What are Mutual Funds & How Do They Work?

what is mutuall fund and how it works

A mutual fund is an investment vehicle that pools money from multiple investors to buy stocks, bonds, and other assets. Instead of purchasing individual securities, you acquire shares in the fund, meaning you own a portion of a diversified portfolio.

It offers an easy way to grow wealth without extensive market knowledge. Whether you seek stability or high returns, understanding the meaning, benefits, and types of mutual funds is crucial.

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What is the Meaning of Mutual Fund?

Mutual funds collect money from different investors and are managed by an AMC (asset management company). The collected money is then invested in assets such as equities, debt instruments, or other securities to raise returns. The fund provides units to the investor, and the value of each unit is the fund's NAV.

SEBI distributes this collected fund back to investors after deducting fund management fees. SEBI refers to the Securities and Exchange Board of India, which governs mutual funds, making the whole process transparent and protecting the investor. Every mutual fund has to be registered with SEBI for its regulation.

How Do Mutual Funds Work?

Mutual fund operations involve putting together investor money to back portfolio investments into different stocks, bonds, and other financial assets. Here is how a mutual fund works:

1. Fund Accumulation

Mutual funds collect money from multiple investors into a shared investment pool. Pooled capital invests in different stocks, bonds, and other financial instruments to maximize returns and spread risk.

2. Unit Allocations

Units of the mutual fund are issued to investors according to the amount they invest and the fund's NAV at the time of purchase. Every unit represents the proportionate ownership that an investor owns in the fund. Units change with the movement in NAV.

3. Professional Management

A fund manager, with the support of financial analysts, will make decisions and maximize return with reduced risk. They invest in various assets, which shows the market trend and the fund's objectives. This decreases the investor's burden of continuously tracking the market.

4. Diversification

Mutual funds can reduce risk by investing in several sectors, industries, and asset classes. Diversification smoothes out losses from one side of a portfolio with gains from the other, thus returning a more stable outcome. This strategy limits market volatility.

5. Investor Shares

The mutual fund is divided among all investors according to their unit holdings. The profits or losses are distributed proportionally according to the fund's performance over time. Investors can enjoy the benefits of professional fund management.

6. Net Asset Value (NAV)

NAV is the price per unit of the fund, which is the daily calculation of the number of units available in circulation divided by the fund's total assets. It is used to determine the fluctuation of NAV according to the market condition.

7. Return Generation

The investor generates returns through capital appreciation and income generated through dividends or interest. Returns can be more specific according to the specific mutual fund strategy adopted.

8. Deduction of Fees and Expenses

Mutual funds charge an expense ratio that comprises management fees, administrative costs, and marketing expenses. The money is taken before it reaches the investors and disperses returns. A low expense ratio means more earnings for the investors.

9. Redemption

Investors can redeem their mutual fund units at the prevailing NAV. Some funds charge an exit load if redemption occurs within a specified period. This enables investors to withdraw funds when required while maintaining long-term investment discipline.

What is an Example of a Mutual Fund?

A mutual fund invests in stocks from companies across various sectors. When you invest in the fund, your money is combined with that of other investors and managed by a fund manager, who aims to generate returns based on the performance of the underlying stocks.

1. An Example of SIP in Mutual Fund

Imagine you start a SIP in a mutual fund with an amount of ₹5,000 per month. Each month, your ₹5,000 gets invested and purchases units based on the NAV applicable for that month.

Calculation of SIP:

Monthly investment: ₹5,000

In all, after 12 months, it would be: ₹5,000 × 12 = ₹60,000

Assume that the average NAV during the year was ₹50 per unit. Then the total units will be

Total Units = ₹60,000 ÷ ₹50 = 1,200 units

If the NAV goes up to ₹60 per unit after one year, then

New Value of Investment: 1,200 units × ₹60 = ₹72,000

This simply means that because of the rise in NAV, your investment is worth ₹12,000 more. Had the NAV gone down, then the value of your investment would have gone down correspondingly.

2. An Example of Lumpsum in Mutual Fund

Suppose you invest a lump sum amount of ₹1,00,000 in a mutual fund. At the time of investment, the NAV stands at ₹50 per unit.

