Mutual Funds

What is a Mutual Fund?

A mutual fund is an investment option in which money from multiple investors is pooled and invested in a diversified portfolio of equities, bonds, money market instruments, or exchange-traded funds (ETFs). These investments are managed by professional fund managers who make decisions on behalf of investors.

When you put money into a scheme, you receive units representing your overall fund share. The NAV (Net Asset Value) determines these units' value, which reflects the fund’s assets' per-unit value after deducting liabilities. NAV in Mutual Funds is calculated at the end of each trading day and is the price for buying or redeeming units.

Since they are market-linked, returns are not guaranteed but often have higher potential than traditional options like fixed deposits.

How is a Mutual Fund Set-up?

A mutual fund operates through a structured framework regulated by the Securities and Exchange Board of India (SEBI) to ensure investor protection and transparency. Here’s how it is typically set up and functions:

1. Role of the AMC

   Asset Management Companies (AMCs) or fund houses launch schemes, responsible for collecting investor money and managing it professionally. The AMC appoints fund managers who construct and manage portfolios to achieve the stated investment objectives of each scheme.

2. Distribution of Schemes

   To make schemes accessible, AMCs rely on intermediaries such as banks, advisers, and brokers. Each Mutual Fund Distributor is registered with the Association of Mutual Funds in India (AMFI) and issued an ARN Code (AMFI Registration Number), which certifies their authorisation to sell schemes. Investors should always verify the distributor’s ARN Code in Mutual Funds before investing.

3. Investor Services

   The smooth operation of mutual funds is supported by Registrar and Transfer Agents such as CAMS and KFintech. RTAs maintain investor records, process applications, and ensure proper servicing of accounts, acting as a link between the AMC and investors.

4. Unit Pricing and Transactions

   Applicable NAV depends on the Mutual Fund Cut Off Time and fund type. For liquid and overnight funds, the purchase cut-off is 1:30 PM, while redemptions use 3:00 PM. For all other schemes, both purchase and redemption cut-offs are 3:00 PM. From February 1, 2021, NAV is applied on a money-realisation basis (funds must actually be received).

5. Oversight and Regulation

   Every scheme charges an Expense Ratio in Mutual Funds, which covers management fees, administrative costs, and other operating expenses. It is calculated as follows: 

   Expense Ratio (%) = (Total Expenses ÷ Average AUM) × 100

   This charge is deducted from the fund’s assets and expressed as a percentage of its average assets under management (AUM), directly impacting investor returns.

6. Regulation

   SEBI and industry bodies such as the Association of Mutual Funds in India (AMFI) closely monitor mutual funds. This regulatory oversight ensures transparency, fairness, and investor protection across all schemes.

Key Benefits of Investing in Mutual Funds

Mutual funds have become a preferred choice for a growing number of investors because they combine accessibility, professional expertise, and transparency. Below are the key benefits that make mutual funds an attractive investment option:

• Diversification: Mutual funds pool money from several investors and invest across equities, debt instruments, money market securities, or a combination. This diversification spreads risk and reduces dependence on the performance of any single asset.

• Professional Management: Through the ecosystem of AMCs, fund managers, distributors, RTAs, and regulators, mutual funds enable investors to access diversified, professionally managed portfolios with clear rules, safeguards, and efficient operations.

• Liquidity: Most mutual fund schemes allow investors to buy or redeem units on any business day at the prevailing NAV in mutual funds. This feature provides quick access to money compared to traditional long-term investments.

• Affordability: Mutual funds typically have a low minimum investment requirement. Even small amounts invested regularly through Systematic Investment Plans (SIPs) can help build significant wealth over time, making them suitable for first-time and seasoned investors.

• Convenience and Flexibility: Features such as SIPs, Systematic Withdrawal Plan (SWPs), and switches between schemes provide systematic investment or withdrawal flexibility. This makes mutual funds convenient for both long-term planning and short-term needs.

• Transparency: Investors receive regular disclosures about fund performance, portfolio holdings, and expense ratios. This high level of transparency helps track investments and assess the value generated.

• Variety of Options: There is a wide range of schemes available, from debt funds and fixed income mutual funds to equity, hybrid, sector-specific, thematic funds, and even fund of funds. This variety allows investors to align investments with their risk appetite and financial goals.

• Tax Benefits: Certain schemes like Equity-Linked Savings Schemes (ELSS) offer tax deductions under Section 80C of the Income Tax Act, making them popular choices for investors seeking growth and tax efficiency.

