A Comprehensive Guide to Mutual Funds in India | Zenith Finserve
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If you’re just starting out with investing or even if you’ve been in the game for a while, you’ve probably come across the term Mutual Funds. But what exactly are mutual funds? How do they work, and most importantly, are they the right choice for you?
We will explore everything you need to know about mutual funds, from how they operate to the different types of mutual funds available, and how you can choose the right one for your financial goals.
What Are Mutual Funds?
To put it simply, mutual funds are investment vehicles where money from multiple investors is pooled together to invest in securities like stocks, bonds, or other assets. A professional fund manager manages the pool, deciding where to invest the money based on the fund’s objectives. This allows investors to get exposure to a diversified portfolio without having to manage individual investments themselves.
How Do Mutual Funds Work?
When you invest in a mutual fund, you’re essentially buying units of that fund. Each unit represents your ownership in the total assets of the fund. The Net Asset Value (NAV) is the price per unit of the mutual fund, which changes daily based on the performance of the underlying assets.
The key advantage of mutual funds is that they offer diversification. Instead of putting all your money into one stock or bond, a mutual fund spreads your money across a variety of assets, which reduces risk. If one stock performs poorly, other stocks or bonds in the fund may balance out the losses, giving you a more stable return.
Types of Mutual Funds
Mutual funds are designed with different types of investors in mind, allowing you to choose a scheme based on your risk profile, financial goals, and the duration you plan to stay invested. Let’s break down the different types of mutual funds available in India.
Types of Mutual Funds Based on Maturity Period
1. Open-Ended Funds
An open-ended fund allows you to buy or sell units at any time, making it highly liquid. You don’t have a fixed maturity date. Most mutual funds in India fall under this category because they offer you the flexibility to enter and exit your investments when you wish, based on the Net Asset Value (NAV) at that point.
2. Close-Ended Funds
Close-ended funds, on the other hand, have a fixed maturity period. You can only invest during the initial launch period, called the New Fund Offer (NFO). Once the offer is closed, no new investments are allowed. However, you can trade these funds on the stock exchange. Some close-ended funds offer periodic repurchases directly through the fund itself.
3. Interval Funds
As the name suggests, interval funds combine features of both open-ended and close-ended funds. They allow you to buy or sell units at specific intervals, which could be predetermined periods or during specific windows when the fund opens for transactions.
Types of Mutual Funds Based on Asset They Invest In
SEBI has classified all the mutual funds in India in five broad categories-
- Equity Schemes
- Debt Schemes
- Hybrid Schemes
- Solution Oriented Schemes
- Other Schemes
1. Equity Schemes
Equity mutual funds invest mainly in stocks and may suit you if you are looking for long-term growth. SEBI has classified equity funds into several categories, including large-cap, mid-cap, and small-cap, based on market capitalisation. These funds offer higher returns but come with higher risks due to market volatility.
In order to ensure uniformity in respect of the investment universe for equity schemes, SEBI has defined the meaning of large cap, mid cap and small cap as follows:
- Large Cap: 1st -100th company in terms of full market capitalization
- Mid Cap: 101st -250th company in terms of full market capitalization
- Small Cap: 251st company onwards in terms of full market capitalization
| Sr. No. | Category of Schemes | Scheme Characteristics | Type of Scheme |
| 1 | Multi Cap Funds | Minimum investment in equity & equity related instruments–65% of total assets | Multi Cap Fund – An equity mutual fund investing across Large Cap, Mid Cap, Small Cap stocks |
| 2 | Large Cap Funds | Minimum investment in equity & equity related instruments of large cap companies – 80% of total assets | Large Cap Fund – An equity mutual fund predominantly investing in Large Cap stocks |
| 3 | Large & Mid Cap Funds | Minimum investment in equity & equity related instruments of large cap companies – 35% of total assets
Minimum investment in equity & equity related instruments of mid cap stocks – 35% of total assets |
Large & Mid Cap Fund – An open ended equity mutual fund investing in both large cap and mid cap stocks |
| 4 | Mid Cap Funds | Minimum investment in equity & equity related instruments of mid cap companies – 65% of total assets | Mid Cap Fund – An equity mutual fund predominantly investing in Mid Cap stocks |
| 5 | Small Cap Funds | Minimum investment in equity & equity related instruments of small cap companies – 65% of total assets | Small Cap Fund – An equity mutual fund predominantly investing in Small Cap stocks |
