The questions people ask before they invest.

Mutual fund is a financial instrument which pools the money of different people and invests them in different financial securities like stocks, bonds etc. Each investor in a mutual fund owns units of the fund, which represents a portion of the holdings of the mutual fund. Let us understand with the help of an example. Suppose you invest Rs 100,000 in a mutual fund. If the price of a unit of the fund is Rs 10, then the mutual fund house will allot you 10,000 units. Let us assume the total money invested in the fund by all the investors is Rs 100 crores. The mutual fund invests the money to buy stocks. Then each unit will represent 0.000001% of all the stocks the mutual fund has in its holdings. If you have 10,000 units, then your portion of the mutual fund stock holdings will be 0.01%. As the value of securities held by the mutual increases or decreases, so will the price of the units.

There are 5 key advantages of investing in mutual funds:-

1. Risk Diversification:

Mutual funds help investors diversify their risks by investing in a fairly portfolio of stocks across different sectors. A diversified portfolio reduces risks associated with individual stocks or specific sectors. If an equity investor were to create a well diversified portfolio by directly investing in stocks it would require a large capital outlay. On the other hand mutual fund investors can buy units of a diversified equity fund with an investment as low as र 5,000/- only (even lower for ELSS funds). Further mutual funds are managed by professional fund managers who are experts in picking the right stocks to get the best risk adjusted returns. Retail investors often lack this expertise.

2. Economies of scale in transaction costs:

Since mutual funds buy and sell securities in large volumes transaction costs on a per unit basis is much lower than buying or selling stocks directly.

3. Tax efficiency:

Mutual funds are more tax efficient than most other investment products. Long term capital gains (holding period of more than 1 year) for equity mutual funds are tax exempt. Further dividends of equity funds are also tax free. For debt funds long term capital gain (holding period of more than 3 years) is taxed at 20% with indexation. Once indexation (due to inflation) is factored in the long term capital gains tax is reduced considerably, especially for investors in the higher tax bracket.

4. High Liquidity:

Open ended mutual funds are more liquid than many other investment products like shares, debentures and variety of deposit products (excluding bank fixed deposits). Investors can redeem their units fully or partially at any time in open ended funds. Moreover, the procedure of redemption is standardized across all mutual funds.

5. Variety of products and modes of investment:

Mutual funds offer investors a variety of products to suit their risk profiles and investment objectives. Apart from equity funds, there are also income funds, balanced funds, monthly income plans and liquid funds to suit different investment requirements. Mutual funds also offer investors flexibility in terms of modes of investment and withdrawal. Investors can opt for different investment modes like lump sum (or one time), systematic investment plans, systematic transfer plans (from other mutual fund schemes) or switching from one scheme to another.

There are essentially two kinds of mutual funds.

• Open Ended Schemes: Investors can buy units of open ended schemes at any time. Investors can also sell units of open ended schemes at any time, though some schemes (e.g. equity linked savings schemes) may have a lock in period during which the investor cannot sell the units.

• Close Ended Schemes: Close ended schemes are open for subscription only for a limited period of time, during the offer period. These schemes have fixed tenure and the investors can sell or redeem only after the maturity of the scheme. Upon maturity, depending on the scheme, the units get automatically redeemed or in some cases, the investors can switch to a different scheme.

Classification of mutual funds is also done on the basis of nature of investment.

• Equity oriented schemes, which primarily invest in equity shares of different companies

• Debt oriented schemes which primarily invest in fixed income securities of different companies, banks and the Government

• Fund of fund schemes, which invest in other mutual fund schemes, including ETFs, depending on the investment objective and strategy

• Exchange traded funds, which invest in a basket of stocks that reflects the composition of an Index, like the Sensex or the Nifty. ETFs are listed and traded on exchanges like stocks

Further categorization of these different mutual fund classes is done on the basis of nature of the specific underlying securities. For example within equity oriented schemes, we have large cap funds, small and midcap funds, multicap or flexicap funds, equity linked savings schemes (tax saver funds), balanced funds (hybrid equity oriented funds).Within debt oriented funds, we have gilt funds, income funds, short term funds, credit opportunities fund, liquid funds and monthly income plans (hybrid debt oriented funds).