Calculation of lumpsum:

Units Bought = ₹1,00,000 ÷ ₹50 = 2,000 units

When the NAV has gone up to ₹60 per unit after one year,

New Value of Investment = 2,000 units × ₹60 = ₹1,20,000

It implies that your investment would have gone up by ₹20,000 since the NAV went up. If the NAV had gone down, the value of your investment would have declined proportionally.

What are the Benefits of Mutual Funds?

Mutual funds have various benefits, making investments in these more attractive. Some of the most essential benefits follows:

Benefit Description
Diversification Mutual funds allow spreading investments in stocks, bonds, and commodities, keeping risk low since a decline in one asset category does not severely affect the entire portfolio.
Professional Management Fund managers with professional experience leverage market analysis to make decisions that benefit investors while the investors stay uninvolved.
Liquidity The ability to purchase and sell mutual fund units is highly prevalent because fund redemption occurs within several days, allowing investors quick access to their money when needed.
Affordability Mutual fund investments are appropriate for every pocket. They demand very low capital at the onset, thus encouraging everybody to participate in wealth creation.
Transparency NAV, fund information, and performance measures are reported regularly so that the investor can see where his investments are.
Tax Benefits Investors can benefit from Equity-Linked Savings Schemes (ELSS) mutual funds since they qualify for Section 80C tax deductions to reduce their taxable income and grow their wealth.
Low Cost Mutual funds have relatively lower expense ratios than most investment alternatives, which offers a means of accessing professional investment management.

What are the Types of Mutual Funds?

Various types of mutual funds are available, each designed to cater to different investment goals and risk profiles. Here's a breakdown of the common types of mutual funds:

1. Mutual Fund Types Based on the Maturity Period

Mutual funds can be categorized based on their maturity periods. They differ in terms of liquidity and flexibility. The table below gives information about these funds:
Type of Mutual Funds Description
Open Ended Funds This means that investors can buy or sell units at any time with no fixed maturity date.
Close Ended Funds Limited investment during the New Fund Offer (NFO), with a fixed maturity date.
Interval Funds Combines features of both open and closed-ended schemes with predefined intervals for trading.

2. Mutual Fund Types Based on Principal Investments

The mutual fund types differ significantly in investment strategies, affecting risk and returns. The following are the categories of mutual funds based on principal investments for various financial goals:
Type of Mutual Funds Description
Equity Funds It mainly invests in stocks with a high growth potential but is associated with a higher risk.
Debt Funds It focuses on fixed-income securities like bonds and provides lower risk with steady returns.
Hybrid Funds It invests in equity and debt funds with a balance of risk and return.

3. Equity Funds

Equity mutual funds invest in stock markets, offering growth potential. The table below showcases various equity schemes designed for different levels of risk:
Type of Equity Funds Description
Multi Cap Funds Invests across large, mid, and small-cap stocks.
Large Cap Funds Invests primarily in large-cap stocks (top 100 companies).
Large & Mid Cap Funds Invests in both large and mid-cap stocks.
Mid Cap Funds Primarily invest in mid-cap stocks (101-250th companies).
Small Cap Funds Focuses on small-cap stocks (251st company onward).
Dividend Yield Funds Invests in dividend-yielding stocks.
Value Funds Follows a value investment strategy, targeting undervalued stocks.
Contra Funds Follows a contrarian investment strategy, buying when others are selling.
Focused Funds Invests in a focused set of stocks, with a cap of 30 stocks.
Sectoral Funds/Thematic Funds Invests in a particular sector or theme.
ELSS Funds A tax-saving mutual fund with a 3-year lock-in period.