• Balanced Asset Allocation: In hybrid and balanced funds, the fund manager manages the mix of equity and debt, ensuring that the portfolio maintains the right balance between growth and stability. Sub-categories like arbitrage funds within hybrids also help optimise returns while managing risk.

Classification of Mutual Fund Schemes

Mutual funds can be classified in several ways depending on their structure, investment objective, or style. Each category caters to different investor needs, levels of risk tolerance, and financial goals.

1. Based on Structure

   The structure of a mutual fund determines how investors can buy or sell units and if the scheme has a maturity period.

   Type of Fund	Details
   Open-ended Funds	These schemes have no fixed maturity and allow investors to buy or sell units anytime. Transactions are executed based on the daily NAV in mutual funds.
   Closed-ended Funds	Run for a specific tenure, usually three to five years. Subscriptions are allowed only during the New Fund Offer (NFO) period, after which units are listed on stock exchanges for trading.
   Interval Funds	A hybrid of open- and closed-ended structures. Purchases and redemptions are allowed only at set intervals, and the units are mandatorily listed on exchanges to provide liquidity.

2. Based on Investment Objective

   The investment objective defines a fund's goal: income generation, capital appreciation, or a mix of both.

   Type of Fund	Details
   Debt Funds	Debt funds invest mainly in bonds, debentures, and government securities, offering stability and regular income for conservative investors. From 1 April 2025, they are defined as schemes investing over 65% of proceeds in debt and money market instruments, or in fund-of-funds with a similar mix. Earlier, they were classified as funds with not more than 35% in domestic equities.
   Equity Funds	Invest in shares of companies across large-cap, mid-cap, and small-cap categories. A specialised variant is Contra Funds, which adopts a contrarian approach by investing in undervalued stocks.
   Hybrid Funds	Combine equity and debt in varying proportions. Sub-categories include Arbitrage Funds, which generate low-risk returns by exploiting market price differences. Hybrid funds offer a balance of stability and growth.
   Fund of Funds (FoFs)	A Fund of Funds invests in other mutual funds or ETFs instead of directly in securities, offering instant diversification across asset classes through a single scheme.
   Thematic Funds	Focus on specific themes such as infrastructure, ESG, or consumption. Thematic Funds are narrower in scope and may carry higher risk, but can generate strong gains when the chosen theme performs well.

3. Based on Investment Style

   The investment style indicates if the fund replicates a market index or actively seeks to outperform it.

   Type of Fund	Details
   Passive Funds	Replicate the performance of a market index like the Nifty 50 or Sensex. They involve no active stock-picking and usually carry a lower expense ratio in mutual funds. Examples include index funds and ETFs.
   Active Funds	Managed by professionals who actively select stocks and sectors to outperform benchmarks. This category covers diversified equity schemes, thematic funds, and specialised strategies such as contra funds.

Methods to Invest in Mutual Fund Schemes

Mutual funds offer two primary ways of investing. The choice depends on an investor’s financial capacity, goals, and risk preference. 

1. Through Lump Sum

   A lump sum investment means putting a large amount of money into a mutual fund scheme at one time. A Mutual Fund Calculator estimates returns on a one-time (lump sum) investment. Investors can see how their money may grow by entering the invested amount, expected rate of return, and tenure.

   • Suitable for investors who have surplus capital available.

   • The full amount is exposed to market movements from the beginning, which can amplify both gains and risks.

   • Commonly chosen when investors receive bonuses, settlements, or inheritances and want to deploy the funds immediately.

2. Through a Systematic Investment Plan (SIP)

   A Systematic Investment Plan (SIP) allows investors to contribute a fixed amount at regular intervals, such as monthly or quarterly. A SIP Calculator projects the value of the regular contributions. Investors can estimate the potential wealth created over time by entering the SIP amount, duration, and expected return.

   • Encourages disciplined saving and consistent investing.

   • Helps manage volatility through rupee cost averaging, as more units are bought when prices are low and fewer when prices are high.

   • Takes advantage of compounding, making it effective for long-term wealth creation.

   • Suitable for depositors who prefer building a portfolio gradually rather than investing a lump sum.

Mutual Fund Charges

Mutual funds are professionally managed investment instruments, and like any financial product, they involve certain costs. These Mutual Fund Charges are regulated by SEBI and disclosed transparently so investors understand how they impact net returns.

