For many Indians, investing is no longer limited to traditional savings options. Mutual funds have become an increasingly accessible way to participate in equity and debt markets without needing to manage investments on your own. Whether you are investing for long-term financial goals, starting an SIP, or exploring investment options for the first time, understanding how mutual funds work can help you make more informed decisions. And with more investors turning towards mutual funds today, learning the basics early may help you navigate your financial journey with greater confidence.
What are mutual funds?
Mutual funds are investment vehicles that pool money from multiple investors and invest it across asset classes such as equities, bonds, government securities, and money market instruments. These investments are managed by professional fund managers based on the scheme’s objective and market conditions.
For many Indian investors, mutual funds offer a simpler way to participate in financial markets without having to buy and manage individual investments on their own. Instead, investors gain exposure to a diversified portfolio through a single mutual fund scheme.
When you invest in a mutual fund, you receive units based on the amount invested and the applicable Net Asset Value (NAV). The value of these units changes depending on the performance of the underlying investments held by the fund.
For example, if you want exposure to some of India’s leading companies across sectors such as banking, technology, and healthcare, buying each stock separately may require larger capital and regular market tracking. A mutual fund helps simplify this by spreading investments across multiple securities through a professionally managed portfolio.
Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI), which has established guidelines around transparency, disclosures, and investor protection.
How do mutual funds work?
When you invest in a mutual fund, your money is combined with investments from other investors and managed through a single portfolio by professional fund managers. This allows the fund to invest across different securities such as equities, bonds, and money market instruments based on the scheme’s objective.
In return for your investment, you receive units of the mutual fund scheme based on the applicable Net Asset Value (NAV). NAV is the per-unit value of the mutual fund and changes daily depending on how the underlying investments perform.
Let’s understand this with a simple example. Suppose you want to invest in some of India’s leading companies across sectors such as banking, technology, and healthcare. Buying shares of each company separately may require larger capital, market research, and regular tracking. A mutual fund makes this process simpler by giving you exposure to multiple companies through a single professionally managed investment.
Different mutual funds invest differently depending on their objective. Equity mutual funds primarily invest in shares of listed companies, while debt mutual funds invest mainly in fixed-income instruments such as bonds and government securities. Some funds, such as index funds, aim to track market indices like the Nifty 50 or Sensex, subject to tracking error.
Mutual funds may generate returns through capital appreciation, dividend income, or interest earned from the underlying investments. Since mutual funds are market-linked investments, returns are not guaranteed and can fluctuate depending on market conditions.
How mutual fund returns are generated ?
Mutual fund returns are generated through the performance of the investments held within the scheme. These returns may come from capital appreciation, dividend income, or interest earned from the underlying securities.
One of the main indicators of a mutual fund’s performance is its Net Asset Value (NAV), which represents the per-unit value of the scheme. NAV changes daily depending on how the underlying investments perform in the market.
For example, suppose you invest ₹10,000 in a mutual fund when the NAV is ₹20. This means you receive 500 units of the scheme. Over time, if the value of the investments in the portfolio increases and the NAV rises to ₹25, the value of your investment may also increase to ₹12,500. Similarly, if market conditions decline, the NAV and investment value may fall as well.
The figures shown are for illustrative purpose only
Some mutual funds may also earn income through dividends from shares or interest from bonds and fixed-income instruments held within the portfolio.
Since mutual funds are market-linked investments, returns are not fixed or guaranteed and can fluctuate depending on market conditions and the performance of the underlying assets.
Benefits of investing in mutual funds
Mutual funds offer investors a convenient way to access professionally managed and diversified investments across different asset classes. Here are some of the key benefits that have contributed to mutual funds becoming increasingly popular among Indian investors:
Diversification
Mutual funds invest across multiple companies, sectors, and asset classes instead of depending on a single investment. This diversification may help reduce the impact of poor performance from any one security within the portfolio.
Professional fund management
Mutual funds are managed by experienced fund managers and research teams who analyse markets and make investment decisions based on the scheme’s objective. This can be useful for investors who may not have the time or expertise to actively manage investments on their own.
Accessibility with smaller investment amounts
Many mutual fund schemes allow investors to begin investing with relatively small amounts, with SIPs often starting from as low as ₹500. This makes mutual funds accessible for first-time investors as well as individuals looking to invest gradually over time.
Liquidity
Most open-ended mutual funds allow investors to buy or redeem units on business days at the applicable NAV, subject to scheme-specific conditions and applicable charges. This flexibility allows investors to access their investments when required.
Convenience and flexibility
Mutual funds offer features such as SIPs, online investing, portfolio tracking, and automated transactions that help simplify the investment experience. Investors can also choose from different categories of mutual funds based on their financial goals, investment horizon, and risk appetite.