4. Debt Funds

Debt mutual funds are focused on fixed-income instruments with lower risk but more stable returns. This table summarises various types of debt schemes, each differing in terms of investment duration and risk profile:
Type of Debt Funds Description
Overnight Funds Invests in securities with a maturity of 1 day.
Liquid Funds Invests in debt and money market instruments with a maturity of up to 91 days.
Ultra Short Duration Funds Invests in instruments with a Macaulay duration of 3-6 months.
Low Duration Funds Invests in instruments with a Macaulay duration of 6-12 months.
Money Market Funds Invests in money market instruments with maturities of 1 year.
Short Duration Funds Invests in instruments with a Macaulay duration of 1-3 years.
Medium Duration Funds Invests in instruments with a Macaulay duration of 3-4 years.
Medium to Long Duration Funds Invests in instruments with a Macaulay duration of 4-7 years.
Long Duration Funds Invests in instruments with a Macaulay duration of over 7 years.
Dynamic Bond Funds Invests across various durations based on market conditions.
Corporate Bond Funds Invests in highly-rated corporate bonds.
Credit Risk Funds Invests in lower-rated corporate bonds.
Banking and PSU Fund Invests in debt instruments of banks and public sector undertakings.
Gilt Fund Invests in government securities (Gsecs).
Floater Fund Invests in floating rate instruments.

5. Hybrid Funds

Hybrid schemes distribute funds between equity and debt instruments. The table here describes various types of hybrid schemes for an investor looking at a combination of growth and safety:
Types of Hybrid Funds Nature
Conservative Hybrid Funds It focuses on debts with more equity (10-25 percent).
Balanced Hybrid Funds Distributes the funds divided equally between the two, such as 40-60%.
Aggressive Hybrid Funds These types focus more on equity (65-80%) than debt (20-35%).
Dynamic Asset Allocation Funds Equity and debt can be adjusted depending on the conditions in the markets.
Multi-Asset Allocation Funds More than two different asset classes.
Arbitrage Funds Arbitrages equity-debt difference between the two.
Equity Savings Funds Invests in equity, debt, and arbitrage strategies for conservative growth.

6. Solution Oriented Schemes

Some are solution-oriented and target goals like retirement or children's education. Some of the very popular solution-oriented schemes, tailored to long-term financial planning and goal achievement, are listed here:
Type of Scheme Description
Retirement Fund It invests with a lock-in period of 5 years or until retirement age, whichever is earlier.
Children's Fund Invests with a lock-in period of 5 years or until the child attains the age of majority.

7. Other Schemes

The table below gives one an overview of these schemes while keeping in focus low-cost and diversified investments:
Type of Scheme Description
Index Funds/ETFs The scheme replicates or tracks an index like the Nifty or Sensex.
FoFs (Overseas/Domestic) Invests in other mutual funds rather than buying securities directly.

Other Popular Investment Plans That You Can Explore

Guaranteed Returns Plan Guaranteed Returns Plan
ULIP Plans ULIP Plans
Endowment Plans Endowment Plans
Whole Life Insurance whole life insurance

What are the Modes of Investment in Mutual Funds?

There are two main modes of investment in mutual funds: Systematic Investment Plan (SIP) and Lump-Sum Investment. Both offer different ways to invest based on individual preferences and financial goals.

1. Systematic Investment Plan (SIP)

A Systematic Investment Plan (SIP) is a mutual fund investment facility where you can invest relatively small amounts regularly. You can invest a fixed amount in any open-ended mutual fund scheme you choose at intervals (e.g., daily, weekly, fortnightly, monthly, etc.) through SIP investments.

To invest through an SIP investment plan, you must register for a Systematic Investment Plan by submitting a bank Electronic Clearing Services (ECS) mandate, which requires you to specify the SIP amount, the interval, and the SIP date. SIPs are ideal investments for your long-term goals.

2. Lump-Sum Investment

A lump sum or a one-time investment is investing your entire amount in one go. It is the simplest form of investment. To invest in a lump sum, select a scheme suitable for your financial goal and risk appetite. Depending on your preferences, you can invest in a Direct or Regular Plan.

Consult your financial advisor if you need help selecting a mutual fund scheme. You should also choose the scheme option, which includes growth, income distribution, capital withdrawal (IDCW), etc.

Who Should Invest in Mutual Funds?