1. Exit Load

   • Exit load is a fee charged when units are redeemed within a scheme’s specified holding period. If you redeem ₹1,00,000 from an equity fund within 6 months at a 1% exit load, you receive ₹99,000.

   • It discourages premature withdrawals and helps fund houses manage liquidity.

   • SIP withdrawals follow the same rules, applied on a first-in-first-out (FIFO) basis.

   Typical exit loads by category:

   • Equity Funds: Usually 1% if redeemed within 1 year.

   • Debt Funds: Around 0.5% if redeemed within 6 months, though large funds may go lower.

   • Liquid Funds: Graded exit load for redemptions within 7 days (per SEBI’s 2019 circular).

   • Overnight Funds: No exit load.

2. Expense Ratio

   • The expense ratio in mutual funds is the annual fee an AMC charges to cover management, administration, marketing, and distribution costs. If expenses are ₹12 crore on an AUM of ₹600 crore, the TER is 2%.

   • Direct plans have lower expense ratios as they exclude distributor commissions.

   Regulatory notes:

   • SEBI earlier allowed an additional 0.30% TER for inflows from cities beyond the top 30 (B30), but this was kept on hold from 1 March 2023.

   • Fund houses can levy only up to 0.05% additional TER under certain conditions if no exit load is charged.

3. Securities Transaction Tax (STT)

   • A statutory tax of 0.001% applies on redemption of equity-oriented mutual funds, including equity-heavy hybrid funds (≥65% equity).

   • STT does not apply to debt-oriented funds.

   • Although small in percentage terms, it directly reduces redemption proceeds.

4. Switching Fees

   • Switching between schemes in the same AMC is treated as redemption plus a fresh purchase.

   • While AMCs generally do not levy a switching fee, exit load and capital gains tax may apply.

   • Some platforms or schemes may charge a nominal fee of 0.25%–1%.

5. Advisor Fees / One-time Charges

   • Investors using Registered Investment Advisers (RIAs) may pay fees regulated by SEBI (fixed fee or AUA-based model).

   • Mutual fund distributors are typically compensated through commissions already included in the expense ratio, not charged separately to investors.

   • Direct Plans: No distributor commissions, hence lower costs.

   • Regular Plans: Advisor commissions included in TER.

6. Recurring Charges

   • These are ongoing costs deducted annually from the scheme’s assets.

   • They include fund management, administration, and operational expenses.

7. Management Fee

   • This fee compensates the fund manager and team for portfolio management and decision-making.

   • Varies by AMC and scheme type.

   • It is included within the expense ratio.

8. Goods and Services Tax (GST)

   • GST of 18% is applied on investment management and advisory services.

   • This is accounted for within the TER and reduces overall returns.

9. Account Maintenance Fees

   • AMCs do not typically charge account maintenance separately, as these costs are covered within the TER.

   • However, some investment platforms may impose subscription or service fees for premium tools or reports outside SEBI’s standard mutual fund framework.

Mutual Funds vs Other Investment Products

Mutual funds are often compared with other investment options available to Indian investors. While each product serves a purpose, they differ in structure, risk, returns, and suitability. The following comparisons highlight the key distinctions:

1. Gold Mutual Funds vs Gold ETFs

   Key differences between Gold Mutual Funds vs Gold ETF include:

   Aspect	Gold ETF	Gold Mutual Fund
   Structure	Traded like stocks on the exchange; invests directly in gold and mirrors its price.	Fund-of-funds that invests mainly in Gold ETFs, managed by an AMC.
   Account Requirement	Requires a Demat and trading account through a broker.	No Demat required; can be purchased directly from AMCs or online platforms.
   SIP Facility	SIP possible but less smooth, may involve brokerage charges.	Offers standard SIP facility with ease and no brokerage.
   Liquidity	Real-time liquidity with price changes during trading hours.	Liquidity based on NAV, calculated once a day.
   Expense Ratio	Lower expense ratio; cost-efficient.	Higher due to layered FoF and ETF expenses.
   Pricing	Price changes intraday with market value.	Price fixed by daily NAV declared at day-end.
   Minimum Investment	One unit usually equals 1 gram of gold.	SIPs can start with as little as ₹100–₹500.
   Additional Costs	Brokerage charges apply on buy/sell.	May include exit loads and fund management fees.
   Best Suited For	DIY investors, traders, cost-conscious investors, or those planning a physical gold conversion.	First-time investors, SIP investors, those without Demat accounts, and those seeking convenience.

