Mutual Funds pool or collect money from a large number of investors. This money is invested in securities like equity, debt and commodities by professional fund manager(s) and their team.

When you invest in a mutual fund scheme, you receive units of the scheme. The price of each mutual fund unit is referred to as NAV (Net Asset Value). As the value of the underlying securities increases, the NAV increases and so does the value of your investment in the scheme.

Whenever you need your invested money back, you can place a ‘redemption’ order. This means that you will sell your units and receive a credit amount depending on the number of units you sell, the prevailing NAV, and exit load, if applicable.

Managed by Professional Fund Managers

Mutual fund schemes are managed by fund managers who have vast experience in the financial markets. 

More often than not, the fund managers have educational qualifications like CA (Chartered Accountant), CFA (Chartered Financial Analyst), MBA (Masters in Business Administration).

Dozens of Types, Thousands of Schemes

Mutual funds don’t have a dearth of options. Firstly, close to 50 AMCs (Asset Management Companies) offer mutual fund schemes in India.

Next, mutual funds are categorised as per the asset class they invest in - equity, debt, or hybrid. Each mutual fund category has several types. For example - large-cap mutual funds are a type of equity mutual funds.

Because of this, over 1,000 mutual fund schemes are available for investing in India. Source - AMFI

Require Low Effort from Investors

Mutual funds are simple instruments for investors. 

Most critical investment decisions associated with asset allocation, market cap allocation, buying and selling securities etc. are taken by the fund’s management teams. These decisions don’t require your review or approval or even in-depth understanding.

All you need to do is invest in the fund and the rest of it is taken care of by professionals.

Offer In-built Diversification that Lowers Risk

Diversification refers to spreading out your money across different assets (like equity, debt etc.) and across different securities (like stocks, bonds, etc.).

Mutual funds are diversified by design. By investing in a single equity mutual fund scheme, you get exposure to dozens of stocks.

Diversification helps in lowering investment risk. Think about it - if you invest in stocks of just one company, it is possible that the company can go bankrupt, wiping out your entire investment. But if you invest in stocks of many different companies, your money is not entirely at risk.

Accessible and Affordable Investing

Anyone can invest in mutual funds. All you need is a smartphone, Rs. 500 in your bank account and 5 minutes to invest in mutual funds, making them super accessible.

Mutual funds charge their investors in proportion of their investments. The charges are also referred to as expense ratios and are generally in the 1-2% range depending on the mutual fund scheme.

Get Your Money Back When You Want it

Most mutual funds are open-ended, meaning you can invest in them and withdraw your investments whenever you want. So you can easily access your mutual fund investments during times of need.

It is important to note that withdrawal may have adverse implications on the returns you will generate, taxes you will pay and may attract exit load.

It is important to note that units of close-ended mutual fund schemes can be redeemed only on maturity. And, units of ELSS have a 3-year lock-in period and can be liquidated only thereafter

Tightly Regulated by the SEBI

Mutual Funds are regulated by the capital markets regulator, Securities and Exchange Board of India (SEBI) under SEBI (Mutual Funds) Regulations, 1996.

The regulations and guidelines protect the investors from various activities of mutual funds - advertising, distributing, pricing, managing portfolio risks etc.

More Favourable Taxation than Direct Stock Investing

You can get equity exposure either by investing in equity mutual funds or direct stocks. While one may work better than the other from a returns perspective, equity mutual funds have more favourable taxation.

When you invest in direct stocks, you have to pay taxes whenever you sell your stocks at a profit or receive dividends. However, when mutual funds do it for you, they are not taxed. The taxation incidence occurs only when you sell the mutual fund units at a profit. Thus, mutual funds enjoy uninterrupted compounding that works in your favour.

If you have heard of mutual funds, you have heard of SIPs or Systematic Investment Plans. SIP is one of the two mutual fund investment methods, the other being lumpsum.

Systematic Investment Plan

Starting an SIP is super easy. All you have to do is select mutual fund schemes, define a date for monthly debit and investment amount and to start the SIP.

SIP offers the convenience of automatic monthly investing with the benefit of beating market volatility through rupee cost-averaging. However, please remember that the Rupee cost averaging does not assure a profit, nor does it protect one against investment losses in declining markets.

Lumpsum Investment

Lumpsum mutual fund investments refers to investing substantial sums of money in a mutual fund scheme(s) in one go.

Lumpsum investments are considered to be riskier than SIP because you invest the entire sum in one go instead of spreading it over time. But lumpsum investments also have the potential to generate higher returns than SIP if timed right.

Mutual funds can be categorised into different types depending on various factors. For example: Investment objective can be a factor and there can be 3 types based on it - Growth, Income and Liquidity.

But the most intuitive way to categorise mutual funds is based on the asset classes they take exposure to or their portfolio composition. Based on this and to for the sake of simplicity, we can say that there are 3 types of mutual funds:

1. Equity Mutual Funds
2. Debt Mutual Funds
3. Hybrid Mutual Funds

Equity Mutual Funds

Equity mutual funds invest most of their assets in equity and related instruments.

In a growing economy like India, equity offers high growth potential but the risk of investing in equity is also relatively higher.

Some popular types of equity mutual funds are - large-cap funds, mid-cap funds, small-cap funds, ELSS (Equity Linked Savings Schemes) funds, and flexi-cap funds.

Debt Mutual Funds

Debt mutual funds invest most of their assets in debt instruments. Since debt instruments are lower risk than equity, debt funds are lower risk than equity funds.

Debt funds offer features like income generation, stable returns, high liquidity, and reasonable safety.

Some popular types of debt mutual funds are - liquid funds, money market funds, corporate bond funds, and dynamic bond funds.

Hybrid Mutual Funds

Hybrid mutual funds typically invest in a mix of debt and equity instruments. So, investors can benefit from the stability offered by debt and the growth offered by equity through a single hybrid fund.

Some popular types of hybrid funds are - balanced advantage funds, aggressive hybrid funds, multi-asset allocation funds, and arbitrage funds.