What are Mutual Funds?

Before understanding how Mutual Funds work, one needs to first understand what exactly a Mutual Fund is. A mutual fund is a collective investment vehicle managed by experts, collects & pools money from several investors and invests the same in various instruments such as equities, bonds, government securities, money market instruments.

Professional fund managers further invest the money collected in Mutual Fund scheme in alignment with the scheme’s investment objective.

How Mutual Funds work?

Once an investor invests his/her funds in a particular Mutual Fund scheme, he/she is allotted units proportionally. Units depend on how much money the investor has invested in the fund scheme and prevailing NAV. NAV, i.e., Net Asset Value represents the market value of each unit held by the investor. NAV is calculated daily based on the total value of the underlying securities in the portfolio and keeps fluctuating based on market conditions- For example, if the NAV of a mutual fund scheme is Rs 20 and an investor invests Rs.20,000, they will receive 1,000 units.

The fund managers supervise the mutual fund schemes and make strategic decisions which are aligned with the investment’s objective. Their aim is to diversify risk across various assets to optimize returns.

Most open-ended mutual funds offer high liquidity. Investors can purchase or redeem their units or amount at the applicable closing NAV on any business day. This facilitates easy entry and exit, making investments more accessible.

Features of Mutual Funds

• Professional Management: Mutual Funds are managed by experienced and qualified fund managers who make informed decisions which are based on in-depth research, financial and prevailing research. This not only saves time and effort but also gets expert view as well
• Diversification: One of the key features of the mutual fund is diversification. The pooled money collected from investors is allocated into different asset classes as per investor’s objective. This helps in reducing the risk as compared to investing in one single investment instrument.
• Liquidity: Investors can opt for buy or sell of mutual fund units on any business day. Investors can opt for redemption of units or amounts as per the applicable closing NAV. This gives the investors easy access to the funds whenever needed.
• Affordability: Investors can opt for investment in Mutual Funds with amount as low as Rs.100 depending on the scheme. Also, investors can also opt for Systematic Investment Plan (SIP) wherein he/she can make regular investments (weekly/monthly/quarterly) as per their goals. This helps the investors to start with their wealth creation process in an easy and affordable manner.
• Transparency: Mutual Funds industry is highly transparent i.e., all the information and necessary disclosures are made on public domain which anyone can access. AMCs are bound to disclose fund performance, factsheets, portfolio holdings to their investors, which makes it easy for the investors to track.
• Multiple Schemes: There are various schemes offered in Mutual Funds, depending on the investor’s risk appetite, duration he/she wants to stay invested, financial goals he/she wants to accomplish. Investors can opt for scheme(s) as per their needs and wants across multiple schemes, giving them an ample set of schemes.
• Highly Regulated: Mutual Funds are highly regulated i.e., they are regulated by various authorities. SEBI (Securities Exchange Board of India) and AMFI (Association of Mutual Funds in India) are the key regulatory bodies for Mutaul Fund. This acts as a layer of safety and trust for the investors.

Why invest in Mutual Fund?

• Convenience: Mutual Funds are easy to track. Infact, there is no need to track the market daily when it comes to Mutual Funds. Along with this, all the information is readily available, making it convenient.
• Tax Benefits: Investors can opt for certain mutual fund schemes which offer tax efficiency benefits as well, helping the investors to make informed decisions.
• Flexibility: Mutual Funds are flexible i.e., it can be easily liquidated as per investor’s convenience. Apart from liquidity, there are schemes which offer other functions such as switching between different schemes, payout options, increase or decrease the invested amount, as per investor’s risk and capability.
• Goal-Based: Mutual Funds can play a pivotal role in terms of financial goal planning. Every investor has a specific financial goal which he/she wants to achieve, and Mutual Funds can help them achieve it.

Known Facts About the Indian Mutual Fund Industry

• Milestones: The Industry’s AUM crossed the milestone of ₹10 Trillion (₹10 Lakh Crore) for the first time as on 31st May 2014 and in a short span of about three years the AUM size had increased more than two folds and crossed ₹ 20 trillion (₹20 Lakh Crore) for the first time in August 2017. The AUM size crossed ₹ 30 trillion (₹30 Lakh Crore) for the first time in November 2020
• Growth: As on 31^st December 2025, the overall size of the Indian Mutual Fund Industry has grown to 80.23 trillion , from ₹ 12.75 trillion as on 31st December 2015- more than 6-fold increase in a duration of 10 years.
• Folio Addition: On average, 27.82 lakh new folios are added every month in the last 5 years since December 2020

Different Types of Mutual Fund

Mutual Fund can be classified into three broad categories on the basis of:

Structure

• Open-ended Funds: These funds allow investors to enter or exit at any time, even after the New Fund Offer (NFO). There is no fixed maturity or closure period for the scheme
• Close ended Funds: These funds have a fixed maturity period. Investors can purchase units of a close-ended scheme only during its New Fund Offer (NFO)
• Interval Funds: These funds combine the characteristics of both open-ended and close-ended schemes. They are primarily close-ended in nature but become open-ended at pre-specified intervals