The Asset Management Company (AMC), i.e. the company which manages the mutual fund raises money from the public. The AMC then deploys the money by investing in different financial securities like stocks, bonds etc. The securities are selected keeping in mind the investment objective of the fund. For example, if the investment objective of the fund is capital appreciation, the fund will invest in shares of different companies. If the investment objective of the fund is to generate income, then the fund will invest in fixed income securities that pay interest. Each investor in a mutual fund owns units of the fund, which represents a portion of the holdings of the mutual fund. On an ongoing basis, the fund managers will manage the fund to ensure that the investment objectives are met. For the services the AMCs provide they incur expenses and charge a fee to the unit holders. These expenses are charged against proportionately against the assets of the fund and are adjusted in the price of the unit. Mutual funds are bought or sold on the basis of Net Asset Value (NAV). Unlike share prices which changes constantly depending on the activity in the share market, the NAV is determined on a daily basis, computed at the end of the day based on closing price of all the securities that the mutual fund owns after making appropriate adjustments.

Though there has been growing awareness about mutual funds in the past few years, mutual funds have been around in India since 1963. For a long period of time, mutual funds were offered only by Unit Trust of India. In the late 80s some public sector banks and insurance companies started offering mutual funds. The early 90s marked the entry of private sector mutual funds. Today there are 44 asset management companies offering mutual fund products. There are essentially two kinds of mutual funds.

• Open Ended Schemes: Investors can buy units of open ended schemes at any time. Investors can also sell units of open ended schemes at any time, though some schemes (e.g. equity linked savings schemes) may have a lock in period during which the investor cannot sell the units.

• Close Ended Schemes: Close ended schemes are open for subscription only for a limited period of time, during the offer period. These schemes have fixed tenure and the investors can sell or redeem only after the maturity of the scheme. Upon maturity, depending on the scheme, the units get automatically redeemed or in some cases, the investors can switch to a different scheme. Mutual fund industry in India is highly regulated under the watch of the securities market regulator, Securities and Exchange Board of India (SEBI). If investors have any complaints they can register them with SEBI, who will ensure appropriate action is taken for redressal.

There are 5 ways by which you can invest in mutual funds.

Through a Financial Advisor:

This the oldest and most popular way of investing in mutual funds in India. AMFI, an industry association of all the SEBI approved AMCs, provides licenses to financial advisor to advice customers on mutual fund investments. The financial advisor provides end to end to services, including collecting KYC (Know your Customer) documents, filling the application forms and getting your signatures and submitting them for processing. Most financial advisors do not charge any fee from their customers. They are paid commissions by the mutual fund companies. If you are new investor it is recommended that you invest through a financial advisor. Before investing through financial advisors, you should check if they have a valid AMFI license.

Investing directly with the Mutual Fund companies:

You can visit the office of the mutual fund companies and invest directly at their office. If you are investing for the first time, you need to submit the necessary documentation for KYC (identity proof, address proof, PAN card etc) along with the duly filled application form at the mutual fund. Once a folio number is generated for you, you can invest online in any scheme of the mutual company by going to the website of the company.

Investing through registrars (CAMS or Karvy):

CAMS or Karvy are registrars who process the mutual fund transactions and keep records on behalf of the mutual fund companies. You can visit CAMS or Karvy offices and submit the mutual fund application forms there, just like investing directly with mutual fund companies.

Investing through online portals:

There are several online portals like fundsindia.com and fundsupermart.com through you can invest in mutual funds. To invest through the online portals your KYC has to be registered. Some of the portals can also help you with getting your KYC registered. One of the advantages of investing through an online portal is that you can view your entire portfolio (investment in mutual funds of different companies) in one place. However, you should know that these online portals are registered mutual fund distributors like your financial advisor and earn commissions from the mutual fund companies. Hence investing through them is not necessarily cheap.

Investing through your online demat account:

Some brokers who provide online trading and demat services, also offer online investment in mutual funds. Brokers who offer this service like ICICI Direct, India Infoline, Anand Rathi, HDFC Securities, Sharekhan etc are registered mutual fund distributors.

