Everything You Need to Know About Mutual Funds in India

Saving money consistently is a challenge many face, especially when unexpected expenses arise. Relying on fixed deposits or gold may feel safe, but it often limits financial growth. The fear of losing hard-earned money can prevent people from exploring better investment options. What if there was a way to invest that offered both safety and growth? It could ease your concerns and pave the way for a more secure financial future. A diversified approach, like mutual funds, might be the answer. 

Today, we will introduce you to one of the most rapidly growing investment options currently—mutual funds—and also shed some light on their advantages and disadvantages.

History Of Mutual Funds In India

India’s mutual fund industry began in 1963 with the creation of the Unit Trust of India (UTI). Over the years, the industry has evolved through five key phases, starting with UTI under RBI, followed by public and private sector fund entries, regulatory changes, and significant growth post-2014. Today, the mutual fund sector is a major part of India’s financial ecosystem.

What Are Mutual Funds?

A mutual fund is a pool of money collected from various investors. The goal is to buy a diversified portfolio of bonds, stocks, or other securities. Professional fund managers handle mutual fund products. By investing in mutual funds, you can access a variety of assets. This usually means dealing with lower risk compared to investing directly in individual stocks. You can start with a small amount and choose from different mutual fund types based on your risk tolerance.

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Everything About Mutual Fund Units

Let’s simplify with an example.

Suppose you and three friends want to buy a pizza that costs ₹40, but each of you only has ₹10. Instead of buying separate items, you all pool your ₹10 each to buy the pizza. Now, you share the pizza based on your contribution.

• Total Pizza Cost: ₹40
• Total Slices: 12
• Cost Per Slice: ₹40 / 12 = ₹3.33

If you put in ₹10, you get 3 slices or 3 units. Each slice costs ₹3.33, so your ₹10 gets you three slices.

Types of Mutual Fund Schemes

There are multiple mutual fund types in India from which you can choose.

Understanding these types can help you pick the right fund for you.

1. Based on Structure:

Mutual funds differ in how they’re structured, which affects how you can invest or withdraw your money.

• Open-Ended Schemes: These funds are always open for buying and selling shares. It’s flexible and convenient if you want easy access to your cash.
• Close-Ended Schemes: These funds have a set end date. You invest when the fund opens and can only redeem your shares at maturity or by selling them on the stock exchange.
• Interval Schemes: These allow you to buy or sell shares during certain periods, which happen at regular intervals (like every 15 days).

2. Based on Portfolio Management:

The way a mutual fund’s portfolio is managed affects its performance and cost.

• Active Funds: These mutual funds and types are managed by professionals who actively choose which stocks to buy or sell. They try to outperform the market by making strategic decisions.
• Passive Funds: These funds track a market index, such as the Nifty 50, and aim to mirror its performance. They usually have lower fees and simpler management.

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3. Based on Investment Objectives:

Different mutual funds cater to different financial goals.

• Growth Funds: These are designed to increase your investment’s value over time. They invest mainly in stocks and are suitable for long-term goals if you can handle some short-term fluctuations.
• Income Funds: These focus on providing regular income by investing in fixed-income securities like bonds. They are ideal if you want predictable returns and are looking for regular payouts.
• Liquid Funds: These invest in short-term, low-risk instruments. They are perfect if you need quick access to your money while still earning some returns.

4. Based on Investment Portfolio:

Funds can be categorized based on where they invest.

• Equity Funds: These mutual fund types invest primarily in stocks. They’re suited for those who can tolerate some risk for potentially higher returns.
• Debt Funds: Such type of mutual funds invest in bonds and other fixed-income securities. These are a good choice for more conservative investors.
• Hybrid Funds: They combine investments in both stocks and bonds. They offer a mix of growth and stability.
• Money Market Funds: Invest in very short-term, low-risk instruments. They’re designed to offer safety and liquidity, ideal for short-term needs or as a place to keep cash.
• Thematic Funds: They allow you to invest according to particular interests or goals.

Why are these gaining popularity nowadays? Learn more about thematic funds!

• Exchange-Traded Funds (ETFs): You can trade on stock exchanges, which represent a collection of assets. They offer flexibility.
• Overseas Funds: Invest in international markets, providing exposure to global investment opportunities.
• Fund of Funds: Invest in other mutual funds rather than directly in stocks or bonds. They offer diversified exposure by pooling together various funds.

How to Invest in Mutual Funds

Investing in Lump Sum Mutual Funds

You can invest in mutual funds effortlessly using the Shoonya web platform. Here’s a simple guide to help you get started:

1. Log In: Access your Shoonya account at trade.shoonya.com.
2. Place an Order: Navigate to the “Orders” section and click on “MF order.”
3. Search for the Fund: Find the mutual fund you wish to invest in.
4. Enter Investment Details: Choose “Fresh” for a new investment and specify the amount you want to invest.
5. Complete Purchase: Click the “Purchase” button to finalise your order.
6. Make Payment: A payment link will be sent to your registered email. Use this link to complete your payment.
7. Fund Allocation: After payment, your mutual fund units will be allotted to your Demat account within T+2 days.

Note: Payments should be made using the bank account registered with your Demat account.

Setting Up a Systematic Investment Plan (SIP)

If you prefer investing through a Systematic Investment Plan (SIP), follow these steps:

1. Log In: Access your Shoonya account at trade.shoonya.com.
2. Select SIP: Go to “Orders” and click on “XSIP.”
3. Choose the Fund: Select the mutual fund for which you want to set up an SIP.
4. Create Mandate ID: If this is your first SIP with Shoonya, you need to create a Mandate ID. Enter the Mandate amount and validity date.