| 6 | Dividend Yield Funds | Scheme should predominantly invest in dividend yielding stocks. Minimum investment in equity – 65% of total assets | An equity mutual fund predominantly investing in dividend yielding stocks |
| 7a. | Value Funds* | Scheme should follow a value investment strategy. Minimum investment in equity & equity related instruments – 65% of total assets | An equity mutual fund following a value investment strategy |
| 7b. | Contra Funds* | Scheme should follow a contrarian investment strategy. Minimum investment in equity & equity related instruments – 65% of total assets | An equity mutual fund following contrarian investment strategy |
| 8 | Focused Funds | A scheme focused on the number of stocks (maximum 30) Minimum investment in equity & equity related instruments – 65% of total assets | An equity scheme investing in maximum 30 stocks (mention where the scheme intends to focus, viz., multi cap, large cap, mid cap, small cap) |
| 9 | Sectoral Funds or Thematic | Minimum investment in equity & equity related instruments of a particular sector/particular theme – 80% of total assets | An open ended equity scheme following the theme as mentioned |
| 10 | ELSS Funds | Minimum investment in equity & equity related instruments – 80% of total assets (in accordance with Equity Linked Saving Scheme, 2005 notified by Ministry of Finance) | An open ended equity linked saving scheme with a statutory lock in of 3 years and tax benefit |
2. Debt Schemes
Debt funds invest in fixed-income securities like bonds and government securities. They are ideal if you are seeking stable returns with lower risk to meet your near term financial goals.
| Sr. No. | Category of Schemes | Scheme Characteristics | Type of Scheme |
| 1 | Overnight Funds | Investment in overnight securities having maturity of 1 day | A debt scheme investing in overnight securities |
| 2 | Liquid Funds | Investment in Debt and money market securities with maturity of upto 91 days only | A liquid scheme |
| 3 | Ultra Short Duration Funds | Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 months – 6 months | An ultra – short term debt scheme investing in instruments with Macaulay duration between 3 months and 6 months |
| 4 | Low Duration Funds | Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 6 months – 12 months | A low duration debt scheme investing in instruments with Macaulay duration between 6 months and 12 months |
| 5 | Money Market Funds | Investment in Money Market instruments having maturity up to 1 year | A debt scheme investing in money market instruments |
| 6 | Short Duration Fund | Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 1 year – 3 years | A short term debt scheme investing in instruments with Macaulay duration between 1 year and 3 years |
| 7 | Medium Duration Funds | Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 years – 4 years | A medium term debt scheme investing in instruments with Macaulay duration between 3 years and 4 years |
| 8 | Medium to Long Duration Fund | Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 4 – 7 years | A medium term debt scheme investing in instruments with Macaulay duration between 4 years and 7 years |
| 9 | Long Duration Fund | Investment in Debt & Money Market Instruments such that the Macaulay duration of the portfolio is greater than 7 years | A debt scheme investing in instruments with Macaulay duration greater than 7 years |
| 10 | Dynamic Bond Funds | Investment across duration | A dynamic debt scheme investing across duration |
| 11 | Corporate Bond Funds | Minimum investment in corporate bonds – 80% of total assets (only in highest rated instruments) | A debt scheme predominantly investing in highest rated corporate bonds |
| 12 | Credit Risk Funds | Minimum investment in corporate bonds – 65% of total assets ( investment in below highest rated instruments) | A debt scheme investing in below highest rated corporate bonds |
| 13 | Banking and PSU Fund | Minimum investment in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions – 80% of total assets | A debt scheme predominantly investing in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions |
| 14 | Gilt Fund | Minimum investment in Gsecs – 80% of total assets (across maturity) | A debt scheme investing in government securities across maturity |
| 15 | Gilt Fund with 10 year constant duration | Minimum investment in Gsecs – 80% of total assets such that the Macaulay duration of the portfolio is equal to 10 years | A debt scheme investing in government securities having a constant maturity of 10 years |
| 16 | Floater Fund | Minimum investment in floating rate instruments – 65% of total assets | A debt scheme predominantly investing in floating rate instruments |
3. Hybrid Schemes
Hybrid funds offer a mix of equity and debt, balancing growth and safety. Nowadays, hybrid funds also invest in commodities like Gold, and properties through Real Estate Investment Trusts (REITs). You get diversification of many asset classes in one well-diversified hybrid fund. They are perfect if you are looking for a balance of risk and returns.