Redeeming or selling your mutual fund units is a very simple process. You have to fill the redemption form with the necessary details like folio number, scheme name, redemption amount etc and submitting it at the mutual fund or the registrar (CAMS and Karvy) offices. If you have a financial advisor, he or she can take care of the process by getting your signature on the redemption. The redemption amount will be directly credited to your bank, as per details provided in the application form of the investment. If your bank account has changed, you should update the bank details first and then submit the redemption form. If you invested online either directly with the mutual fund companies or through other online intermediaries, then you can also redeem online.

There are 4 ways in which you can invest online in mutual funds

Direct Online Investment at the mutual fund companies’ websites:

If you are an existing investor of a particular mutual fund company you can start invest online by going to the website of the company. If you are a first time investor of a particular mutual fund company with a valid KYC, the mutual fund company will first check for the KYC validity from your PAN when you register online. If they find that you are KYC compliant, then they will generate a folio number for you and you can start investing online. If you do not have a valid KYC, you need to submit the KYC documents to the mutual fund company. Once you have a valid KYC, the company will generate a folio number for you and you can start transacting online.

Investing through online portals:

There are several online portals like fundsindia.com and fundsupermart.com through you can invest in mutual funds. To invest through the online portals your KYC has to be registered. Some of the portals can also help you with getting your KYC registered. One of the advantages of investing through an online portal is that you can view your entire portfolio (investment in mutual funds of different companies) in one place. However, you should know that these online portals are registered mutual fund distributors like your financial advisor and earn commissions from the mutual fund companies. Hence investing through them is not necessarily cheap.

Investing through your online demat account:

Some brokers who provide online trading and demat services, also offer online investment in mutual funds. Brokers who offer this service like ICICI Direct, India Infoline, Anand Rathi, HDFC Securities, Sharekhan etc are registered mutual fund distributors.

Investing through registrars (CAMS or Karvy):

CAMS or Karvy also offer online mutual fund investment if you have a valid KYC. However, you cannot invest in all mutual fund companies through CAMS or Karvy. Investing online through CAMS or Karvy offers you the benefit of portfolio viewing, like online mutual fund investment portals and demat accounts.

There are broadly seven types of debt mutual funds in India.

Gilt Funds:

Gilt funds invest in Government securities with varying maturities. Average maturities of government bonds in the portfolio of long term gilt funds are in the range of 15 to 30 years. The fund manager in long term gilt funds actively manage their portfolio and take duration calls with outlook on the interest rate. The returns of these funds are highly sensitive to interest rates movements. The NAVs of gilt funds can be extremely volatile. The primary objective of Gilt Funds is capital appreciation. Investors with moderate to high risk tolerance level, looking for capital appreciation, can invest in Gilt Funds.

Income Funds:

Income funds invest in a variety of fixed income securities such as bonds, debentures and government securities, across different maturity profiles. For example they can invest in 2 to 3 year corporate non convertible debenture and at the same time invest in a 20 year Government bond. Their investment strategy is a mix of both hold to maturity (accrual income) and duration calls. This enables them to earn good returns in different interest rate scenarios. However, the average maturities of securities in the portfolio of income funds are in the range of 7 to 20 years. Therefore, these funds are also highly sensitive to interest rate movements. However, the interest rate sensitivity of income funds is less than gilt funds. Investors with moderate to high risk tolerance level, looking for both income and capital appreciation in different interest rate scenarios, can invest in income funds.

Short Term Debt Funds:

Short term bond funds invest in Commercial Papers (CP), Certificate of Deposits (CD) and short maturity bonds. The average maturities of the securities in the portfolio of short term bond funds are in the range of 2 – 3 years. The fund managers employ a predominantly accrual (hold to maturity) strategy for these funds. Short term debt funds are suitable for investors with low risk tolerance, looking for stable income.

Credit Opportunities Funds:

Credit opportunities fund are similar to short term debt funds. The fund managers lock in a few percentage points of additional yield by investing in slightly lower rated corporate bonds. Despite the slightly lower credit rating of the bonds in the credit opportunities fund portfolio, on an average, majority of the bonds in the fund portfolios are rated AAA and AA. The average maturities of the bonds in the portfolio of credit opportunities funds are in the range of 2 – 3 years. The fund managers hold the bonds to maturity and so there is very little interest rate risk. Credit Opportunities funds are suitable for investors with low risk tolerance, looking for slightly higher income than short term debt funds.

