Mutual Fund Investment

Introduction

Mutual fund investing is one of the most popular ways to start your financial journey and work toward financial freedom. This beginner’s guide to mutual fund investing in India will walk you through everything — from what mutual funds are and how they work, to how you can start investing step by step. Many people prefer mutual funds because they are simple, accessible, and managed by financial experts.

In this blog, you’ll learn everything about mutual fund investing — how to get started, important terms you should know, and the different ways to invest, along with the pros and cons. If this is your first time hearing about mutual funds, don’t worry — everything is explained clearly and simply.

What Is a Mutual Fund?

The word “mutual” means shared or common, and “fund” means money collected and used for a specific purpose. So, a mutual fund is a way of collecting money from many people and investing it in different financial assets like stocks, bonds, or other securities.

Important Mutual Fund Terms You Should Know

Before you start investing in mutual funds, it’s essential to understand some basic terms. Knowing these will help you make better and more confident investment decisions.

NAV (Net Asset Value)

NAV is the price of one unit of a mutual fund. It changes daily based on the market value of the fund’s assets.

Units

A mutual fund collects money from many investors and divides it into small parts called units. The number of units you get depends on how much you invest and the NAV at the time of purchase.

Formula:
Investment Amount ÷ NAV = Number of Units

Example:
If you invest ₹1,000 in a fund with an NAV of ₹50:
1000 ÷ 50 = 20 units

Performance

This shows how much return the fund has given over time (like 1 year, 3 years, or 5 years). It helps you compare how well the fund has performed against others.

Expense Ratio

The expense ratio is a small fee charged by the fund company for managing your money.

💡 Note: Sometimes, funds with higher returns may have a slightly higher expense ratio — but not always.

AUM (Assets Under Management)

AUM refers to the total amount of money a fund is managing from all investors. A higher AUM often shows that the fund is trusted and popular among investors.

Exit Load

Exit load is a fee charged if you withdraw your money before a certain period (usually 1 year). It encourages long-term investing.

NFO (New Fund Offer)

When a mutual fund is launched for the first time, it’s called an NFO. The starting NAV of an NFO is usually ₹10.

🔍 Quick Tip:
You can easily find details like NAV, expense ratio, AUM, and past performance by searching the fund name on platforms like Groww or Moneycontrol.

Types of Mutual Funds (By Asset Class)

Bond Mutual Fund

In a bond mutual fund, the fund manager actively invests your money in bonds. These bonds are either issued by the government or by corporate companies. Each bond pays a fixed interest known as a coupon rate.

 Key Features

• Government bonds are usually safer, but they offer lower interest rates.

• Corporate bonds provide higher returns, but the risk level depends on the company’s credit rating.

  • Bonds from highly rated companies are more stable but give lower interest.

  • Bonds from low-rated companies may offer higher interest, but they come with greater risk due to potential defaults.

🔍 Example: If a company has a poor credit score, there’s a higher chance it may not repay its debt, which increases risk for investors.

Commodity Mutual Fund

A commodity mutual fund invests your money in precious metals like gold and silver. These funds rely heavily on global price movements of the underlying metals to generate returns.

Key Features

• If gold or silver prices increase, your investment grows in value.

• If prices fall, returns may be lower or even negative.

• Many people use these funds as a hedge against inflation, since commodities tend to hold value when inflation rises.

💡 Tip: Commodity funds are suitable for investors who want to diversify and protect their portfolio during uncertain times.

Equity Mutual Fund

In an equity mutual fund, the fund manager invests your money primarily in company shares listed on the stock market. These funds can be highly volatile, meaning their value changes frequently. However, they also offer strong long-term growth potential.

 What Affects Equity Funds?

Equity mutual funds react to several external factors, including:

• Macroeconomic indicators like inflation, GDP, and interest rates

• Government policies and reforms

• Company-specific news, earnings reports, and overall stock market trends

Why Consider Equity Funds?

Although equity funds may experience short-term ups and downs, they can deliver higher returns over time. That’s why it’s important to:

• Stay disciplined in your investments

• Remain patient through market cycles

• Avoid emotional decisions during market downturns

Types of Companies in Equity Funds

Equity mutual funds invest in different types of companies based on their market capitalization (i.e., the total market value of a company’s shares). Here’s a simple breakdown:

1. Large-Cap Companies

   • Well-established companies with high market capital.
   • Their brands are widely known, often recognized globally.
   • Tend to be more stable and can handle tough market conditions better.