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5. Authenticate Mandate: Submit the details and wait for the Mandate authentication link sent to your email. Approval typically takes 24 hours.
6. Set Up SIP: Once approved, return to “XSIP,” enter the SIP amount, and select “Fresh” as the transaction type.
7. Choose Debit Date: Specify the date for monthly debits directly from your registered bank.
8. Specify Installments: Choose “Monthly” for monthly debits and specify the number of instalments (e.g., 24 instalments for a 2-year SIP).

This process makes it easy to invest systematically over time

Advantages of Investing in Mutual Funds

Here’s a look at why they might be a good choice for you:

1. Expert Investment Management:

Managing investments can be time-consuming and complex. Mutual funds are governed by professional money managers who have the expertise and resources to handle this for you.

2. Risk Management: 

One of the biggest benefits of mutual funds is the ability to spread your investments across various assets. If one part of the fund performs poorly, other investments might perform better, balancing out the overall risk.

3. Affordability & Comfort

Buying all the individual securities a mutual fund holds can be expensive. Mutual funds allow you to invest in a broad range of assets with a relatively small amount of money.

4. Liquidity 

Mutual funds generally offer easy access to your money. For open-ended funds, you can redeem your units on any business day. However, some funds, like close-ended or tax-saving funds, have specific lock-in periods.

5. Well-Regulated

Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI). This regulation helps ensure that mutual funds are managed fairly.

6. Tax Benefits 

Investing in certain mutual funds, like Equity Linked Savings Schemes (ELSS), can offer tax benefits under Section 80C of the Income Tax Act. Additionally, long-term investments in mutual funds are often more tax-efficient.

Disadvantages of Investing in Mutual Funds

While mutual funds offer several advantages, they also come with some drawbacks.

Here’s a look at the potential disadvantages to keep in mind:

1. Management Fees 

Even though mutual funds have relatively low costs, you still have to pay management fees, known as the expense ratio. For actively managed funds, these fees can be higher compared to passive funds.

2. Market Risk 

Mutual funds are subject to market risk. This means that the value of your investment can go up or down based on market conditions.

3. Tax Implications 

While some mutual funds offer tax benefits, others might not. Additionally, when a fund manager buys or sells securities within the fund, it can trigger capital gains taxes, which might impact your overall returns.

3. Performance Variability 

The performance of mutual funds can vary significantly. It is important for you to actively research and understand a fund’s historical performance and management style.

4. Hidden Costs 

Some mutual fund types may have additional fees or charges. These hidden costs can reduce your overall returns.

SEBI Categorization of Mutual Funds Schemes

According to SEBI’s guidelines from October 2017, mutual funds are grouped into several categories.

1. Equity Schemes These funds are mainly invested in stocks. They’re categorised based on the size of the companies they invest in:
   • Large-Cap Funds: Invest in large, established companies.
   • Mid-Cap Funds: Focus on medium-sized companies.
   • Small-Cap Funds: Target smaller, growing companies.
2. Debt Schemes These funds invest in bonds and other fixed-income securities. They’re classified based on the risk level:
   • Low-Risk Debt Funds: Invest in safer securities.
   • Medium-Risk Debt Funds: Mix of safer and higher-yield securities.
   • High-Risk Debt Funds: Invest in riskier, higher-yield securities.
3. Hybrid Schemes These funds combine stocks and bonds. They’re split into:
   • Conservative Hybrid Funds: More focused on bonds, with some investment in stocks.
   • Balanced Hybrid Funds: Equal mix of stocks and bonds.
   • Aggressive Hybrid Funds: Higher proportion of stocks compared to bonds.
4. Solution-Oriented Schemes Designed for specific financial goals:
   • Retirement Funds: Help you save for retirement.
   • Children’s Funds: Aim to support your child’s future needs, like education.
5. Other Schemes This category includes:
   • Index Funds & ETFs: Track specific stock indices.
   • Fund of Funds: Invest in other mutual funds instead of directly in stocks or bonds.

This classification helps investors choose funds that match their financial goals and risk tolerance.

Myths & Facts about Mutual Funds

When it comes to investing, mutual funds are often surrounded by myths and misconceptions. Understanding the truth is highly important.

Myth: Mutual funds are only for experts.

Fact: Mutual funds are designed for everyday investors, even those who aren’t experts. This means you can benefit from expert management without needing to be a financial whiz.

Myth: Mutual funds are just for the long term.

Fact: While many mutual funds are suitable for long-term goals, there are also funds designed for short-term needs. You can choose from various mutual fund types.

Myth: Investing in mutual funds is the same as investing in the stock market or that mutual funds are just equity products.

Fact: Mutual funds invest in a variety of assets, including stocks (equity), bonds (debt), and other securities. They’re not limited to just the stock market.

Myth: You need a large amount of money to invest in mutual funds.

Fact: Many mutual funds allow you to start with a small investment. They are accessible to investors with various budget sizes, so you don’t need a large sum to begin investing.

Conclusion

Mutual funds offer a versatile investment option suitable for various financial goals and risk needs. With options ranging from equity to debt, you can choose the mutual fund type that suits your needs. Despite some drawbacks, the benefits of professional management and diversification often outweigh these concerns. However, you must remember to do proper research before choosing any mutual fund scheme.

FAQs| Mutual Fund Types

Source: AMFIndia

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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.