Transparency
Mutual funds regularly disclose important information such as portfolio holdings, NAVs, expense ratios, and scheme-related updates. This allows investors to stay informed about where their money is being invested and how the scheme is performing.
Regulated investment environment
Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI), which has established guidelines around disclosures, valuation, and investor protection. This regulatory framework helps improve transparency and standardisation across the mutual fund industry.
Tax-saving opportunities
Investments in Equity Linked Savings Schemes (ELSS) may qualify for tax deductions of up to ₹1.5 lakh under Section 80C of the Income Tax Act, subject to prevailing tax laws and regulations. ELSS funds also provide exposure to equity markets along with tax-saving benefits, although they come with a mandatory lock-in period of three years.
The tax information in this article is based on prevailing laws at the time of publishing the article and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.
Disciplined investing through SIPs
Systematic Investment Plans (SIPs) allow investors to invest fixed amounts at regular intervals instead of investing a large amount at one time. This may encourage disciplined investing habits and allow investors to participate in markets gradually over time.
Types of mutual funds
Mutual funds are available in different categories to suit varying financial goals, investment horizons, and risk appetites. In India, SEBI broadly categorises mutual funds into equity, debt, hybrid, passive, and other scheme categories.
| Type of mutual fund | What it primarily invests in | Common categories |
| Equity mutual funds | Shares of listed companies |
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| Debt mutual funds | Fixed-income instruments such as government securities, treasury bills, and corporate bonds |
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| Hybrid mutual funds | A mix of equity and debt instruments |
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| Index funds and ETFs | Securities that replicate a market index such as the Nifty 50 or Sensex |
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| Fund of Funds (FoFs) | Other mutual fund schemes instead of direct securities |
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| Life cycle funds | Multiple asset classes with changing allocation over time |
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Equity mutual funds are generally considered by investors seeking potential long-term capital appreciation, while debt funds are commonly considered for relatively lower volatility. Hybrid funds combine equity and debt exposure within a single scheme, while passive funds aim to track the performance of a market index, subject to tracking error.
Mutual funds vs other investment options
Many investors compare mutual funds with traditional investment options before making investment decisions. Here is a simple comparison to help understand how mutual funds differ from fixed deposits and direct stock investing:
Mutual funds vs fixed deposits
Both mutual funds and fixed deposits are commonly considered investment options, but they differ in terms of returns, risk, liquidity, and investment approach:
| Parameter | Mutual funds | Fixed deposits |
| Returns | Market-linked and may fluctuate depending on fund performance and market conditions | Fixed and predetermined at the time of investment |
| Risk level | Risk varies depending on the type of mutual fund and underlying investments | Generally considered relatively lower risk |
| Growth potential | May offer potential long-term capital appreciation | Primarily focused on stable returns |
| Liquidity | Most open-ended funds can be redeemed on business days, subject to scheme conditions | Premature withdrawals may attract penalties |
| Diversification | Invests across multiple securities and asset classes | No diversification |
| Suitable for | Investors looking for diversification and market participation | Investors seeking relatively stable and predictable returns |
Returns on fixed deposits/savings accounts are fixed, however, returns on mutual funds are subject to market risks.
Mutual funds vs stocks
While both mutual funds and stocks are market-linked investments, they differ in terms of diversification, management style, and overall investment experience:
| Parameter | Mutual funds | Stocks |
| Investment approach | Invests across multiple companies and sectors through a single scheme | Direct investment in individual companies |
| Risk level | Risk is spread across multiple investments within the portfolio | Risk may be higher due to concentration in individual stocks |
| Professional management | Managed by professional fund managers and research teams | Requires individual research and regular monitoring |
| Diversification | Provides diversified exposure across companies and sectors | Diversification depends on the investor’s own portfolio choices |
| Returns | Depends on the performance of the overall portfolio | Depends on the performance of individual stocks |
| Suitable for | Investors seeking professionally managed diversification | Investors comfortable managing stock investments independently |
Modes of Investing in Mutual Funds
Mutual funds offer different ways to invest based on your financial goals, investing style, and cash flow preferences. Whether you prefer investing gradually from your monthly income or investing a larger amount at one time, Bajaj Finserv AMC offers multiple ways to begin your investment journey:
SIP (Systematic Investment Plan)
An SIP allows you to invest a fixed amount regularly, such as monthly or quarterly, instead of investing a large amount at one time. For example, if you want to invest a portion of your monthly salary towards long-term goals such as retirement, higher education, or buying a home, an SIP can help you invest gradually over time.
Lump sum investment
A lump sum investment involves investing a larger amount in a mutual fund scheme through a single transaction. This mode may be considered by investors who have surplus funds available for investing at one time.