Mutual funds are for everyone. They are good for beginners and expert investors. Different plans suit different financial goals. Some plans help in long-term wealth building; others help with short-term money needs. Here's who should invest in it:

  • Both Indians and Non-Resident Indians (NRIs) can invest. NRIs must follow the Foreign Exchange Management Act (FEMA). They must show proof of NRI status.
  • Anyone 18 years or older can invest in mutual funds. Minors can invest through a guardian, who manages the investment until the child becomes an adult.
  • Mutual funds cater to both conservative and risk-taking investors. Conservative investors can choose debt funds with assured returns, while risk-takers can choose equity funds.
  • Individuals with a salary can invest small amounts every month. Systematic Investment Plans (SIP) make it easy. Self-employed individuals can invest based on income flow.
  • Senior citizens can invest in mutual funds for regular income. They can look into debt funds and balanced funds that provide stability. These funds secure their retirement.

How to Invest in Mutual Funds Online?

Investing in mutual funds allows you to grow wealth by pooling money with others to invest in diverse assets. An easy way of directly accessing mutual funds is by logging in online. Here's the step-by-step process to start:

Step 1

Choose a Portal: Start direct investment through the websites of AMCs or third-party portals for mutual fund investment, including Groww, Zerodha, ET Money, and mobile applications.

Choose the most appropriate portal with smooth navigation that matches your objectives.

Step 2

Fill KYC: Before investing, complete the KYC process by providing the documents Aadhaar, PAN, and bank details. This is a prerequisite for all investors in India.

Online KYC can be sent through OTP or video calls on some platforms.

Step 3

Select the Mutual Fund: Mutual funds are categorized and offered under different headings, such as equity, debt, hybrid, etc., depending on your risk profile.

You can use the platform filter to find funds with high returns, low expense ratios, or even top-performing fund managers.

Step 4

Investment Amount: Invest any amount, be it a one-time lump sum or SIP investment, depending on your pocket and investment needs.

SIP is investing a fixed amount of money at fixed intervals. The one-time payment is a lump sum.

Step 5

Payment: For SIP, the platform auto-debited the monthly amount from the bank account.

You can transfer the amount directly using net banking, UPI, or debit/credit card as a lump sum.

Step 6

Monitor Your Investment: Once you invest, you can track the performance of your mutual funds on the platform's dashboard.

You can also redeem or switch investments if needed.

How to Invest in Mutual Funds Offline?

If you prefer a more traditional approach, investing offline in mutual funds is also an option. Here's how to do it:

Step 1

Select a mutual fund house, i.e., AMC or other brokers.

Step 2

Provide an Aadhaar, PAN, and a passport-sized photograph.

Step 3

Choose the fund to achieve your financial objectives.

Step 4

Fill out details, amount, and mode of investment.

Step 5

Pay by cheque, DD, or auto-debit for SIP.

Step 6

Get a statement showing your allocated mutual fund units.

Step 7

Monitor statements and redeem or switch funds as needed.

What are the Fees Associated with Mutual Funds?

Fees in mutual funds are costs associated with managing the fund and can affect the overall returns. Here are the key fees:

Fee Type Description Typical Range
Expense Ratio Annual fee charged by the Asset Management Company (AMC) for managing the mutual fund. It covers costs like fund management, administration, and marketing. 0.5% to 2.5% of average assets under management (AUM)
Exit Load Fee charged when redeeming or selling mutual fund units before a specified time, typically within 1-3 years. 0.5% to 3% of the redemption amount
Transaction Charges Small fee per transaction, charged for new investments or transfers between schemes. ₹100 to ₹150 per transaction
Performance Fee Fee charged based on the fund's performance above a predefined benchmark or threshold. It is more common in actively managed funds. A percentage of returns above a specific target (varies by fund)
Management Fee Part of the expense ratio is allocated for the fund manager's services, including salary and performance incentives. Included in the overall expense ratio varies by fund

How Taxation Works on Mutual Funds?

Mutual fund taxation involves taxes on capital gains, dividends, and certain tax-saving mutual funds. The tax treatment depends on the type of fund and the holding period.