| Sr. No. | Category of Schemes | Scheme Characteristics | Type of Scheme |
| 1 | Conservative Hybrid Funds | Investment in equity & equity related instruments – between 10% and 25% of total assets; Investment in Debt instruments – between 75% and 90% of total assets | A hybrid mutual fund investing predominantly in debt instruments |
| 2A. | Balanced Hybrid Funds* | Equity & Equity related instruments – between 40% and 60% of total assets; Debt instruments – between 40% and 60% of total assets. No Arbitrage would be permitted in this scheme | 50-50 balanced scheme investing in equity and debt instruments |
| 2B. | Aggressive Hybrid Funds | Equity & Equity related instruments – between 65% and 80% of total assets; Debt instruments – between 20% – 35% of total assets. Most of the balanced funds will fall into this category. | A hybrid scheme investing predominantly in equity and equity related instruments |
| 3 | Dynamic Asset Allocation Funds or Balanced Advantage | Investment in equity/ debt that is managed dynamically. All famous balanced advantage or dynamic funds will fall into this category. | A hybrid mutual fund which will change its equity exposure based on market conditions |
| 4 | Multi-Asset Allocation Funds | Invests in at least three asset classes with a minimum allocation of at least 10% each in all three asset classes. Foreign investment will be considered as a separate asset class. | A scheme investing in 3 different asset classes. |
| 5 | Arbitrage Funds | Scheme following arbitrage strategy. Minimum investment in equity & equity related instruments – 65% of total assets | A scheme investing in arbitrage opportunities |
| 6 | Equity Savings | Minimum investment in equity & equity related instruments – 65% of total assets and minimum investment in debt – 10% of total assets. Minimum hedged & unhedged to be stated in the SID. Asset Allocation under defensive considerations may also be stated in the Offer Document | A scheme investing in equity, arbitrage, and debt |
4. Solution Oriented Schemes
| Sr. No. | Category of Schemes | Scheme Characteristics | Type of Scheme |
| 1 | Retirement Fund | Scheme having a lock – in for at least 5 years or till retirement age whichever is earlier | A retirement solution oriented scheme having a lock-in of 5 years or till retirement age (whichever is earlier) |
| 2 | Children’s Fund | Scheme having a lock – in for at least 5 years or till the child attains age of majority whichever is earlier | A fund for investment for children having a lock – in for at least 5 years or till the child attains age of majority (whichever is earlier) |
5. Other Schemes
| Sr. No. | Category of Schemes | Scheme Characteristics | Type of Scheme |
| 1 | Index Funds/ ETFs | Minimum investment in securities of a particular index (which is being replicated/ tracked) – 95% of total assets | A mutual fund replicating/ tracking any index |
| 2 | FoF’s (Overseas/Domestic) | Minimum investment in the underlying fund – 95% of total assets | A fund of fund is a mutual fund that invests in other mutual funds |
Benefits of Mutual Funds
Let’s talk about why mutual funds can be a great investment option for you.
1. Diversification
One of the primary benefits of mutual funds is diversification. Instead of putting all your money in one stock or bond, a mutual fund spreads it across multiple assets. This reduces your risk, as losses in one investment may be offset by gains in another.
2. Professional Management
Mutual funds are managed by experienced fund managers who have expertise in analyzing and selecting the best investment opportunities. They actively monitor the market and adjust the fund’s portfolio to maximize returns. This gives you access to professional management without needing to manage the investments yourself.
3. Affordability
You don’t need a huge sum of money to start investing in mutual funds. You can start with as little as ₹500 per month with Systematic Investment Plans (SIPs) to begin their investment journey.
4. Liquidity
Mutual funds offer excellent liquidity, meaning you can redeem your investments and access your money whenever you need it (except for funds with a lock-in period like ELSS). This flexibility allows you to manage your finances more efficiently.
5. Tax Efficiency
Certain mutual funds, like Equity-Linked Savings Scheme (ELSS), offer tax benefits under Section 80C of the Income Tax Act. Additionally, the tax on long-term capital gains (LTCG) for equity mutual funds is relatively low, making them a tax-efficient investment option.
6. Transparency
Mutual funds are highly regulated by the Securities and Exchange Board of India (SEBI), which ensures transparency in operations. Regular updates, factsheets, and portfolio disclosures give investors a clear view of where their money is being invested.
Things to Consider Before Investing in Mutual Funds
While mutual funds are a great investment vehicle, there are some things you should keep in mind before diving in-
1. Market Risks
Although mutual funds offer diversification, they are still subject to market risks. Equity mutual funds, in particular, can experience sharp ups and downs depending on market conditions. It’s important to assess your risk profile before investing, and understand that higher returns often come with higher risk.
