What is a Mutual Fund?

A Mutual Fund What is a Mutual Fund? A Mutual Fund pools money from multiple investors with a shared financial goal. It is managed by Fund managers who invest in a diversified mix of stocks, bonds, and other assets. It's a simple and transparent way to grow wealth, regulated by SEBI for investor protection.

Tax Efficient | Diversified | Low Cost

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Benefits of Mutual Funds

Professionally Managed

Mutual funds are handled by experienced fund managers with extensive knowledge of financial markets.

Tax Efficiency

Hybrid funds are taxed like equity funds, making them a tax-efficient way to add debt to your portfolio. ELSS funds also offer benefits of up to ₹1.5 lakh/year under Section 80C.

Cost-Efficient & Hassle-Free

MFs offer a low-cost investment approach. Key decisions like asset allocation and security selection are managed by experts, making investing simple.

Regulated

Mutual funds are regulated by the Securities and Exchange Board of India (SEBI) which enforces high standards of transparency and investor protection.

Diversified

Mutual funds invest across various sectors and asset classes, reducing the risk associated with individual investments.

Type of Mutual Funds

Equity Funds

Equity funds mainly invest in stocks of different companies, making investors partial owners of those companies when they invest in such funds.

Debt Funds

Debt Mutual Funds invest in fixed-income securities such as government bonds, corporate bonds, treasury bills, and other money market instruments.

Hybrid Funds

Hybrid funds are a combination of equity and debt investments. The blend of these asset classes varies based on the fund’s investment goals.

SIP V/S Lumspsum Investments

Feature SIP (Systematic Investment Plan) Lumpsum Investment
Starting Point You can begin investing with as little as ₹500 per month. Requires a large sum of money to start.
Risk Exposure Starting small reduces risk; even if mistakes happen early, the loss is limited. High risk if markets fall soon after investing, especially during volatile periods.
Market Timing No need to time the market – investments are spread out, averaging the cost over time. Success depends heavily on timing the market correctly.
Flexibility You can increase, pause, or stop your SIP anytime. Once invested, funds are locked in unless redeemed or switched.
Financial Discipline SIPs auto-debit from your bank account, helping you avoid impulsive spending and build good habits. No built-in structure to enforce discipline; requires self-control.
Who Should Choose Ideal for beginners and salaried individuals looking for long-term growth. Better suited for seasoned investors with strong risk appetite and market knowledge.

Basic Mutual Fund terminology

Net Asset Value (NAV)

When you invest in a mutual fund scheme, you receive units of the scheme. The price of each unit is called net asset value or NAV. As the price of the underlying securities (stocks, bonds, etc.) of the scheme increases or decreases, the NAV also increases or decreases.

Exit Load

Exit load is the charge levied when an investor redeems or sells their mutual fund units within a defined period. This discourages investors from selling their funds before holding them for a suitable time. Exit loads vary from one fund to another, and not all funds impose an exit load.

Total Expense Ratio (TER)

Mutual funds charge their investors for helping them invest their money in the financial markets. This charge is known as the Total Expense Ratio or, simply, expense ratio. The expense ratio is deducted from your investments regularly. So, the lower the expense ratio of a scheme, the better it is for you.

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F.A.Q

  • When were Mutual Funds introduced in India?

    Mutual funds in India began in 1963 with the Unit Trust of India (UTI), backed by the Government of India and RBI. The first scheme, US-64, launched in 1964, gained immense popularity. In 1987, public sector banks and institutions entered the industry, with SBI launching the first non-UTI fund. The 1991 economic liberalization allowed private players, increasing competition and innovation. SEBI, established in 1992, became the industry regulator. By September 2023, the industry’s AUM had grown to ₹46.58 trillion, with 44 AMCs operating in the market.

  • NAV (Net Asset Value) is the per-unit price of a mutual fund, calculated as: NAV = (Total Assets - Total Liabilities) / Total Number of Outstanding Units For example, if a fund has ₹10,00,000 in assets, ₹50,000 in liabilities, and 1,00,000 units, the NAV would be ₹9.5. NAV is updated daily based on the closing prices of the fund’s holdings

  • An AMC manages mutual fund schemes by pooling investor money and investing in various securities. Fund managers make investment decisions, handle compliance, and track fund performance. AMCs charge an expense ratio for management and operational costs. They are regulated by SEBI to ensure transparency. Top AMCs include SBI MF, ICICI MF, HDFC MF, and Axis MF.

