Know more about Mutual funds

Invest Wisely: An Introduction to Mutual Funds

Over the past decade, Indian investors have increasingly turned to mutual funds to save for retirement and other financial goals. Mutual funds can offer the advantages of diversification and professional management. But, as with other investment choices, investing in mutual funds involves risk and fees and taxes will diminish a fund's returns. It pays to understand both the upsides and the downsides of mutual fund investing and how to choose products that match your goals and tolerance for risk.

This section explains the basics of mutual fund investing - how mutual funds work, what factors to consider before investing, and how to avoid common pitfalls.

Key Points to Remember

  • Mutual funds are not guaranteed or insured by government agency - even if you buy through a bank and the fund carries the bank's name. You can lose money investing in mutual funds.

  • Past performance is not a reliable indicator of future performance. So don't be dazzled by last year's high returns. But past performance can help you assess a fund's volatility over time.

  • All mutual funds have costs that lower your investment returns

How Mutual Funds Work?

What They Are

A mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments. The combined holdings a mutual fund owns are known as its portfolio. Each share represents an investor's proportionate ownership of the fund's holdings and the income those holdings generate. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:


There are many entities involved and the diagram below illustrates the organisational set up of a mutual fund:


Every investment has advantages and disadvantages. But it's important to remember that features that matter to one investor may not be important to you. Whether any particular feature is an advantage for you will depend on your unique circumstances. For some investors, mutual funds provide an attractive investment choice because they generally offer the following features:

  • Professional Management - Professional money managers research, select, and monitor the performance of the securities the fund purchases.

  • Diversification - Diversification is an investing strategy that can be neatly summed up as "Don't put all your eggs in one basket." Spreading your investments across a wide range of companies and industry sectors can help lower your risk if a company or sector fails. Some investors find it easier to achieve diversification through ownership of mutual funds rather than through ownership of individual stocks or bonds.

  • Affordability - Some mutual funds accommodate investors who don't have a lot of money to invest by setting relatively low amounts for initial purchases, subsequent monthly purchases, or both.

  • Liquidity - Mutual fund investors can readily redeem their shares at the current NAV - plus any fees and charges assessed on redemption - at any time.


But mutual funds also have features that some investors might view as disadvantages, such as:

  • Costs Despite Negative Returns - Investors must pay sales charges, annual fees, and other expenses regardless of how the fund performs. And, depending on the timing of their investment, investors may also have to pay taxes on any capital gains distribution they receive - even if the fund went on to perform poorly after they bought shares.

  • Lack of Control - Investors typically cannot ascertain the exact make-up of a fund's portfolio at any given time, nor can they directly influence which securities the fund manager buys and sells or the timing of those trades.

  • Price Uncertainty - With an individual stock, you can obtain real-time (or close to real-time) pricing information with relative ease by checking financial websites or by calling your broker. You can also monitor how a stock's price changes from hour to hour - or even second to second. By contrast, with a mutual fund, the price at which you purchase or redeem shares will typically depend on the fund's NAV, which the fund might not calculate until many hours after you've placed your order. In general, mutual funds must calculate their NAV at least once every business day.


    By Structure
    • Open - Ended Schemes
    • Close - Ended Schemes
    • Interval Schemes

    By Investment Objective
    • Growth Schemes
    • Income Schemes
    • Balanced Schemes
    • Money Market Schemes

    Other Schemes
    • Tax Saving Schemes
    • Special Schemes
      • Index Schemes
      • Sector Specfic Schemes

This section contains comprehensive learning on the concept, execution, governance and benefits of Mutual Funds in India . For investors with basic finance knowledge and who prefer a quick reckoner, the Frequently Asked Questions (FAQs) will be an ideal option. 

As part of its role in governing financial services Securities and Exchange Board of India (SEBI) and Association of Mutual Funds of India (AMFI) publish their own education material on mutual funds - the quick links above will take you to their websites.