1. Taxation on Capital Gains from Mutual Funds

The gains from the mutual funds are taxed according to the type of fund and the holding period. There are differences in tax rates between equity and debt funds and specific rules about short-term and long-term capital gains.
Type of Mutual Funds Holding Period Short-Term Capital Gains (STCG) Tax Rate Long-Term Capital Gains (LTCG) Tax Rate
Equity Funds Less than 12 months 20% (effective from July 23, 2024) 12.5% on gains exceeding ₹1.25 lakh per financial year
More than 12 months 12.5% on gains exceeding ₹1.25 lakh per financial year 12.5% on gains exceeding ₹1.25 lakh per financial year
Debt Funds Less than 36 months Taxed as per the investor's income tax slab rate 12.5% with indexation benefit
More than 36 months 12.5% with indexation benefit 12.5% with indexation benefit

Note: The tax rates for STCG and LTCG on equity funds were revised in the Union Budget 2024.

2. Tax on Dividends from Mutual Funds

Dividend income from mutual funds is also taxed differently based on the type of fund. Equity and debt funds have different tax treatments, with TDS for equity funds above a certain limit.
Type of Mutual Funds Dividend Income Taxation
Equity Funds Exceeds ₹5,000 in a financial year 10% Tax Deducted at Source (TDS)
Debt Funds All dividend income Added to total income and taxed as per the individual's tax slab rate

Note: The TDS rate on dividends exceeding ₹5,000 in a financial year is 10%.

3. Tax-Saving Mutual Funds (ELSS)

Although ELSS schemes provide tax benefits under Section 80C, a certain percentage of tax is levied on it.
Aspect Description
Investment Limit Up to ₹1.5 lakh are eligible for tax deduction under Section 80C of the Income Tax Act
Lock-In Period 3 years
LTCG Tax Rate 12.5% on gains exceeding ₹1.25 lakh per financial year

Note: The tax exemption limit for LTCG on equity funds was increased to ₹1.25 lakh per financial year in the Union Budget 2024.

What are the Risks Associated with Mutual Funds?

Risk is always associated with an opportunity. Mutual funds create a common fund to invest in the money market and derive the best returns. A lot of risk factors are associated with it. The five main types of risks are:

1. Market Risk

Mutual fund returns depend heavily on market capitalization; therefore, they can decline or increase based on market fluctuations.

2. Inflation Risk

Inflation declines the purchasing power; therefore, it undermines the return on investment.

3. Interest Rate Risk

A rise in the interest rate decreases the bond's value, reducing its return.

4. Currency Risk

The mutual fund's return is reflected by a decline or hike in the exchange rate, also known as foreign exchange.

5. Credit Risk

It occurs when a bond issuer runs out of funds and fails to provide interest or redeem the bond for face value.

How to Calculate Returns in Mutual Funds?

The return on mutual funds is the profit or loss generated from your investment, considering the period, NAV changes, and type of investment, i.e., SIP or lump sum. Here are some ways how it is calculated:

1. Absolute Returns

Absolute returns indicate the total percent change in your mutual fund's value over time without involving the time aspect. You use the following formula to calculate absolute returns:

Absolute Returns = (Current Net Asset Value - Initial Net Asset Value)Initial Net Asset Value x 100

2. Annualised Returns

Annualised returns are the average annual rate of return on an investment over a specified period. It is more suitable for calculating mutual fund returns if the holding period exceeds 12 months. You can use the following mutual fund return calculation formula to determine it:

Annualised Returns = 1+[(Absolute Returns100)365Holding period in days - 1] x 100

3. Compound Annual Growth Rate (CAGR)

Compound Annual Growth Rate (CAGR) is one of the most accurate ways to calculate mutual fund returns. It measures the fund's growth over multiple periods and considers the effect of compounding. Using the following formula, you can quickly determine the CAGR of a fund:

CAGR = [(Current NAVInitial NAV)1Honlding period in years-1)] x 100

4. Extended Internal Rate of Return (XIRR)

XIRR is a comprehensive method for calculating mutual fund returns. It considers the timing of the various cash inflows and outflows to determine the annualised rate of return. This makes the method suitable for determining returns from mutual fund SIP investments. Its formula is:

 = XIRR (values, dates, guess)

Factors to Consider Before Investing in Mutual Funds

While investing in a mutual fund, you should know what a mutual fund in India is. To clear your concept, we have provided all the necessary details. However, here are things to consider before investing in a mutual fund:

1. Fund Manager

The best fund requires a good and experienced manager. Their diversification and market analysis expertise enhance better returns and lower risks. Thus, it puts you out of the market tracking burden.