STP (Systematic Transfer Plan)
An STP allows investors to transfer a fixed amount from one mutual fund scheme to another within the same AMC at regular intervals. Some investors use this approach to gradually move investments from debt funds to equity funds over time.
SWP (Systematic Withdrawal Plan)
An SWP allows investors to withdraw a fixed amount from their mutual fund investment at regular intervals. This may be useful for investors looking for periodic cash flows to manage regular expenses.
You can also use an SIP calculator to estimate how regular investments may potentially grow over time based on your investment amount, tenure, and expected rate of return.
The calculator is an aid, not a prediction tool. It may provide only an indicative picture.
Mutual fund fees and charges
Mutual funds may involve certain fees and charges that investors should understand before investing, as these costs can impact the overall investment value over time:
Expense ratio
The expense ratio is the annual fee charged by the AMC for managing and operating the mutual fund scheme, expressed as a percentage of the scheme’s assets under management (AUM).
Exit load
An exit load is a charge that may apply when investors redeem mutual fund units before a specified holding period.
Transaction charges
Certain mutual fund investments made through distributors may attract transaction charges, subject to applicable regulations.
Fund management fees
Fund management fees form a part of the expense ratio and are charged for managing the investments within the mutual fund scheme.
Taxes on mutual funds
Returns from mutual funds may be subject to taxation depending on the type of fund and the investment holding period, subject to prevailing tax laws and regulations.
Who should invest in mutual funds?
Mutual funds may be considered by a wide range of investors depending on their financial goals, investment horizon, and comfort with market fluctuations. If you are looking to begin your investment journey, an SIP can help you start investing gradually with relatively smaller amounts, with many schemes allowing investments starting from as low as ₹500.
Mutual funds may also suit individuals who do not have the time or expertise to regularly track and manage stock market investments on their own. With different categories such as equity, debt, hybrid, and passive funds available, investors can choose schemes based on their financial needs and risk appetite.
They may also be considered by investors planning for goals such as buying a home, funding higher education, planning for retirement, or building long-term wealth over time. Investors looking for tax-saving opportunities may also consider ELSS funds, which may qualify for deductions under Section 80C of the Income Tax Act, subject to prevailing tax laws and regulations.
Things to consider before investing in mutual funds
Considering a few important factors before investing can help you make more informed mutual fund investment decisions:
- Define your financial goals clearly, whether you are investing for retirement, a home purchase, children’s education, or long-term wealth creation.
- Consider your investment horizon, as different mutual fund categories may be suitable for different time periods.
- Assess your risk appetite before investing, since some mutual funds can be more volatile than others.
- Understand the investment objective and portfolio allocation of the mutual fund scheme before investing.
- Compare different mutual fund categories such as equity, debt, and hybrid funds based on your financial needs and comfort with market fluctuations.
- Review the expense ratio, exit load, and other applicable charges, as these can affect overall returns.
- Diversifying investments across asset classes or mutual fund categories may help reduce concentration risk within a portfolio.
- Past performance may provide insights into historical trends, but it does not guarantee future returns.
- Regular investing through an SIP may help investors participate in markets gradually over time.
- Reading the Scheme Information Document (SID) and related documents can help investors better understand the scheme’s features and risks.
Past performance may or may not be sustained in future
How to start investing in mutual funds
Starting your mutual fund investment journey with Bajaj Finserv AMC is a simple and fully digital process that can be completed in just a few steps:
- Visit the Bajaj Finserv AMC website and click on ‘Invest Now’ to access the investor portal.
- Log in if you are an existing investor or create a new account using your PAN and mobile number.
- Complete your KYC verification if it is not already done, as this is required before investing in mutual funds.
- Add your bank account and nominee details to complete your profile setup and begin investing smoothly.
- Explore different mutual fund schemes and choose one based on your financial goals, investment horizon, and comfort with market risk.
- Select whether you would like to invest through an SIP or a lump sum investment and enter the amount you wish to invest.
- Review your details, complete the payment process, and your investment will be initiated.