Management Style

• Actively managed Funds: These funds where the fund manager has the flexibility to choose the investment portfolio within the broad parameters of the investment objective of the scheme
• Passive Funds: These funds invest based on a specified index, whose performance it seeks to track.
• Exchange Traded Funds: Like passive funds whose portfolio replicates an index or benchmark such as an equity market index or a commodity index. ETF are traded at real-time prices that are linked to the changes in the underlying index

Investment Strategy

• Equity Schemes: Equity funds are mutual funds that mainly invest in stocks, which are chosen by professional fund managers to generate higher returns while managing risk
• Debt Schemes: Debt funds are a type of mutual fund that invests in fixed-income instruments like corporate bonds, government securities, corporate debt, and money market instruments.
• Hybrid Schemes: Hybrid funds invest in a combination of asset classes, mainly equity and debt. Some hybrid funds also invest in assets like gold and international equities
• Solution-oriented Schemes: Solution‑oriented mutual funds are goal‑based investment plans focused on long‑term objectives such as retirement and children’s education.
• Other Schemes: Other schemes include Fund of Fund (FoFs) which invest in an underlying fund and ETFs

Important terms in Mutual Fund

There are few terminologies which every investor should know before investing in Mutual Fund. These are:

• NAV: Net Asset Value represents the market value of each unit held by the investor. NAV is calculated daily based on the total value of the underlying securities in the portfolio and keeps fluctuating based on market conditions
• Asset under Management (AuM): Total market value of investments managed by a fund house
• Exit Load: A penalty fee charged if an investor redeems (sells) units before a specific period
• Expense Ratio: It is the annual fee charged by the AMCs to manage the fund, covering administrative and management costs
• New Fund Offer (NFO): It is the launch of a new mutual fund scheme by AMC. It is open for a specific interval of time for initial purchases.

How to choose Mutual Fund?

An investor should consider various factors before choosing Mutual Fund scheme(s) for investment. Few of them are listed below:

• Defined Goals and Time Period: An investor should make sure that his/her goals are clear and well-defined as this will help the investor to choose suitable Mutual Fund scheme. Along with this, investors should be clear as to the time horizon i.e., if he/she wants to invest for short-term or long-term
• Know your Risk Appetite: Investors should make sure that they understand their risk appetite. Investors should accommodate his/her comfort level with the market fluctuations.
• Evaluate Funds’ Past Performance: Investors should make sure that he/she should evaluate the past performance of the scheme(s) he is planning to invest. However, past performance of any scheme does not give guarantee of future returns, but it gives a view of how the scheme is doing
• Experience of Fund Manager: It is important to understand the Fund Manager’s experience of managing the scheme.

Myths about Mutual Funds

Every industry faces rumors, but Mutual Funds deal with myths. There are various myths pertaining to Mutual Funds. Following are few myths which are common

Myth 1: Mutual Fund investments are for long term only

Mutual Fund investments can be for short-term as well, depending on investor’s time horizon and objective. There are various short-term schemes in Mutual Funds where one can invest for few days/weeks/years. While Equity Schemes are most suitable for a longer term, debt mutual funds are suitable for investors with short term (less than 5 years) investment horizons.

Myth 2: Investing in Mutual Funds is same as investing in stock market

Mutual Funds invests in equities, bonds, money market instruments etc. it is not restricted to Equity only. It gives investors an opportunity to invest in other instruments as well, making it affordable and convenient for them.

Myth 3: One needs to invest large amount in Mutual Fund

False. One could start his/her Mutual Fund investment with ₹5000 for a lump-sum / one-time investment with no upper limit and ₹1000 towards subsequent / additional subscription in most of the mutual fund schemes. Moreover, investors can also opt for SIP i.e., Systematic Investment Plan which starts with as low as Rs.500.

Myth 4: Demat Account is mandatory for Mutual Fund

Investors do have an option of holding units in Demat mode, but it is not mandatory to have Demat A/c for Mutual Funds. Mutual Funds can be held in physical statement mode as well. Investors can contact the AMC directly for purchase of Mutual Fund or can purchase via AMFI- Registered distributors.

Myth 5: Higher NAV means Expensive

Often individuals think that NAV is the share price whereas it is an indicator of market value of outstanding shares held by fund on any business day. Higher NAV means that the scheme has performed over the years

Myth 6: Top-rated Mutual Fund scheme guarantees returns

Returns calculated are dynamic in nature and are based on the scheme’s performance over years which are subject to market conditions. The scheme may or may not be part of top-rated funds in given course of time. One can use the data under the past performance, but it does not mean that it is ‘guaranteed’.

Conclusion

To summarize, Mutual Funds offer a simple path for the Indian investors to achieve their financial goals by diversified, professionally managed and flexible ways for wealth creation along with balancing risk. They are well-regulated by SEBI and AMFI, ensuring investor protection as well. We have seen rapid growth in India’s Mutual Fund industry, crossing major AUM milestones and adding millions of investor folios over the years. The Mutual Fund industry has also observed myths associated but in reality, it still stands as a convenient, flexible, and goal-oriented path for wealth creation.