2. Mid-Cap Companies

   • Medium market capitalization.
   • Usually growing businesses with potential to become large-cap companies in the future.
   • May offer higher returns but come with slightly more risk than large-caps.

3. Small-Cap Companies

   • Low market capitalization.
   • In early growth stage and may face challenges during uncertain times.
   • Can offer high growth potential, but are also the riskiest.

Example: If you stay invested in a good equity fund for 5–10 years, you may benefit from compounding and long-term market grow

Large-Cap Fund

Large-cap funds invest at least 80% of their assets in well-established, financially strong companies with a large market capitalization.

• In addition, they may invest up to 20% in mid-cap, small-cap stocks, or hold liquid cash.
• Because these companies are relatively stable, the fund is considered low-risk and ideal for conservative investors.

Use this fund if you want steady growth with less fluctuation.

Mid-Cap Fund

Mid-cap funds allocate at least 65% of investments to mid-sized companies that are growing rapidly and have the potential to become large-cap.

• The remaining up to 35% may go into large-cap or small-cap stocks and liquid assets.
• As a result, mid-cap funds offer a balanced mix of risk and return.

Choose this if you’re comfortable with moderate risk and want growth opportunities.

Small-Cap Fund

Small-cap funds invest a minimum of 65% in smaller, lesser-known companies.

• The remaining portion is flexible and may include larger companies or cash reserves.
• These funds have high return potential, but they also come with greater volatility and risk.

Suitable for investors who are willing to take risks for higher long-term rewards.

Hybrid Fund

Hybrid funds invest across large-cap, mid-cap, and small-cap companies.

• In many cases, the fund also includes debt instruments like bonds, adding more stability.
• By spreading investments across categories, this fund aims to reduce risk while capturing returns from different market segments.

Ideal for beginners or those looking for both growth and safety.

Index Fund

Index funds track a specific market index like the Nifty 50 or Sensex.

• The fund manager invests only in companies that form part of the chosen index.
• Therefore, returns usually closely follow the index’s performance, though small tracking errors may occur.

Best for passive investors who want market-matching returns with minimal fees.

Flexi-Cap Fund

Flexi-cap funds allow the fund manager to freely invest in any market cap category — large, mid, or small — without any fixed allocation.

• As market conditions change, the fund’s portfolio is adjusted dynamically.
• Consequently, this type offers diversification and adaptability, making it a good choice for long-term growth.

Great for investors who want flexibility and are comfortable with moderate to high risk.

💡 Tip for Investors
Choose equity mutual funds based on your risk appetite and financial goals:

• Prefer stability? Go with Index Funds, Large-Cap Funds, or Hybrid Funds.
• Choose the fund with Direct Growth Option.
• Comfortable with market risk? Consider Mid-Cap or Small-Cap Funds for higher returns.

Multi-Asset Fund

A Multi-Asset Fund is a type of mutual fund that invests in three different asset classes — typically Equity (stocks), Debt (bonds), and Commodities (like gold).

• By allocating money across different assets, this fund helps spread your risk.
• In addition, it provides greater stability during market fluctuations.
• This makes it ideal for investors who want a balanced mix of growth and safety in one fund.

🎯 If you prefer diversification within a single fund, Multi-Asset Funds are a smart choice.

How to Begin Mutual Fund Investing in India (Platforms, KYC)

Starting your mutual fund investment journey is easier than you might think. Below are two common and beginner-friendly ways to get started:

Option 1: Through a Bank or Official Mutual Fund Platform

This method is ideal if you want a straightforward and direct experience.

1. First, visit your bank’s website or any official mutual fund house’s website (like HDFC Mutual Fund, SBI Mutual Fund, etc.).

2. Then, complete the KYC (Know Your Customer) process. This usually involves:

   • Submitting your ID proof,

   • Address proof,

   • And a passport-size photo.

3. Importantly, a Demat account is not required for this route.

4. After KYC approval, you can start exploring and investing in mutual funds directly through the same platform.

💡 Tip: This option is best for beginners who prefer a simple and trusted route without dealing with trading platforms.

Option 2: Through a Demat Account (via Broking Platforms)

If you already invest in stocks, this method can help you consolidate all investments in one place.