Fixed Maturity Plans:

Fixed Maturity Plans (FMPs) are close ended schemes. In other words investors can subscribe to this scheme only during the offer period. The tenure of the scheme is fixed. FMPs invest in fixed income securities of maturities matching with the tenure of the scheme. This is done to reduce or prevent re-investment risk. Since the bonds in the FMP portfolio are held till maturity, the returns of FMPs are very stable. FMPs are suitable for investors with low risk tolerance, looking for stable returns and tax advantage over an investment period of 3 years or more. They can provide better post tax returns than bank fixed deposits and are attractive investment options when yields are high.

Liquid Funds:

Liquid fund are money market mutual funds and invest primarily in money market instruments like treasury bills, certificate of deposits and commercial papers and term deposits, with the objective of providing investors an opportunity to earn returns, without compromising on the liquidity of the investment. Typically they invest in money market securities that have a residual maturity of less than or equal to 91 days. Liquid funds give higher returns than savings bank. Unlike savings bank interest, no tax is deducted at source for liquid fund returns. There is no exit load. Withdrawals from liquid funds are processed within 24 hours on business days. Liquid funds are suitable for investors who have substantial amount of cash lying idle in their savings bank account.

Monthly Income Plans:

Monthly income plans are debt oriented hybrid mutual funds. These funds invest 75 – 80% of their portfolio in fixed income securities and the 20 – 25% in equities. The equity portion of the portfolio of Monthly Income Plans provides a kicker to the generally stable returns generated by the debt portion of the portfolio. Monthly income plans can generate higher returns from pure debt funds. However, the risk is also slightly higher in monthly income plans compared to most of the other debt fund categories.

Read more about different types of debt mutual funds in our article, Demystifying debt mutual funds.

A money market fund is a type of open ended debt fund that invests solely in money market instruments. Money market instruments are fixed income securities like treasury bills, certificate of deposits and commercial papers and term deposits, which have very short term maturities and are highly liquid. The objective of money market mutual funds is to provide investors an opportunity to earn returns, without compromising on capital safety and liquidity of the investment. Typically money market mutual funds invest in money market securities that have a residual maturity of ranging from few days to at most few months. This helps the fund managers of liquid funds in meeting the redemption demand from the investors. Money market mutual funds are mainly used by institutional investors for parking money from time to time. Money market mutual funds, also known as Liquid funds, are also offered to retail investors to park their cash on a short term basis. While the terms money market mutual funds and liquid funds are used interchangeably, there are two kinds of money market mutual funds.

Liquid Funds:

Liquid funds are money market mutual funds and invest primarily in money market instruments like treasury bills, certificate of deposits and commercial papers and term deposits, with the objective of providing investors an opportunity to earn returns, without compromising on the liquidity of the investment. Typically they invest in money market securities that have a residual maturity of less than or equal to 91 days.

Ultra Short Term Bond Funds:

Ultra short term bond funds invest in money market instruments that mature in 6 to 12 months. Longer average maturities, enable ultra short debt funds get higher returns than liquid funds. However for the same reason, the volatilities of the short term debt funds are also slightly higher than liquid funds.

As per definition, diversified equity mutual funds are purely equity funds which invest in a large number of stocks across different sectors. The objective is to diversify unsystematic risks and generate highest risk adjusted returns. Company specific and sector specific risks are unsystematic risks. Equity Linked Savings Schemes are essentially diversified equity mutual funds, which enjoy tax benefits under Section 80C of Income Tax Act. Balanced Funds (hybrid equity oriented funds) and Sector Funds (e.g. Infrastructure Funds, Banking Funds, Technology Funds, Pharma Funds etc) are not diversified equity funds.

Some research houses (e.g. CRISIL) and publications employ a stricter definition for diversified equity funds. As per their definition diversified equity funds are equity funds, which invest in stocks across different sectors and market segments. In other words, as per this definition, diversified equity funds in addition to investing in stocks across different industry sectors (e.g. Banking, oil and gas, cement and construction, automobiles, technology, pharmaceuticals, capital goods, FMCG, power, infrastructure etc), also invest in stocks across different market segments in terms of market capitalization (i.e. large cap, midcap, small cap and micro cap companies). These funds are also known as flexicap or multicap funds.