2. Mutual Funds vs Post Office Schemes

   Mutual Funds vs Post Office comparison at a glance:

   Aspect	Mutual Funds	Post Office Schemes
   Nature of Product	Investment products pooling money into equities, debt, or hybrid securities.	Government-backed small savings schemes with fixed and assured returns (revised quarterly).
   Returns	Market-driven and vary based on asset performance and conditions.	Fixed and revised quarterly by the Government of India.
   Risk	Carry market volatility risk; returns not guaranteed.	Very low risk, with capital and interest backed by the Government.
   Liquidity	Most allow easy redemption, except closed-ended funds and ELSS (3-year lock-in).	Limited liquidity; schemes like NSC, PPF, and SSA have lock-ins, with penalties for premature withdrawals.
   Minimum/Maximum Investment	SIPs usually start at ₹500; some AMCs allow sachet SIPs from ₹100–₹250. No upper cap for most mutual funds.	Limits vary by scheme (e.g., PPF ₹1.5 lakh/year, SCSS ₹30 lakh, SSA ₹1.5 lakh/year).
   Taxation	Equity funds: Long term capital gain tax is 12.5% above ₹1.25 lakh; STCG at 20% (post 23 July 2024). Funds not meeting equity-oriented criteria (i.e., ‘specified’ debt MFs, generally >65% in debt/money-market, effective Apr 1, 2025) are taxed as per the slab for units bought on/after Apr 1, 2023. ELSS: eligible for Section 80C (₹1.5 lakh).	PPF & SSA: Full EEE status.  NSC & 5-year TD: Section 80C benefit, interest taxable (NSC interest reinvested except final year). SCSS: Section 80C eligible, interest fully taxable, TDS above ₹1,00,000 (from 1 Apr 2025).
   Regulation / Management	Regulated by SEBI and managed by AMCs.	Managed and guaranteed by the Government of India through the Department of Posts and the Ministry of Finance.

3. NPS vs Mutual Funds

   NPS vs Mutual Funds distinction broadly covers the following aspects:

   Aspect	NPS	Mutual Funds
   Objective	Designed specifically to help individuals build a retirement corpus.	Can be used for short-term, medium-term, or long-term goals depending on the type of fund.
   Investment Options	Invests mainly in equities, government bonds, corporate debt, and alternative assets.	Offers a wide range, including equity, debt, hybrid, thematic, and international funds.
   Lock-in Period	Tier-I accounts are locked in until age 60.	Most funds have no lock-in. ELSS funds have a 3-year lock-in.
   Regulator	Regulated by the Pension Fund Regulatory and Development Authority (PFRDA).	Regulated by the Securities and Exchange Board of India (SEBI).
   Risk Profile	Lower risk, as equity exposure is capped and reduces as the investor ages.	Risk depends on the type of fund. Equity funds are more volatile; debt funds are more stable.
   Volatility	Fewer and more stable fluctuations over time.	It can be highly volatile in the case of equity funds.
   Withdrawals and Taxation	At maturity, 60% of the corpus can be withdrawn tax-free; 40% must be used to purchase an annuity.	Units can be redeemed anytime (subject to exit loads). Tax depends on fund type and holding period.

4. Mutual Funds vs Equities

   Let’s now cover the Mutual Funds vs Equities comparison at a glance:

   Aspect	Mutual Funds	Equities (Stocks)
   Definition	A pool of money from multiple investors, managed by a professional, and invested across stocks, bonds, or hybrids.	Direct purchase of shares of a single company, making the investor a part-owner.
   Risk to Returns	Risk varies by type: equity funds are higher risk, hybrid funds moderate, and debt funds lower. Diversification helps balance returns.	Potential for very high returns, but risk is concentrated and much higher.
   Control Over Investment	Limited control; the fund manager decides where to invest.	Full control; the investor chooses the company, entry, and exit points.
   Diversification	High, as money is spread across many companies or sectors.	Low, since investment depends on one or a few companies chosen.
   Management	Professionally managed by qualified fund managers.	Self-managed; the investor makes all decisions.
   Research Effort	Low, as the AMC research team handles analysis.	High, since the investor must study companies and markets directly.
   Liquidity	Units redeemed at NAV; proceeds credited within 3 working days for most schemes; within 5 working days if the scheme invests ≥80% in permitted overseas assets. ELSS has a 3-year lock-in.	Shares are traded on exchanges during market hours. The settlement cycle is T+1, with limited T+0 being rolled out.
   Return Potential	Moderate; generally stable over the long term but less likely to deliver extreme gains than direct stocks.	High; some stocks can generate outsized returns, though losses can also be substantial.
   Risk	Spread across multiple assets, reducing overall risk.	Concentrated in specific companies, leading to higher exposure and risk.

