also consider the following points:
Additionally, investors should consider the fund’s portfolio diversification to reduce concentration risk within debt holdings.
Mutual Fund Taxation
Equity and debt funds have different ways of taxation, details of both funds are discussed below:
Taxation of Equity funds
If you redeem your investments before 12 months, there is a flat 20% Capital Gain tax on your gains.
Till FY 2017-18, Equity-oriented funds had no tax on long-term capital gains if you want to sell your funds after 12 months.
But things changed after the 2025 budget, now the 12.5% tax is applicable, if the gains are more than 1.25 Lakhs, for a holding period of more than 1 year. It is demonstrated in the table below:
| Holding Period | Taxation |
| Less than 1 year | Flat 20% Capital Gain tax |
| More than 1 year | 12.5% tax is applicable if the gains are more than |
Understanding equity mutual funds tax is essential for effective tax planning in your investment portfolio.
Taxation of Debt Funds
Gains are taxed as per your income tax slab irrespective of the holding period.
Debt funds offer a unique tax advantage. Unlike fixed deposits (FDs), where interest is taxed annually, debt funds are taxed only at the time of withdrawal and only on the amount withdrawn.
What is indexation?
Indexation means adjustment of gains with respect to inflation, that is, subtracting the impact of inflation on your returns and then paying taxes.
Here inflation is calculated based on the CII (Cost Inflation Index) provided by the income tax department each year.
Knowing debt mutual funds tax treatment helps you optimize returns on your fixed-income investments.
How the returns are calculated in a Mutual Fund?
By now you might want to know, how your returns on Mutual Fund investment are calculated!!
Well… there are various ways to calculate returns, which depend on the duration of the investment.
The various ways to calculate the returns are given below:
For more illustrations and examples on calculating Mutual Fund Returns, you can read this article on Calculating Mutual Fund returns.
You can use the calculator, shown below, to find your estimated Mutual Fund Returns.
In this calculator, you can choose the option:
So, how much returns you should expect from your Mutual Fund Scheme?
This short video will give you an estimate on what returns should you expect from your Mutual Fund scheme.
The consistent review of your mutual fund portfolio enables stable returns and easy accomplishment of targets. Remember the 4 simple tactics given below to review your Mutual Fund portfolio:
For more details, you can read this article on “When to Review your investment portfolio?”
Regular mutual fund portfolio review helps you rebalance and stay aligned with your financial goals.
We hope that this exhaustive post has provided you with enough clarity on Mutual Fund Investments.
If you have further queries related to the topics discussed in this post or specific to your investment, feel free to leave them below.
Also, to create your customized investment plan and utilize our best investment services; you can book a FREE Consultation call with us by clicking the link below:
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Hello sir,
I have just started my career and i was searching about mutual funds and found this and this article help me a lot in understanding about the Mutual funds.
Thank you :)