  • The expense ratio is the annual cost of managing a fund, expressed as a percentage of AUM. For example, a 1.5% expense ratio means ₹1.5 is charged annually per ₹100 invested. SEBI sets limits: equity funds can charge up to 2.25%, while debt funds have a 2.0% cap. A lower expense ratio helps maximize investor returns.

    • Absolute Return: Simple percentage change in NAV over time.
    • CAGR (Compound Annual Growth Rate): Annualized return accounting for time.
    • TWRR (Time-Weighted Rate of Return): Adjusts for multiple cash flows but ignores size.
    • XIRR (Extended Internal Rate of Return): Considers both cash flow timing and size, offering the most comprehensive measure.

  • Exit load is a fee charged if investors redeem units before a specified period. For example, a 1% exit load on a ₹10,000 redemption means a ₹100 deduction. It discourages early withdrawals.

  • Select a fund based on:

    • Investment Horizon: Equity funds for long-term goals (5+ years), debt/hybrid for shorter periods.
    • Performance vs. Benchmark: Active funds should consistently outperform; passive funds should have low tracking error.
    • Expense Ratio: Compare within the same category.
    • Risk Profile: Consider asset allocation and debt fund credit quality. Regular monitoring ensures alignment with financial goals.

  • A fund manager oversees investment decisions, portfolio allocation, and market analysis to achieve fund objectives.

    • Active Managers: Aim to outperform benchmarks, leading to higher expense ratios.
    • Passive Managers: Track indices, focusing on minimizing tracking error.

  • Yes, due to market fluctuations, fund misalignment with investor goals, or poor management. For instance, sectoral funds face higher risks if their sector underperforms. Staying invested through market downturns can mitigate losses.

    • Expense Ratio: Management fees deducted annually.
    • Stamp Duty & STT: 0.005% on purchases, 0.001% on redemptions (equity funds).
    • Capital Gains Tax: 20% for short-term (<1 year), 12.5% for long-term (>1 year, above ₹1.25 lakh gains).
    • Exit Load: If applicable, varies by fund.
    • Dividend Taxation: Taxed as per the investor’s income slab.

  • Yes, a parent/guardian can invest on behalf of a minor. A separate account is required, with the guardian managing it until the child turns 18. On turning 18, KYC needs to be completed for account transfer. Returns are clubbed with the guardian’s income.

  • Yes, joint mutual fund accounts are allowed for shared financial goals. All holders must complete KYC, and transactions typically require approval from all account holders.

  • An NFO is the launch of a new mutual fund by an AMC, offered at a fixed price (usually ₹10 per unit). Similar to an IPO, it helps raise capital for investments. Investors should assess the fund’s theme and objectives before investing.

  • Both pool investor money, but ETFs trade on exchanges like stocks, with prices fluctuating throughout the day. Mutual funds are bought/sold at NAV, calculated at day’s end. ETFs are mostly passive and cost-effective, while mutual funds can be actively managed but carry higher fees. ETFs are also more tax-efficient.

  • SIP spreads investments over time, averaging costs and reducing market timing risks—ideal for steady earners. Lump sum investments suit those confident in market trends but carry higher risk.

  • Equity funds settle in T+3 days, debt funds in T+2 days. Processing may be delayed on weekends/holidays, with proceeds credited to your bank account.

  • Yes. A HUF can invest using its own PAN and bank account. The Karta, as the head, must complete non-individual KYC with documents like PAN, bank statement, and HUF declaration deed.

  • Tax depends on the fund type and holding period: Equity Mutual Funds

    • Sold before July 23, 2024: STCG @ 15%, LTCG @ 10%
    • Sold after July 23, 2024: STCG @ 20%, LTCG @ 12.5%
    Debt Mutual Funds
    • Invested before April 1, 2023:
      • Sold before July 23, 2024: LTCG (held > 36 months) @ 20% with indexation, STCG taxed per slab
      • Sold after July 23, 2024: LTCG (held > 24 months) @ 12.5% with indexation, STCG taxed per slab
    • Invested after April 1, 2023: Taxed as per income slab, regardless of holding period.

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