1. To begin, log in to your stockbroking platform — for example, Groww, Zerodha, Upstox, Angel One, and others.

2. Since KYC is usually done during the Demat account setup, you can skip that step.

3. Next, go to the mutual fund section and browse various schemes based on your goals.

4. Finally, choose a fund and start investing with just a few clicks.

💡 Tip: This option works well for investors who are already familiar with stock platforms and want everything under one login.

Ways to Invest in Mutual Funds (SIP vs. Lumpsum)

When it comes to investing in mutual funds, you have two main approaches. Each has its own advantages depending on your financial goals and cash flow.

1. SIP (Systematic Investment Plan)

SIP allows you to invest a fixed amount regularly — whether monthly, weekly, or even daily.

• To begin with, it’s ideal for those who want to build wealth gradually and consistently.

• Additionally, SIP helps reduce the impact of market volatility. This is done through a strategy called Rupee Cost Averaging, which averages your purchase cost over time.

• Since investments are made at multiple time intervals, returns are calculated using XIRR (Extended Internal Rate of Return).

• Moreover, SIPs help develop a habit of saving and investing regularly, which is key to long-term success.

📌 Best for salaried individuals or anyone looking to stay disciplined and invest over the long term.

2. Lumpsum Investment

Unlike SIPs, a lumpsum investment involves investing a large amount at once.

• This approach works well if you have surplus cash, such as a bonus or inheritance.

• As a result, you get the benefit of investing your entire amount upfront, which allows the money to start compounding immediately.

• However, it requires confidence in your market timing, since the entire investment is exposed to market conditions from day one.

• Here, returns are calculated using CAGR (Compound Annual Growth Rate), which measures the average yearly growth over a period.

📌 Best suited for investors with a high risk appetite and a clear investment strategy.

Pros of Investing in Mutual Funds

Mutual funds offer several advantages, especially for beginners:

1️. Power of Compounding

• Starting early allows your money to grow over time through compound interest.
• Even small investments can grow into a large amount if you stay invested long term.
• This can help you achieve financial freedom at an early age.

Person A	Person B
Starts investing at age 25	Starts investing at age 30
Invests ₹5,000/month	Invests ₹8,000/month
Continues till age 60 (35 years)	Continues till age 60 (30 years)
Expected return: 12% per year	Expected return: 12% per year
Final Amount at 60: ₹3.25 Crores	Final Amount at 60: ₹2.82 Crores

Even though Person B invests more monthly, Person A, who started 5 years earlier, ends up with more money due to the power of compounding. The earlier you start, the longer your money grows.

2️. Less Effort and Time

• Your money is managed by professional fund managers.
• All you need is to choose a good fund; the rest is taken care of.

3️. Builds Financial Discipline

• Regular investments, especially through SIPs, help develop saving and investing habits.
• Leads to better money management and future planning.

4️. Emergency Support

• Mutual funds, especially liquid or short-term funds, can act as an emergency fund.
• You can redeem units quickly during urgent needs.

Risks of Investing in Mutual Funds (Especially Equity Funds)

While mutual funds are a great way to grow wealth long term, there are risks:

1️. No Guaranteed Returns

• Equity mutual funds do not offer fixed or guaranteed returns.
• Returns depend on market performance, which fluctuates due to economic and company factors.

2️. Long-Term Commitment Needed

• Equity funds often require patience and a long investment horizon (5+ years) for good results.
• Short-term investing may lead to losses.

3️. Requires Financial Discipline

• You need to stay invested during market ups and downs.
• Avoid panic-selling during drops.

4️. Tax on Returns

• Profits are taxable:
  • Equity Funds: Long-Term Capital Gains (LTCG) tax applies if profits exceed ₹1 lakh after 1 year (10%).
  • Short-Term: If sold before 1 year, gains taxed at 15%.

Conclusion
Before investing in mutual funds, consider your financial goals and risk appetite carefully. Choose the right fund type and asset class that best suits your needs. Always compare important factors like NAV, expense ratio, past performance, and AUM—even among similar funds. Building financial discipline through regular investing, such as SIPs, helps grow your wealth steadily and prepares you for unexpected financial challenges. Start investing with small amounts to gain knowledge and experience; over time, you’ll be confident enough to guide others on their investment journey. Invest wisely and take control of your financial future!

⚠️ Disclaimer
This blog is for educational purposes only. It is not financial advice or a recommendation to buy or sell mutual funds or other investment products. Please consult a certified financial advisor before making investment decisions.