1. What are Mutual Funds (MF) and How do they Work ?
Mutual funds are a way for a group of people to pool their money together to invest in a variety of assets like stocks, bonds, or other securities.
These funds are managed by professional money managers [ known as FUND MANAGERS] who make investment decisions on behalf of the investors.
Each investor owns shares in the mutual fund, and the value of those shares is determined by the performance of the underlying assets.
When you invest in a mutual fund, your money is combined with the money of other investors. The Fund Manager then uses this pool of money to buy a mix of investments according to the fund’s objectives.
For example, if you invest in an equity mutual fund, your money might be used to buy stocks of different companies.
As the value of the investments in the fund goes up or down, so does the value of your shares. If the investments perform well, the value of your shares increases, and you may earn dividends or interest payments.
Conversely, if the investments perform poorly, the value of your shares may decrease.
1a. Net Asset Value (NAV) in Mutual Funds
The Net Asset Value (NAV) is the price of one unit of a mutual fund. It is calculated by taking the total value of the fund’s assets (like stocks, bonds, cash) minus its liabilities, and then dividing it by the number of units issued to investors.
In simple terms, if you buy a mutual fund, NAV tells you how much one unit of that fund is worth on a given day. For example, if a fund’s NAV is ₹20 and you invest ₹2,000, you get 100 units.
As the value of the investments inside the fund rises or falls, the NAV also changes.
1b. Role of the Fund Manager
A fund manager is the professional who manages the mutual fund on behalf of investors. Their job is to decide where to invest the pooled money – whether in stocks, bonds, gold, or other assets – based on the fund’s objectives.
They research markets, analyse companies, track performance, and make buy/sell decisions to maximize returns while managing risks. In short, the fund manager is like the “captain of the ship” steering the fund towards its financial goals.
2. Benefits of investing in Mutual Funds.
Mutual funds are one of the simplest and most effective ways to grow your money. They bring together the power of professional management, diversification, and convenience in a single product.
1. Diversification
Your money is spread across many stocks, bonds, or securities, reducing the risk of “all eggs in one basket.”
2. Professional Management
A qualified fund manager makes investment decisions on your behalf, saving you time and effort.
3. Affordable & Flexible
You can start investing with as little as ₹500 through SIPs, and add more as your income grows.
4. Liquidity
Most mutual funds allow you to redeem your investment anytime, making it easier to access your money.
5. Goal-Based Investing
Different funds suit different goals — wealth creation, regular income, short-term needs, or tax saving.
6. Transparency & Regulation
All mutual funds in India are regulated by SEBI, ensuring investor protection and clear disclosure of costs and performance.
3. Types of Mutual Funds
| Type of Scheme | Simple Description |
| Equity Schemes | Invest mainly in shares of companies. Aim for high growth over long term. Risk is higher but suitable for wealth creation goals (5+ years). |
| Debt Schemes | Invest in bonds, deposits, and government securities. Provide stable income with lower risk compared to equity. Suitable for short- to medium-term goals. |
| Hybrid Schemes | Mix of equity + debt in varying proportions. Balance between growth and safety. Good for medium-term investors or those unsure where to begin. |
| Solution Oriented Schemes | Goal-based funds designed for specific needs: Retirement Funds (long-term wealth + retirement income) and Children’s Funds (education goals). They have Lock In Periods |
| Other Schemes | Index Funds & ETFs: Copy a market index (like Nifty/Sensex) for low-cost, passive investing. Fund of Funds (FoF): Invests in other mutual funds, giving instant diversification. |
3a. Other Types of Mutual Funds :
3ab. Index Funds
An Index Fund is a type of mutual fund that builds its portfolio to exactly replicate a specific market index (like Nifty 50 or Sensex). The securities and their weights in the portfolio are the same as the chosen index.
Since the fund manager does not try to outperform the market but only to match it, index funds are passively managed.
This makes them transparent, cost-effective, and simple for investors who want returns similar to the index they follow.
| Feature | Explanation |
| Definition | Index funds replicate a specific market index (e.g., Nifty 50, Sensex). |
| Portfolio Composition | Securities and their weights are identical to the index being tracked. |
| Fund Manager’s Role | Does not actively pick or rebalance based on views; only makes minor adjustments to stay in line with the index. |
| Management Style | Passively managed – no attempt to beat the market, just to match the index performance. |
| Return & Risk | Offers returns and risk similar to the index being tracked. |
| Cost Efficiency | Expense ratio capped at 1.5%, making it cheaper than actively managed funds. |
| Transparency | Investors always know which stocks are in the fund, since the index composition is public. |
| Suitability | Ideal for investors who want simple, low-cost, market-matching returns. |
3ac. Exchange Traded Funds (ETFs)
An Exchange Traded Fund (ETF) is a type of mutual fund that tracks a market index (like Nifty 50 or Sensex) but trades on stock exchanges6. International Funds
International Funds allow Indian investors to diversify globally by investing in assets outside India.