Common terms related to mutual funds
Here are some commonly used mutual fund terms that can help make investing concepts easier to understand:
| Term | Meaning |
| NAV (Net Asset Value) | The per-unit value of a mutual fund scheme that changes daily based on the value of underlying investments. |
| AMC (Asset Management Company) | The company that manages and operates mutual fund schemes. |
| SIP (Systematic Investment Plan) | A facility that allows investors to invest fixed amounts regularly in mutual funds. |
| AUM (Assets Under Management) | The total market value of assets managed by a mutual fund scheme or AMC. |
| ELSS (Equity Linked Savings Scheme) | A type of equity mutual fund that may offer tax deductions under Section 80C of the Income Tax Act, subject to prevailing tax laws and regulations. |
| ETF (Exchange Traded Fund) | A passive fund that tracks a market index and trades on stock exchanges like shares. |
| KYC (Know Your Customer) | A mandatory verification process required before investing in mutual funds. |
| Expense ratio | The annual fee charged by the mutual fund for managing the scheme, expressed as a percentage of assets. |
| Fund manager | The investment professional responsible for managing the mutual fund portfolio and investment decisions. |
| Portfolio | The collection of securities such as stocks and bonds held within a mutual fund scheme. |
| Benchmark | A market index used to compare the performance of a mutual fund scheme. |
| Exit load | A charge that may apply when investors redeem units within a specified period. |
| Equity fund | A mutual fund that primarily invests in shares of listed companies. |
| Debt fund | A mutual fund that primarily invests in fixed-income instruments such as bonds and government securities. |
| Hybrid fund | A mutual fund that invests across both equity and debt instruments. |
| Redemption | The process of withdrawing money by selling mutual fund units. |
Conclusion
Mutual funds offer Indian investors a convenient way to participate in financial markets through professionally managed and diversified investments. Whether you are starting an SIP with smaller amounts, planning for long-term financial goals, or exploring different investment options, understanding how mutual funds work can help you make more informed decisions. With multiple fund categories and investment modes available today, understanding mutual funds can help investors approach investing with greater clarity and awareness.
FAQs
What do you mean by mutual fund?
A mutual fund is an investment vehicle that pools money from multiple investors and invests it across assets such as equities, bonds, and money market instruments. These investments are managed by professional fund managers, making it easier for investors to participate in financial markets without having to manage individual investments on their own.
How do mutual funds work?
When you invest in a mutual fund, your money is combined with investments from other investors and managed through a diversified portfolio by an Asset Management Company (AMC). In return, you receive units based on the amount invested and the applicable Net Asset Value (NAV), while the value of your investment changes depending on how the underlying investments perform.
Are mutual funds safe for beginners?
Mutual funds are often considered by beginners because they offer professionally managed and diversified investments across different asset classes. However, since mutual funds are market-linked investments, their value can fluctuate depending on market conditions and the type of fund selected.
Can I lose money in mutual funds?
Yes, mutual funds are subject to market risks, so the value of investments can rise or fall over time. The level of risk generally depends on the type of mutual fund, with equity funds typically carrying relatively higher market volatility than debt-oriented funds.
What are the different types of mutual funds?
Mutual funds are broadly categorised into equity funds, debt funds, hybrid funds, index funds and ETFs, and solution-oriented funds. Each category invests differently and may suit different financial goals, investment horizons, and comfort with market fluctuations.
What is the minimum amount required to invest in mutual funds?
Many mutual fund schemes allow investors to begin with relatively small amounts, with SIPs often starting from as low as ₹500. The minimum investment amount may vary depending on the mutual fund scheme and investment mode selected.
What is the difference between an SIP and a lump sum investment?
An SIP allows you to invest a fixed amount regularly over time, while a lump sum investment involves investing a larger amount in a single transaction. The choice between the two usually depends on your cash flow, financial goals, and investing preferences.
Can I withdraw money from mutual funds anytime?
Most open-ended mutual funds allow investors to redeem units on business days at the applicable NAV, subject to scheme-specific conditions and applicable charges such as exit loads. However, certain schemes, such as ELSS funds, come with mandatory lock-in periods.
How are mutual funds taxed in India?
The taxation of mutual funds depends on factors such as the type of mutual fund and the investment holding period. Capital gains from equity and debt mutual funds are taxed differently under prevailing tax laws and regulations.
How do I start investing in mutual funds?
You can start investing in mutual funds online through Bajaj Finserv AMC by completing your KYC verification, selecting a suitable mutual fund scheme, and choosing between an SIP or lump sum investment. Many investors begin gradually through SIPs, depending on their financial goals and investment preferences.
What are the 4 types of mutual funds?
Mutual funds are broadly classified into 6 main categories based on their investment objective and the types of assets they invest in. These include equity mutual funds, debt mutual funds, hybrid mutual funds, index funds and ETFs, Fund of Funds (FoFs), and life cycle funds. Each category carries different levels of market risk, return potential, and investment strategy, allowing investors to choose schemes based on their financial goals, investment horizon, and comfort with market fluctuations.
Which mutual fund gives 100% return?
No mutual fund can guarantee 100% returns, as mutual funds are market-linked investments and their performance depends on market conditions and the underlying assets within the portfolio. It is important for investors to make decisions based on financial goals and risk appetite rather than return expectations alone.
What are the top 5 mutual funds?
There is no single list of mutual funds that may be suitable for every investor, as the suitability of a scheme depends on factors such as financial goals, investment horizon, and comfort with risk. Investors should review scheme-related documents and evaluate funds carefully before investing.
