A complete beginner’s guide to what is mutual funds and how does it work?

Benefits of Mutual Funds

Mutual Funds


Mutual Funds are subject to market risks please read the offer documents carefully is a very confusing and scary sentence isn’t’ it? however, there are almost 11-13 lakh crores of people in India who invest in Mutual Funds. The Mutual fund’s Industry in the country speculated to increase to 40 lakh people by 2020.

Awareness among people towards savings and investing has seen a positive shift, however, there are people who get intimidated towards Mutual funds investments.

The jargons make it more complex and scary. The fact is mutual funds are most popular among individuals because of the benefits it offers to the investors.

The biggest advantage of mutual funds is that it can be started with as minimum as Rs 500. The tax benefits are huge compared to the traditional form of investment like PPF or Fixed deposit.  Below is all the information you require to start investing in Mutual Funds.

What are Mutual Funds?

A mutual fund is a company that collects money from all the investors and puts it together in one large space. The investment manager of this company invests this money in various assets such as stocks, precious metals, bonds, commodities and even on real estates.

An investor buys shares in a mutual fund from the company. These funds represent the ownership of a portion of assets. Due to its diversification, it minimizes the risk of an investment. Mutual funds are designed for long-term investments but they are also very liquid and it is very easy to buy and redeem.

  • A mutual fund is open to all: It can be invested by anyone as per their finance goals. A working professional having difficulty to channelize his/her funds can start investing in mutual funds for as minimum as Rs 500 per month or can increase to Rs 20,000 per month. There are mutual funds for retirement savings plan for 15-20 years. So basically anyone can invest in mutual funds.
  • Choose as per your Risk appetite: Mutual funds are for People who are willing to take risks for immediate returns, people who can take moderate risks and also for people who never take any risks. It offers options for all kind of risk appetite
  • If you need money anytime within a year choose Liquid or debt fund where the risk is very low.
  • If your money requirement is less than 3 years go for balanced funds where the risk level is moderate.
  • You need returns in more than 3 years you can invest in equity mutual funds which come with high risk and the risk is minimized if you invest for 4 or more years.
  • Invest as per your goals: One can invest for a certain period and enjoy the returns. For example, you can choose SIP (Systematic investment plan) for some requirement next year may be educational expenses or vacation you can choose liquid funds which will offer you better returns than FD in a bank. You can also invest for four years and have an accumulated amount. You can also invest for 15-20 years on retirement plan to have return like a pension in your old age.

Let us have a look at the Basics of Mutual funds which you will come across during trading

AMC: Asset Management Companies

A company that puts together a mutual fund is called AMC. It may have several schemes of mutual funds with similar or various investment objectives. The AMC hires a professional money manager who buys and sells shares as per the objective. All the AMC’s are regulated by The Security and Exchange Board of India (SEBI).

As per the mutual fund regulations the fund’s objectives should be clearly mentioned in the prospectus (legal document). Every mutual fund has a board of directors who should represent the interest of the shareholders.


NAV: Net Asset Value and how it is calculated? 

The net expenses per unit of the fund and NAV is calculated by the AMC at every EOD (End of the Day)

The value of all the securities is calculated daily and from this, all the expenses are subtracted, the result is further divided by the number of units in the fund which gives the NAV.

Expense Ratio:

The annual fee of AMC such as administration fees, brokerage, salaries and advertising.


AMC’S also have charges like sales charge, entry load or exit load charges. There are no load funds too where there are no sales charges.

Open and Close-Ended Funds:

Open-ended funds: where investors can exit and enter the mutual fund by buying or selling at its nav.

Whereas in Close-ended funds the investor can exit only after the period of the scheme is over. There is no loading on close-ended funds, and these shares are listed on the stock exchanges and can be traded on the secondary market.


Benefits of Mutual Funds

  • The Mutual fund comes with the inbuilt feature of diversification: Your money is combined with the money from other investors and you are the part of the pool of investment. With the fluctuation of the share market, not all the fund will perform better at one time, hence if you hold a variety of mutual funds, you can balance with the performing and poor performing shares.
  • A wide range of options: People can choose mutual funds as per their risk appetite.
  • Easy to buy and easy to sell: Mutual funds can be sold and purchased easily if there is an urgent requirement of money. There may be certain deductions due to withdrawal before maturity in certain cases.
  • Mutual funds are managed by professionals: A person who does not have any knowledge about mutual funds investments can also invest as there are experts, portfolio managers who decide on your behalf where to invest the money and when to buy and sell the shares.

Investing in mutual funds is not a rocket science, but it is very much essential that the investor should be aware of the details where his/her hard earned money is invested. Always ask queries to your portfolio manager and have a track of your holdings.

Happy mutual fund to you.



  1. Very nicely written.It clears all my doubts regarding mutual funds,simple and easy to understand language and presented in a good manner liked it very much.


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