2. Investment Objective

Clearly defining your financial goals helps you choose the right fund. Your growth, income, or stability objective should align with the fund's strategy and risk level.

3. Return on Investment (ROI)

Mutual funds cannot guarantee returns, but assessing past performance can help estimate reliability. The consistent returns over time suggest that the fund effectively meets financial goals.

4. Risk Profile

Risk levels vary between mutual funds, affecting returns. It's essential to evaluate your risk tolerance and select funds that match your comfort level with market fluctuations.

5. Investment Horizon

Your investment horizon affects the type of fund to choose. Long-term investors can afford the risky growth funds, whereas short-term investors opt for lower-risk stable options.

6. Liquidity

This implies the ease of withdrawing your money. Low-liquidity funds have a lock-in period, which makes them less flexible. While those allowing greater withdrawal flexibility may not.

7. Tax Implications

Understand the capital gains and tax policies relating to dividends. Tax treatment is one of the reasons for buying a mutual fund. Since its tax efficiency predominantly affects your net return.

How to Redeem Mutual Funds Online?

Online redemption allows you to redeem your mutual fund units with just a few clicks. Follow the simple steps given here to complete an online redemption transaction:

Step 1

Log in to Your Account: Open the mutual fund portal (through the fund house website or an investment website).

Step 2

Select Fund: Go through the 'My Investments' screen and choose the mutual fund you desire to redeem the units.

Step 3

Choose Redemption Amount: Specify whether you wish to redeem a partial or complete amount of your units.

Step 4

Verify Details: Confirm the redemption request, including the amount and fund details. Verify all the details for smooth processing. Submit a redemption request submission.

Step 5

Receive the Amount: After a few days, the redemption amount will be credited to your registered bank account after you have deducted any applicable charges.

How to Redeem Mutual Funds Offline?

In offline redemption, one requests to redeem the mutual fund units. The subsequent steps illustrate how to redeem using offline modes of forms and physically submitting these forms:

Step 1

Obtain, fill out, and submit the redemption form from the mutual fund company.

Step 2

Enter your folio number, units to be redeemed, and bank details.

Step 3

Submit the completed form at the nearest branch or send it by post to the company.

Step 4

After verification, the request will be processed, and the funds will go to your account.

Note: In both cases, you may incur exit loads or taxes, depending on the duration of your investment.

Terminologies Used in Mutual Funds

Being aware of certain mutual fund terminologies is as essential as investing wisely. Here are some of the key terminologies:

Term Description
Asset Management Company (AMC) An organization that administers mutual fund-related investments and wealth.
Net Asset Value (NAV) The total value of the assets obtained with the total assets divided by the number of units.
Expense Ratio The annual fees are a percentage of total assets under management, including all administrative, marketing, and management costs.
Systematic Investment Plan (SIP) A method of investing a fixed amount regularly in mutual funds to benefit from dollar-cost averaging.
Lump-Sum Investment A one-time, significant investment in mutual funds instead of periodic SIPs.
Unit The portion of a mutual fund owned by an investor represents their share of the total fund.
Fund Manager A professional who makes investment decisions based on the fund's objectives.
Exit Load A fee is charged when redeeming units before a specified period to discourage short-term trading.
Entry Load A fee charged when purchasing mutual fund units applies to some funds (though SEBI has removed most entry loads).
AUM (Assets Under Management) The total market value of all investments managed by the mutual fund.
Capital Gains The profit or loss from selling securities is categorized as short-term or long-term.
Dividend Payout Distributing a portion of the fund's income (dividends or interest) to unit holders.
Growth Option A mutual fund scheme in which income is reinvested, thereby increasing the NAV.
Dividend Option A mutual fund scheme in which income is distributed to investors as dividends.
Risk-Return Profile The trade-off between potential returns and the risk involved determines investors' suitability.
Benchmark Index or measure that can be used for comparison purposes. For example, the Nifty 50 or Sensex.
Fund Prospectus A document detailing the mutual fund's objectives, investment strategy, risk description, and fees.
Capital Appreciation The rise in a mutual fund's investment value results in a higher NAV.
Net Investment The net amount is put into a mutual fund after excluding any withdrawals or redemptions.
SWP (Systematic Withdrawal Plan) Withdrawing a fixed sum periodically from a mutual fund investment.
STP (Systematic Transfer Plan) A method to transfer a fixed amount periodically from one mutual fund scheme to another.
Redemption The process of selling mutual fund units back to the fund for cash or reinvestment.
Long-Term Capital Gains (LTCG) Profit from the sale of securities held for more than a year is taxed at a lower rate for equity funds.
Short-Term Capital Gains (STCG) Profit from the sale of securities held for less than a year is taxed at a higher rate for equity funds.
SIP Top-Up An option to periodically increase the SIP amount to boost investment over time.
Tax-Free Funds Money that invests in tax-free securities, such as government bonds, offers tax-free income.
Risk-Adjusted Returns Metrics such as the Sharpe ratio measure a fund's return relative to its risk.
Asset Allocation Investment diversification across different asset classes by a mutual fund to optimize the risk and return.
Fund Objective The goal or strategy that guides a mutual fund's investment decisions (growth, income, etc.).
Volatility The fluctuation in a mutual fund's value indicates its risk level.

 

In conclusion, mutual funds provide a structured solution to all the needs of beginners and seasoned investors seeking stability. Combining flexibility with professional management, they offer the ideal pathway for short-term cash flow and long-term financial security.

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Disclaimer: The information provided on this website is for general informational purposes only and should not be construed as financial, investment, or legal advice. While we strive to provide accurate and up-to-date content, we do not guarantee the completeness, reliability, or suitability of the information for your specific needs.

We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.

FAQs about Mutual Funds

What is a mutual fund investment?

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A mutual fund investment involves pooling money from multiple investors, which a fund manager then manages to buy a diversified portfolio of stocks, bonds, or other securities.

How do mutual funds work?

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Mutual funds collect funds that investors commit and invest in various assets. Units allocated are based on the investment the investor places and returns based on the fund's performance.

What is an example of a mutual fund?

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HDFC Equity Fund, for instance, is a type of mutual fund that invests mainly in equities of large-cap companies.

What are the advantages of investing in mutual funds?

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Benefits include diversification, professional management, liquidity, and access to classes of assets even with lower investment sums.

What are the different types of mutual funds?

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Equity, debt, hybrid, money market, and index funds are types of mutual funds, and each type varies according to risk levels and investment objectives.

What are the risks associated with mutual funds?

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Risks associated with the assets that the fund invests in are market risk, interest rate risk, credit risk, etc.

What are the two ways of investing in mutual funds?

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You can invest either through SIP for regular investments or lump sum for one-time investments.

What are the tax implications of mutual funds?

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Mutual funds are taxed based on the holding period, with long-term capital gains (LTCG) and short-term capital gains (STCG) tax rates varying for equity and debt funds.

Are mutual funds taxable?

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Yes, mutual fund investments are subject to capital gains tax, with different rates for equity and debt funds.

What are the fees associated with mutual funds?

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Fees include the expense ratio, entry/exit loads, and sometimes additional fund management charges, such as management fees.

How to choose a mutual fund?

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Choose based on investment goals, risk tolerance, fund performance, expense ratios, and fund manager reputation.

What are the factors to consider before investing in mutual funds?

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Consider investment horizon, risk tolerance, fund objectives, and past performance before investing.

How do you calculate mutual fund returns?

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Returns are calculated based on the change in Net Asset Value (NAV) over time, accounting for dividends and interest.

How do you invest in mutual funds?

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You can invest through online platforms, fund houses, or through a financial advisor, choosing a fund based on your risk profile.

How to redeem mutual funds online?

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To redeem online, log into your mutual fund account, select the fund to redeem, and submit the redemption request.

What are the disadvantages of mutual funds?