2. Lock-In Periods
Certain types of mutual funds, like Equity-Linked Savings Schemes (ELSS), come with a lock-in period. For ELSS, this is 3 years. This means you can’t withdraw your money until the lock-in period ends, so ensure you don’t need immediate liquidity from this portion of your portfolio.
3. Exit Loads
Some mutual funds charge an exit load if you redeem your investment before a certain period, usually one year. This is essentially a penalty for early withdrawal. Make sure you’re aware of any exit loads that apply to the funds you’re investing in, especially if you think you might need to access the funds before the holding period ends.
What are the different ways of investing in Mutual Funds?
- Lumpsum
A lump sum investment in mutual funds is where you invest a large amount of money all at once, rather than spreading it out over time. This approach is ideal if you have a substantial amount of money ready to invest and are confident about the market’s direction. Lump sum investments allow your money to start working immediately, giving you the potential to earn higher returns if the market is on an upward trend.
- Systematic Investment Plans (SIPs)
SIPs are one of the most popular ways to invest in mutual funds. Instead of investing a lump sum, you can invest small, fixed amounts on a regular basis (typically monthly). SIPs are great for those who don’t want to time the market and wish to average out the cost of investments. It’s also a disciplined way to invest, making it easier to achieve your long-term financial goals.
SIP vs Lump Sum: Which is Better?
One common question when investing in mutual funds is whether to go for a Systematic Investment Plan (SIP) or a lump sum investment. Both have their pros and cons, depending on your financial situation and market conditions.
SIP (Systematic Investment Plan)
- Benefits: SIPs allow you to invest regularly, making it easier to start with a smaller amount. You don’t have to worry about market timing since your investments are spread out over time, averaging out the cost. It’s also a disciplined way to invest, making it less tempting to pull out money during market fluctuations.
- Drawbacks: The main drawback is that you won’t benefit from sudden market upswings as much as you would with a lump sum, as your money is being invested gradually.
Lump Sum
- Benefits: If you have a large amount of money available, a lump sum investment can potentially yield better returns during bull markets since the entire amount is invested upfront. You also don’t have to worry about missing out on market rallies.
- Drawbacks: The biggest risk is that if you invest a lump sum right before a market downturn, you might suffer significant short-term losses.
In general, if you have a long-term horizon, SIPs provide more stability and remove the need to time the market. However, if the market is down and you’re confident of a future rebound, a lump sum investment can yield better returns.
Moreover, you should choose the way of investment based on your cash flows rather than market movements. If you have a monthly income like someone in employment, SIP should be a more suitable way of investing for you. However, if you have sporadic cash flows like someone in business or profession, lumpsum may be more suitable for you.
Common Myths About Mutual Funds
There are plenty of myths surrounding mutual funds that might make you hesitant. Let’s debunk a few of them-
1. Mutual Funds Are Risky
While mutual funds carry some level of risk, it’s important to note that there are different types of funds with varying risk profiles. Debt funds, for example, are far less risky than equity funds. Choosing the right fund based on your risk profile and time horizon can help mitigate this perceived risk.
2. SIPs Only Work in Falling Markets
SIPs work by averaging your purchase cost over time, which is helpful whether the market is rising or falling. Over the long term, SIPs can provide stable returns by spreading out the investment, regardless of market conditions.
3. You Need a Lot of Money to Invest
This is one of the most common myths. You can start investing in mutual funds with as little as ₹500 through SIPs. The idea is to start early, invest consistently, and take advantage of the power of compounding.
Taxation on Mutual Funds
It’s crucial to understand the tax implications of mutual funds to ensure you’re not caught off guard when tax season comes around. Mutual funds are taxed based on how long you hold your investment and the type of fund (equity or debt) you invest in.
1. Equity Mutual Funds
- Short-Term Capital Gains (STCG): If you redeem your equity mutual fund units within one year, the gains are considered short-term and are taxed at 20%.
- Long-Term Capital Gains (LTCG): Gains from equity mutual funds held for more than one year are considered long-term. The LTCG is tax-free up to ₹1.25 lakhs, but beyond that, it is taxed at 12.50% without indexation benefits.
2. Debt Mutual Funds
For debt funds, both Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) are taxed at your income tax slab rate irrespective of when you redeem.