| Feature | Explanation |
| Definition | Mutual funds that invest in international markets, giving exposure beyond India. |
| Portfolio Composition | May include: – Equity of companies listed abroad – ADRs/GDRs of Indian companies – Debt of foreign companies – ETFs or index funds of other countries – Units of actively managed overseas funds. |
| Indian Exposure | Can hold a portion in Indian equity/debt and money market instruments for liquidity management. |
| Benefits | – Diversification across geographies – Access to companies not listed in India – Investment in global leaders – Potential lower correlation with Indian markets. |
| Risks | – Political and macroeconomic risks in foreign markets – Currency exchange rate fluctuations – Changes in foreign investment policies. |
| Tax Treatment (India) | Treated as non-equity oriented mutual funds for taxation purposes. |
| Suitability | Best for investors seeking global diversification and willing to accept currency and geopolitical risks. |
3ad. Fund of Funds (FoF)
A Fund of Funds (FoF) is a type of mutual fund that doesn’t invest directly in stocks, bonds, or securities.
Instead, it invests in units of other mutual fund schemes, either within the same fund house or across different ones.
| Feature | Explanation |
| Definition | A mutual fund scheme that invests in units of other mutual funds rather than directly in securities. |
| Investment Approach | Underlying funds are selected based on the FoF’s investment objective (e.g., equity, debt, international, or multi-asset). |
| Expense Structure | Two levels of expenses: 1. The expense ratio of the underlying funds. 2. The expense ratio of the FoF itself. Regulations limit the combined expenses. |
| Benefits | – Easy way to access multiple funds through one scheme – Provides built-in diversification – Can include global, thematic, or asset-allocated exposure. |
| Drawbacks | – Double layer of expenses reduces net returns – Performance depends entirely on selected underlying funds. |
| Suitability | Ideal for investors seeking diversification across fund categories or geographies without actively choosing multiple schemes. |
4. How to Start Investing in Mutual Funds ?
| Step | What to Do | Why It Matters |
| Define Your Goal | Decide the purpose – wealth creation, tax saving, retirement, child’s education, etc. | Clear goals help in choosing the right type of fund. |
| Choose the Right Fund Type | Equity for long-term growth, Debt for stability, Hybrid for balance, ELSS for tax savings. | Different funds serve different needs and risk Levels. |
| Complete KYC | Submit documents online or offline for Know Your Customer (KYC). | Mandatory one-time process before investing. |
| Select Investment Method | Pick SIP (Systematic Investment Plan) for regular investing or Lump Sum if you have surplus money. | SIP builds discipline, lump sum works if funds are available. |
| Open an Account | Invest directly with fund houses, through a distributor/advisor, or via online platforms. | Multiple options make it convenient for beginners. |
| Start and Monitor | Begin your investment, review once a year, and stay consistent. | Helps you stay on track with your goals and adjust if needed. |
5. Choosing the Right Investment Method
Once you’ve understood the process of starting your mutual fund journey — from setting goals, completing KYC, and selecting the right fund — the next important step is to decide how you want to invest your money.
Mutual funds give you flexibility: you can invest a large amount at once, or spread it out over time through smaller, regular contributions.
Each method has its own benefits and risks, and the choice often depends on your financial situation, goals, and comfort with market ups and downs.
This brings us to the two most common approaches: Systematic Investment Plan (SIP) and Lump Sum Investment.
| Method | How It Works | Example & Outcome (Illustration) | Key Advantages |
| SIP (Systematic Investment Plan) | Money goes in regularly at different market levels. When markets fall, you buy more units; when markets rise, you buy fewer. This reduces timing risk. | You invest ₹5,000 every month for 5 years (₹3,00,000 total). At ~12% annualised return, your money may grow to around ₹4.2 lakh. Returns are smoother because of staggered entry. | ✅ Rupee Cost Averaging – lowers risk of wrong timing. ✅ Affordability – start with as little as ₹500 per month. ✅ Discipline – builds a regular saving & investing habit. |
| Lump Sum Investment | All money is invested on one day. If markets rise right after, you gain fully; if they fall, you face immediate losses. | You invest ₹3,00,000 all at once and stay invested for 5 years. At ~12% annualised return, this may grow to ₹5.3 lakh. But if markets correct soon after entry, your returns could be much lower. | ✅ Good when you already have a big amount. ❌ Risky if invested at the wrong time. ❌ Needs strong patience during volatility. |
6. How to Choose the Right Mutual Fund
Choosing the right mutual fund becomes easy when you match the fund to your goals, time horizon, and risk comfort. Instead of chasing “best funds,” focus on what suits you.
1. Define Your Goal :
Are you investing for short-term needs (1–3 years), medium-term (3–5 years), or long-term (5+ years like retirement or children’s education)?
2. Match Fund Type to Goal :
- Equity Funds → Best for long-term wealth creation.