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Disadvantages include management fees, market risk, and the potential for lower returns compared to direct stock investments.

Can I invest in mutual funds?

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Yes, individuals with valid PAN cards and KYC (Know Your Customer) documentation can invest in mutual funds.

Are mutual funds safer than stocks?

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Yes, due to their diversification, mutual funds are less risky than individual stocks but are still subject to market fluctuations.

Is investing in mutual funds safe?

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Yes, investing in mutual funds is safer than stocks due to professional management and diversification. However, market risks still apply.

What is the minimum amount required to invest in mutual funds?

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The minimum investment amount varies but is generally as low as ₹500 for SIP and ₹1,000 for lump-sum investments.

Can I redeem/withdraw mutual funds anytime?

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Yes, mutual funds can be redeemed anytime, though exit loads or taxes may apply.

How are mutual fund fees regulated in India?

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Mutual fund fees are regulated by SEBI, with limits on expense ratios to protect investor interests.

How do mutual funds affect my investment?

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Mutual funds can affect your investment by providing diversification, professional management, and returns linked to the fund's performance.

Who manages the mutual fund?

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A fund manager or a team of experts from the Asset Management Company (AMC) manages the mutual fund.

What are the essential terms used in mutual funds?

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Essential terms include Net Asset Value (NAV), Expense Ratio, SIP, Exit Load, AUM (Assets Under Management), and Capital Gains.

Other Important Articles about Mutual Funds

What is Growth Mutual Fund?
Trailing Returns vs Rolling Returns
CAGR vs Absolute Return
What is Interval Fund?
What is Mutual Fund?
ETF vs Index Funds
What is Lock in Period in Mutual Fund?
What is Systematic Investment Plan(SIP)?
Types of Mutual Funds in India
Arbitrage Fund vs Liquid Funds
Flexi Cap vs Multi Cap Funds
How Mutual Funds are Taxed?
What are Arbitrage Funds?
Gold Mutual Fund vs Gold ETF
What are Debt Funds?
What is Equity Fund?
Difference Between PMS and Mutual Funds
IDCW vs Growth
What is Hybrid Fund?
Types of Mutual Fund Returns in India
Debt Fund vs Fixed Deposit
What is Statutory Liquidity Ratio?
What is Index Fund?
Open Ended Fund vs Closed Ended Fund
What are Multi Cap Mutual Funds?
SIP vs SWP
SIP vs Mutual Funds
XIRR vs IRR
What is Income Fund?
Sharpe Ratio vs Treynor Ratio
What is International Fund?
Direct vs Regular Mutual Funds
Index Funds vs Mutual Funds
IDCW vs SWP
What are Corporate Bond Funds?
STP vs SWP
Smallcase vs Mutual Funds
Overnight Funds vs Liquid Funds
Value Funds vs Growth Funds
SIP vs PPF
Mutual Fund Charges or Fees
XIRR vs CAGR
SIP vs STP
What is Money Market Fund?
ETF vs Mutual Funds
What is XIRR in Mutual Fund?
Fixed Deposit vs Mutual Funds
What are Leveraged Funds?
Liquid Funds vs Debt Funds
Daily SIP vs Monthly SIP
Active Funds vs Passive Funds
What is Lumpsum in Mutual Fund?
What are Commodity Mutual Funds?
NPS vs Mutual Funds
Sharpe Ratio vs Sortino Ratio
Bonds vs Mutual Funds
SIP vs FD
ELSS vs SIP
Balanced Funds vs Equity Funds
Large Cap vs Mid Cap vs Small Cap Funds
Mutual Fund vs Life Insurance
What is Exchange Traded Fund?
Equity Funds vs Debt Funds
Growth Fund vs Dividend Fund
What are Sectoral Funds?
PPF vs Mutual Funds
SIP vs Lumpsum in Mutual Funds
ETF vs FOF
What is ELSS?
What is Capital Protection Fund?
Annualised Return vs Absolute Return
AIF vs Mutual Funds
SIP vs RD
What is a Balanced Fund?
Mutual Funds vs Stocks
Mutual Funds vs Hedge Funds

Disclaimer

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  • This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
  • All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
  • Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.

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