The below table summarises the tax implications on different types of Mutual Funds-
| Type of Mutual Fund | Before Union Budget 2024 | Changes announced in Budget 2024 | After Union Budget 2024 | ||
| Short-Term Capital Gain Holding Period and Tax | Long-Term Capital Gain Holding Period and Tax | Short-Term Capital Gain Holding Period and Tax | Long-Term Capital Gain Holding Period and Tax | ||
| Equity mutual funds | <12 months
15% |
>=12 months
10%, on gains above Rs 1 lakh |
No change in the holding period, but change in taxation | <12 months
20% |
>=12 months
12.5%, on gains above Rs 1.25 lakhs |
| Debt Mutual funds | NA
Taxed as per slab rate |
NA
Taxed as per slab rate |
No change in holding period, and no change in taxation | NA
Taxed as per slab rate |
NA
Taxed as per slab rate |
| Equity FOFs/ Gold Funds/ Overseas FOFs | NA
Taxed as per slab rate |
NA
Taxed as per slab rate |
Change in holding period, and change in taxation | <12 months
20% |
>=12 months
12.5% |
3. Dividends
Mutual fund dividends are taxed in your hands based on your applicable income tax slab. If you’re in a higher tax bracket, this can be a less tax-efficient option compared to reinvested growth funds.
How to Choose the Best Mutual Funds to Invest?
Choosing the best mutual fund depends on several factors that are based on your personal circumstances. Here’s what you should consider-
1. Your Financial Goals
Are you saving for retirement, a house, or a child’s education? Different goals require different investment approaches. If you’re saving for a long-term goal (10 years or more), you might want to go for equity mutual funds for higher returns. If your goal is nearer, debt or hybrid funds might be more appropriate to reduce risk.
2. Risk Profile
Each mutual fund has a different risk profile. Equity funds are riskier than debt funds, so you need to assess how comfortable you are with volatility. If you can handle market ups and downs and aim for higher returns, equity funds are the way to go. If you prefer stable, low-risk returns, then debt funds or hybrid funds may be a better fit.
3. Investment Horizon
How long you plan to stay invested plays a huge role in fund selection. Equity mutual funds are ideal for long-term investors with horizons of 5-10 years or more, as they have the potential to outperform other asset classes over time. On the other hand, for short-term goals, debt or liquid funds would be more suitable.
4. Fund Performance
Before choosing a mutual fund, look at its historical performance. While past performance is not a guarantee of future returns, it gives you a sense of how the fund has performed in different market conditions. Always compare the fund’s returns with its benchmark index and its peer group.
Why Mutual Funds Can Be the Best Investment?
Mutual funds offer a fantastic way to achieve your financial goals. There is something for you in mutual funds whether you’re looking for long-term growth through equity funds, stability through debt funds, or a balanced approach with hybrid funds. The key lies in understanding your financial goals, assessing your risk profile, and choosing the right mix of funds that align with your objectives.
How Zenith Finserve Can Help You to Invest in The Best Mutual Funds?
At Zenith Finserve, we make investing in mutual funds simple and stress-free by tailoring a strategy just for you. We take into account your goals, whether it’s long-term wealth creation or saving for something specific, and match that with your risk level and timeline.
Our team thoroughly researches funds to ensure you’re investing in the best options, and we continue to monitor your portfolio to keep it on track, even as markets change. We also help you optimise your investments to be tax-efficient and are always available to answer your questions, so you feel confident at every step.
Frequently Asked Questions (FAQs) about Mutual Funds
What is the best mutual fund in India?
There isn’t a single “best” mutual fund for everyone. The best fund depends on your financial goals, risk tolerance, and how long you plan to invest. It’s all about finding the right fit for you.
Can I invest ₹1,000 in mutual funds?
Absolutely! You can start with as little as ₹500 or ₹1,000 per month through a Systematic Investment Plan (SIP). It’s a great way to start building your wealth without needing a big amount upfront.
What are the 4 types of mutual funds?
The main types are Equity funds (stocks), Debt funds (bonds), Hybrid funds (mix of equity and debt), and Solution-oriented funds (like retirement or education funds).
Which is better, SIP or MF?
SIP is just a way to invest in mutual funds. While a SIP spreads your investment over time, a lump sum investment is when you invest a big amount all at once. Both have their advantages depending on your situation.
Which is the safest mutual fund?
If you’re looking for safety, debt mutual funds, especially liquid funds or gilt funds, are considered safer because they invest in government or corporate bonds.
What is a portfolio?
A portfolio is basically your entire collection of investments—whether it’s mutual funds, stocks, bonds, or other assets. It’s all the things you invest in to grow your wealth.