5. SIP vs Recurring Deposit

   Systematic Investment Plans (SIPs) and Recurring Deposits (RDs) are popular ways of regularly investing small amounts. The key distinction between SIP vs Recurring Deposit is as follows:

   Aspect	SIP	RD
   Nature of Investment	Invests in mutual funds such as equity, debt, or hybrid schemes.	Fixed monthly deposit maintained with a bank or post office.
   Tenure	Flexible duration; no fixed maturity except ELSS or close-ended funds.	Fixed tenure, usually between 6 months and 10 years (bank RDs).
   Returns	Market-linked outcomes can be higher or lower than fixed products and are not guaranteed.	Fixed interest rates, generally 2.75%–7.25%.
   Risk	Market-dependent; carries moderate to high risk.	Very low risk; guaranteed principal and assured interest.
   Tax Treatment	Capital gains tax applies. ELSS offers Section 80C benefits.	Interest taxed as per investor’s income slab; TDS may apply if threshold exceeded.
   Liquidity	High; redemption possible anytime (exit load may apply in some cases).	Moderate; premature withdrawals attract penalties.
   Compounding	Strong long-term compounding via reinvestment of returns.	Quarterly compounding ensures predictable growth.
   Flexibility	Flexible to start, pause, change amount, or modify frequency.	Fixed monthly deposit amount with little or no flexibility.
   Suitability	Ideal for wealth creation and moderate-to-high risk investors.	Suitable for conservative investors with short-term savings goals.

How to Choose the Best Mutual Fund Scheme?

Selecting a mutual fund scheme requires a structured evaluation of personal financial needs and fund-specific factors. Let’s understand all these factors in a broader way as follows:

1. Risk Appetite

   The first consideration is assessing your comfort with risk. High Risk vs Low Risk Mutual Funds behave differently. Equity funds can deliver higher long-term returns but carry more volatility, while debt funds provide relative stability with modest growth. Aligning the fund type with your risk tolerance ensures you remain invested through market fluctuations.

2. Investment Goals

   Your financial objective should determine the category of scheme. For example, retirement planning may require a long-term equity or hybrid fund, whereas short-term goals may align better with debt funds. Before investing, it is useful to compare Mutual Funds across categories to identify which suits your objectives.

3. Investment Horizon

   Mutual funds are generally more effective for medium- to long-term investing. Reviewing the Rolling Returns of Mutual Funds provides a clearer picture of consistency over time, rather than focusing only on short-term results. A longer investment horizon helps balance market volatility, particularly for equity schemes.

4. Fund Manager and Fund House Track Record

   The experience of the fund manager is an important factor in scheme performance. Evaluate the manager’s investment style, tenure in managing similar schemes, and past performance across different market cycles. The credibility of the fund house also matters, with aspects such as philosophy, governance, and process requiring attention. Risk metrics such as Standard Deviation in Mutual Funds can further indicate how stable returns have been relative to peers.

5. Monitoring and Tracking Investments

   Once invested, it is important to track performance regularly. Investors can check Mutual Fund Status with Folio Number through official portals, which provide scheme-specific updates. Regular monitoring ensures that investments align with financial goals and enables timely adjustments. In addition, they can track all Mutual Funds with PAN using platforms such as CAMS, KFintech, or MF Central, allowing a consolidated view of their portfolio. 

Key Takeaways

Mutual funds provide investors with diversification, liquidity, and professional management while being regulated by SEBI. Returns are market-linked and influenced by the risk category, fund type, and investment horizon. Tools such as folio number tracking and PAN-based consolidation help monitor investments effectively. Taxation differs across schemes: equity funds attract long-term capital gain tax of 12.5% above ₹1.25 lakh (from 23 July 2024), while, post-April 2023, debt fund gains are taxed as per the income slab. Expense ratios, exit loads, and other charges must be reviewed carefully, as they directly affect net returns. Investors looking to build disciplined investment habits can also start SIP in best mutual fund plans in India.