Fixed income or Debt mutual funds primarily invest in a variety fixed income securities like treasury bills, commercial papers, certificates of deposits, corporate bonds and government bonds, issued by different banks, companies and the Government. The fixed income securities are of a range of maturity profiles from short maturity period of 3 months to long maturity periods of 30 years or more. The primary investment objective of short term debt mutual funds (short term maturity profile) is to generate income while that of long term debt funds (long term maturity profile) is to generate both income and capital appreciation. Unlike bank deposits, debt funds are not risk free investments. There are two kinds of risk associated with debt funds:-

• Interest rate risk

• Credit risk

Long term debt funds have higher sensitivity to interest rate risks, while short term debt funds have lower sensitivity to interest rate risks. Corporate bond funds are exposed to credit risks. However, for the vast majority of debt mutual funds credit risk is quite low. Even the corporate bond funds, which aim to generate few percentage points of additional yield by investing in slightly lower rated corporate bonds, majority of the bonds in the fund portfolios are rated AAA and AA. To know the different types of debt funds, go to question,What are the different types of debt mutual funds in India?

Best or top performing mutual fund schemes across all debt mutual fund categories keep changing over time, since current performance of a scheme relative to other schemes, may not always be sustained in the future. One cannot compare the performance of debt funds across different categories. For example, one cannot compare the performance of a long term gilt fund with a short term fund). Once an investor has identified a particular category of debt funds for investment, based on his or her investment objectives, he or she needs to look at a number of factors when identifying the best debt funds in that category. The investor needs to look at returns across various timescales by going to our MF research section

( Funds&period=1y&type=Open&mode=Growth). You should first select the relevant category and then look at the top performing funds across several time periods, by selecting different periods like 1 year, 2 years, 3 years, 5 years etc from the drop down menu. You should also check for the consistency in the fund performance by looking at the rolling returns of the funds versus the benchmark. Rolling returns are the total returns of the scheme taken for a specified period on every day/week/month and taken till the last day of the duration. In this chart we are showing returns on every day during the specified period and comparing it with the benchmark. Rolling returns is the best measure of a fund's performance. Trailing returns have a recency bias and point to point returns are specific to the period in consideration. Rolling returns, on the other hand, measures the fund's absolute and relative performance across all timescales, without bias. You can see rolling returns in our MF research section by going to The rolling return time period should correspond with your typical investment holding period. In addition to returns, investors should also look at the track record of the fund manager and the mutual fund company.

Liquid fund are money market mutual funds and invest primarily in money market instruments like treasury bills, certificate of deposits and commercial papers and term deposits, with the objective of providing investors an opportunity to earn returns, without compromising on the liquidity of the investment. Typically they invest in money market securities that have a residual maturity of less than or equal to 91 days. This helps the fund managers of liquid funds in meeting the redemption demand from the investors.

Liquid funds provide a better alternative to investors who keep their surplus money parked in a savings bank account. While savings bank accounts typically pay interest rates in the range of 4 to 5%, liquid funds can potentially give much higher returns. Compared to other mutual fund categories, these funds have very low risk. Key benefits of liquid funds are:-

• High liquidity: Liquid funds do not have any exit load. Therefore, they can be redeemed any time after investment without any penalty.

• Higher returns than savings bank: Liquid funds give higher returns than savings bank. Savings bank interest rate is around 4%, whereas liquid funds can give higher returns by at least a few percentage points. The returns of liquid funds rise when bond yields rise and fall when bond yield, but they can always provide higher returns than savings bank

• Low volatility: Liquid funds are less volatile than longer term debt funds, since the underlying securities in their investment portfolio have short durations. Fixed income securities with short durations or maturities have lower interest rate risk, since the probability of the interest rates changing before the maturity of the securities is lower.

Mutual funds are bought or sold on the basis of Net Asset Value (NAV). Unlike share prices which changes constantly depending on the activity in the share market, the NAV is determined on a daily basis, computed at the end of the day based on closing price of all the securities that the mutual fund owns after making appropriate adjustments. The NAV is calculated by dividing the net assets (value of the securities and cash held by the fund minus the liabilities) of the fund by the total number of units outstanding.