- Debt Funds → Safer, for short-term or emergency needs.
- Hybrid Funds → Balanced option for medium-term
- goals.
- ELSS Funds → For tax-saving under 80C.
3. Check Basics :
Look at the fund’s track record, expense ratio, and consistency (not just past returns).
4. Know Your Risk Appetite :
Conservative investors may prefer debt or hybrid; aggressive investors may opt for equity.
5. Stay Aligned :
Pick a fund that fits your plan and stick with it; don’t switch too often based on short-term market moves.
7. Common Mutual Fund Mistakes Beginners Should Avoid
Investing in mutual funds is one of the best ways for beginners to enter the world of markets. But just because it’s “easier” doesn’t mean mistakes don’t happen.
Below are seven common pitfalls new investors often fall into — and how to avoid them.
1. Investing Without a Clear Goal
Many new investors start investing just because they read it’s a good idea — without linking it to a specific purpose like retirement, child’s education, or buying a home. Without a goal, it’s harder to choose the right fund type, time horizon, or risk level — and you’re more likely to abandon the plan when markets get tough
2. Chasing Past Performance
It’s tempting to pick the “top fund of last year.” But past returns aren’t a guarantee of future success. Markets change, fund strategies evolve, and what worked in one cycle may underperform in another.
3. Letting Emotions Drive Decisions
When markets fall, many panic and redeem. When markets soar, they invest more, often at peaks. Such behaviour undermines long-term investing.
4. Poor Diversification or Over-Diversification
- Under-diversification: putting all your money into one fund, sector, or asset type. If that part suffers, your whole portfolio suffers.
- Over-diversification (“diworsification”): having too many funds, diluting your gains and making monitoring difficult.
5. Ignoring Costs, Fees & Expense Ratios
Even a small difference in expense ratio can erode long-term returns. Some funds carry hidden costs (entry/exit loads, transaction fees).
6. Neglecting Periodic Review & Rebalancing
Markets don’t move evenly. Over time, your portfolio may drift away from your original risk mix. Also, life goals and risk appetite change. Many beginners “set and forget” — which can lead to mismatch later.
7. Ignoring Risk Profile & Time Horizon
Many beginners invest in aggressive equity funds even when their goals are near (1–3 years) or when they cannot stomach volatility. This mismatch causes stress and may lead to premature withdrawals.
Avoiding these mistakes doesn’t require deep finance knowledge — it requires discipline, patience, and a bit of awareness. A sound investment journey begins with clarity (goals + risk), consistency (regular SIPs), and periodic tuning (review + rebalance).
8. Understanding Taxation of Mutual Funds
Just like any other investment, the returns you earn from mutual funds are subject to taxation.
tax treatment depends on the type of mutual fund (equity, debt, hybrid, gold, international, etc.) and how long you stay invested.
Knowing the basics of mutual fund taxation helps you plan better, avoid surprises at redemption, and choose the right funds based on your goals.
| Type of Mutual Fund | New Rule (From July 23, 2024) |
| Equity Mutual Funds | STCG: 20% + cess LTCG: 12.5% (above ₹1.25L exemption) |
| Debt Mutual Funds | Purchased on or after Apr 1, 2023: Slab rate regardless of holding period |
| Hybrid Mutual Funds | Same treatment based on equity %: – Equity ≥ 65%: Equity < 65%: Slab rate (like debt funds) |
| Gold Mutual Funds | Taxed as per slab rate |
| International Mutual Funds | Taxed as per slab rate |
| Fund of Funds (FoFs) | Equity – like FoFs → Taxed like Equity Mutual Funds Debt – like FoFs Others → Slab rate |
| ETFs (non-equity based) | STCG: Slab rate (if sold ≤ 1 year) LTCG: 12.5% (if sold > 1 year, no indexation) |
9. How to Review & Rebalance Your Mutual Fund Portfolio
Investing in mutual funds is not a one-time activity — it needs periodic review to stay aligned with your financial goals. Markets change, your goals evolve, and risk levels shift over time. That’s why reviewing and rebalancing is essential.
1. Review Regularly
Check your portfolio at least once a year. Look at:
- Performance vs Benchmark: Is your fund consistently underperforming?
- Fund Category Fit: Does it still match your goal (equity for long-term, debt for short-term)?
- Costs & Changes: Any increase in expense ratio, change in fund manager, or strategy shift?
2. Rebalance When Needed
Over time, market movements can tilt your allocation (e.g., equity growing much larger than debt).
Rebalancing means bringing your portfolio back to the original mix.
- If Equity is too high: Shift some money to debt to reduce risk.
- If Equity is too low: Add to equity to maintain long-term growth potential.
3. Stay Goal-Focused
Don’t rebalance just because markets are volatile.
Do it only if your asset mix has moved significantly (say 5–10%) away from your plan, or when your goal timeline is nearing.
