Mutual Fund Basics

These days, any proper investment plan tends to include a plan to invest in mutual funds too. While investing in a mutual fund is a good idea, it more often that not, leaves potential investors scratching their heads about what this whole mutual fund thing is all about. Mutual funds are incredibly simple to understand. The basics of the mutual fund is that you invest money in a fund along with load of other people. The company that offers the fund then invests the money and you get the returns.

How mutual funds work is by collecting money from lots of investors and then investing that money in stocks and bonds. The idea behind the mutual fund is to invest in a balanced way so as to mitigate the risk associated with investments as much as possible. Being an investment that is made in the markets, there is an inherent risk that comes with this investment and investors must be prepared for the possibility of a loss.

The fund, especially an open ended fund, can be judged by checking the NAV or the net asset value. The NAV, when multiplied by the units in the fund, is what will determine the amount that the investor will get when they make a withdrawal. It must however be remembered that the NAV is NOT an indication of the quality of the fund and should not be the only criteria used to judge the mutual fund.

Types of mutual funds

There are two broad types of mutual funds available in India. They are the open ended and closed ended mutual funds.


Open ended mutual funds are those where investors can indulge in the buying and seeling of units at any time. There are no maturity periods or investment periods for these funds. They can also be further classified in 4 types, which are:

  • Debt/ Income

  • Debt or income mutual funds are those where investments are made in bonds and treasury bills. Money invested in such a fund can be put into monthly income plans, short term plans, flexible maturity plans, etc. These investments offer a very low risk factor and low returns and are ideal for those who are looking for a safer environment for their money to grow in.

  • Money Market/ Liquid

  • Money market or liquid mutual funds are those where investments are made in treasury bills and fixed income securities among other instruments like short term bank certificates of deposits. The purpose of these funds is to provide investors with liquidity hence they come with short maturity periods of about 90 days.

  • Equity/ Growth

  • Equity or growth mutual funds are those where the investors money is invested in equity stocks with the idea of either generating an income or capital gains. Sometimes they can be investments made with the purpose of generating both gains and income.

  • Balanced

  • Balance funds, as the name suggests, invest the money in a balanced way between fixed income securities and equity funds so as to provide investors with the opportunity to invest aggressively but with caution.

Closed ended mutual funds

Closed ended mutual funds are those where the fund comes with a fixed maturity period and also alows for investments to take place only in the innitial stages of the fund. It has two types, the capital protection fund and the fixed maturity plans fund.

  • Capital Protection

  • The capital protection mutual fund invest in both fixed income securities and equity plans but the investment in equity is marginal since the aim of the scheme is to safeguard the principal while still getting returns.

  • Fixed Maturity Plans

  • These plans, unlike most other plans, may come with the lowest charges for the scheme because they are not managed actively like other funds. In a fixed maturity plan, the investment is made mostly in debt instruments that mature along the same timeline as this fund since it comes with a fixed maturity period.


Sometimes you will notice that a mutual fund will only allow investment at specific periods. It does not allow investment at any time but it still allows investments to happen much later into the schemes duration too. This is so because the interval mutual funds operate as a combination of both open and close ended funds where investments can be made at specific intervals.

Advantages of Mutual Fund

There are several advantages to mutual funds. Some of these are:

  • Since the investments are actually by experts, investors are not required to have an expert understanding of the markets and how they function.
  • The investment in a mutual fund can be done in a lump sum or in instalments.
  • Investments made in tax saver mutual funds are exempt from tax under section 80C.
  • Investors can chose the risk level from low, medium and high risk funds based on their appetite for risk.
  • Risks are mitigated by investment the money in different stocks and bonds.
  • Mutual funds that don't have lock in periods can offer liquidity when needed.
  • There is no need for large sums of money to begin investing in mutual funds.
  • Invests can also be made in SIPs, (systematic investment plans) where a specific amount can be paid towards the mutual fund every month.

Disadvantages of Mutual Funds

The main disadvantage that a mutual fund may have is that, unlike fixed deposits or other such investments, there is a factor of risk involved. While fixed deposits provide steady and safe growth, the growth in a mutual fund depends on the market performance and can provide returns or even cause the investor to incur a loss.

How to invest in Mutual Funds

The very first step to investing in mutual funds is to figure out if the investment will be done in a lump sum or through SIPs. Once that is sorted, you will need to figure out your appetite for risk. Generally the high risk funds will also provide the highest returns but if you are not looking for high return rather, lower returns in a safer environment then you can go in for a medium or low risk mutual fund.

News About Mutual Funds

  • e-commerce platforms will now offer cheaper Mutual Funds

    With SEBI planning to allow the sale of mutual funds on e-commerce websites, they also plan to make them cheaper. Currently mutual fund are being sold at 50 basis point per unit, and commision to be paid will be up to 150 basis points. If an investor directly invests in a fund house the commissions can be avoided but management fees and other charges will be applicable. A new NAV and cost structure leading to a third set if mutual funds are sold on e-commerce platforms. Different commission structures for different platforms was the initial discussion, this could also lead to having different NAVs for online sellers depending on the cost structures.

    3 November 2015

  • New fund offer document filed from Sundaram Mutual Fund

    Sundaram Mutual Fund has filed a document with SEBI for a new fund offer for the open-end fund-of-funds scheme called Sundaram Developed Markets Fund. The objective of the fund is Rs. 5, 000 and multiples of Re. 1 thereafter. There will no entry load and the exit load will be 1% if the redemption is within a year of allotment. The objective of the scheme is to offer long term growth and dividend options, and to also collect Rs. 10 crore, being benchmarked at MSCI World Index.

    20 October 2015

  • BNP Paribas Dividend Yield Fund shows rich despite doggy markets

    Despite the markets being doggy the BNP Paribas Dividend Yield Fund is showing great returns and yields for long term funds. They are able to show stability in cash flows and also a great track record for the dividend payouts. Even with the market being bearish stocks from the fund have better yield. For the past 5 years, the fund has crossed its benchmark of 80% on rolling returns basis. With this fund you have a wide option to invest in, even though lower returns is possible, the BNP Paribas Dividend Yield Fund invest in stocks that have a yield of 0.5% and above.

    7 October 2015

GST rate of 18% applicable for all financial services effective July 1, 2017.

Display of any trademarks, tradenames, logos and other subject matters of intellectual property belong to their respective intellectual property owners. Display of such IP along with the related product information does not imply BankBazaar's partnership with the owner of the Intellectual Property or issuer/manufacturer of such products.

This Page is BLOCKED as it is using Iframes.