Funds with high NAVs are not overpriced and funds with low NAVs are not attractively priced. Older the fund higher will the NAV be over a period of time. Low or high, the NAV by itself does not impact the return on investment from the mutual fund. The percentage change in a fund's NAV over a period of time denotes the percentage returns on investment of all the unit holders of the fund over the same period.

You can also find the current NAV of all mutual fund schemes on this website. Go the MF Research ( from the homepage and select Latest NAV ( under Lookup from the menu on the left hand side of the page. Select the AMC from the drop down menu and you will be able to see the NAVs of all the mutual fund schemes of the AMC.

You can find the current NAVs of mutual funds on the websites of the respective asset management companies (mutual fund houses) and the AMFI website. You can also find the current NAV of any mutual fund scheme on this website. Go the MF Research ( from the homepage and select Latest NAV ( under Lookup from the menu on the left hand side of the page. Type the first few letters of the scheme name in the search box on the right and the scheme name will be auto-filled. Select the scheme name and you will be able to see the current NAVs.

You can find the historical NAVs of mutual funds on the websites of the respective asset management companies (mutual fund houses). You can also find the current NAV of any mutual fund scheme on this website. Go the MF Research ( from the homepage and select Latest NAV ( under Lookup from the menu on the left hand side of the page. Type the first few letters of the scheme name in the search box and the scheme name will be auto-filled. Select the scheme name. Select the start date, end date and click on Submit. You will get the historical NAVs of the scheme for that period. If you historical NAVs since inception of the scheme, click on the check box next to Prefill dates with inception and last nav date and click on Submit. You will get the historical NAVs from inception till date.

Unit Linked Insurance Plans (ULIPs) are combined life insurance cum investment products. Unlike traditional insurance plans e.g. endowment, money back plans, pension plans etc, ULIPs are market-linked and have the potential to deliver higher returns compared to traditional plans. However, ULIPs, unlike traditional life insurance plans, do not offer capital safety. ULIPs provide investors with life insurance cover and at the same time investment in a fund of their choice.

Mutual fund, on the other hand, is a purely market linked instrument, which pools the money of different people and invests them in different financial securities like stocks, bonds etc. Each investor in a mutual fund owns units of the fund, which represents a portion of the holdings of the mutual fund.

One can think of ULIP as a mutual fund with a term life insurance plan attached to it. In terms of gross investment returns ULIPs have performed comparably with mutual funds over a 5 year period. However, net returns to investors are lower in ULIP because various costs are deducted from ULIP premiums before they are invested in the ULIP fund. A portion of the ULIP premium goes towards buying the life cover or sum assured. Another portion goes towards a variety of fees like, premium allocation fees, policy administration fees, fund management etc. The balance premium is then invested in the ULIP fund.

For an objective comparison of ULIP and mutual funds, read our article, Term Insurance and Mutual Fund or ULIP: Which is a better option?

An Exchange Traded Fund is essentially a basket of stocks that reflects the composition of an Index, like the Sensex or the Nifty. The price of the ETF reflects the net asset value of the basket of stocks. Exchange Traded Funds (ETFs) are are listed and traded on exchanges like stocks. There are various categories of ETFs in India. They are:-

• Equity

• Gold

• World Indices

• Debt

While an ETF is similar to a mutual fund in many ways, there are crucial differences between ETFs and mutual funds.

• Unlike a mutual fund, where NAV is calculated at the end of the day, the price of the ETF changes real time throughout the day, based on the actual share prices of the underlying stocks at any point of time during the day

• Mutual funds are actively managed, whereas ETFs are passively managed. Mutual funds aim to generate an alpha (or outperformance versus a market benchmark), whereas ETFs aim to track a particular index

• Mutual funds have specific investment objectives, like capital appreciation, income generation, large cap stock focus, midcap stock focus, sector focus etc. ETFs only aim to track the relevant index and reduce tracking errors

• Even though mutual funds aim to diversify unsystematic risks (or security specific risk), and they do diversify, to a large extent, there is likely to be still some residual unsystematic risk in mutual funds because mutual funds do not exactly reflect the market portfolio. ETFs, on the other hand, are only subject to systematic risk (or market risk), since they reflect the market portfolio

You need to have a demat account to invest in ETFs. On the other hand, you do not necessarily need to have a demat account to invest in mutual funds How to purchase / buy / invest in mutual funds?.