Mutual Fund – A Detailed Beginner’s Guide

1. Meaning of Mutual Fund

A mutual fund is an investment vehicle where money from many investors is collected (pooled) and invested in shares, bonds, money market instruments, or other securities by a professional fund manager.

👉 Instead of selecting individual stocks or bonds yourself, you invest in a mutual fund scheme, and experts manage your money.

2. How a Mutual Fund Works (Step by Step)

1. Many investors invest money in a mutual fund
2. The money is pooled into a common fund
3. The Asset Management Company (AMC) appoints a fund manager
4. The fund manager invests money according to the scheme’s objective
5. Profits or losses are shared among investors proportionately

3. Important Participants in Mutual Funds

1. Investor

The person who invests money in the mutual fund.

2. Asset Management Company (AMC)

The company that manages mutual funds (e.g., SBI Mutual Fund, HDFC Mutual Fund).

3. Fund Manager

A professional expert who decides where and how to invest the fund’s money.

4. Trustee

Protects investors’ interests and ensures the AMC follows rules.

5. Custodian

Safely holds the securities (shares, bonds) of the mutual fund.

4. Net Asset Value (NAV)

NAV (Net Asset Value) is the price of one unit of a mutual fund.

NAV equals to Total value of Assets minus Total Liability Divided by Total number of Units.

Key Points:

·         NAV changes daily

·         Higher NAV does not mean expensive

·         Returns depend on percentage growth, not NAV value

5. Types of Mutual Funds (Very Important)

A. Based on Investment Objective

1. Equity Mutual Funds

·         Invest mainly in shares

·         High risk, high return

·         Suitable for long-term goals (5+ years)

Examples:

·         Large-cap funds

·         Mid-cap funds

·         Small-cap funds

·         Index funds

2. Debt Mutual Funds

·         Invest in bonds, government securities, treasury bills

·         Lower risk compared to equity

·         Suitable for stability and regular income

Examples:

·         Liquid funds

·         Short-term debt funds

·         Corporate bond funds

3. Hybrid Mutual Funds

·         Invest in both equity and debt

·         Balanced risk and return

·         Suitable for moderate investors

B. Based on Structure

1. Open-Ended Mutual Funds

·         Can invest or redeem anytime

·         No fixed maturity

·         Most common type

2. Closed-Ended Mutual Funds

·         Fixed maturity period

·         Invest only during initial offer

·         Traded on stock exchange

C. Based on Special Features

·         ELSS (Equity Linked Saving Scheme) – tax saving

·         Index Funds – track market index

·         Sectoral Funds – invest in specific sectors

·         Thematic Funds – based on themes like ESG, infrastructure

6. Ways to Invest in Mutual Funds

1. Lump Sum Investment

·         Invest a large amount at once

·         Suitable when markets are low

2. SIP (Systematic Investment Plan)

·         Invest fixed amount regularly (monthly/quarterly)

·         Reduces market timing risk

·         Best option for beginners

👉 You can start SIP with as low as ₹500 per month.

7. Returns from Mutual Funds

Returns depend on:

·         Type of mutual fund

·         Market performance

·         Time period of investment

Types of Returns:

·         Capital appreciation

·         Dividends (if chosen)

8. Risks in Mutual Funds

·         Market risk (especially equity funds)

·         Interest rate risk (debt funds)

·         Credit risk

·         No guaranteed returns

⚠️ That’s why you hear:
“Mutual fund investments are subject to market risks.”

9. Advantages of Mutual Funds

·         Professional fund management

·         Diversification (risk is spread)

·         Affordable for small investors

·         High liquidity

·         Transparent and SEBI regulated

·         Suitable for beginners

10. Disadvantages / Limitations

·         Market-linked returns (no guarantee)

·         Expense ratio reduces returns slightly

·         Poor fund selection can lead to low returns

11. Mutual Funds vs Fixed Deposits

12. Taxation of Mutual Funds (India – Basic)

Equity Mutual Funds

·         Short-term (≤1 year): 15% tax

·         Long-term (>1 year): 10% tax (above ₹1 lakh)

Debt Mutual Funds

·         Taxed as per income tax slab (as applicable)

13. Who Should Invest in Mutual Funds?

·         Beginners in stock market

·         Salaried individuals

·         Long-term wealth creators

·         Investors with limited market knowledge

14. Common Myths About Mutual Funds

❌ Mutual funds are very risky
✅ Risk depends on fund type

❌ Only experts can invest
✅ Beginners can start easily

❌ Need large money
✅ SIP starts at ₹500

15. Simple Example

You invest ₹12,000 through SIP (₹1,000 per month).
Over time, due to compounding, your investment grows to ₹20,000+ depending on returns.

16. In Simple Words

A mutual fund is an easy, smart, and professional way to invest money where experts invest on your behalf to help your money grow over time.

17. Final Tips for Beginners

·         Start early

·         Prefer SIP over lump sum

·         Choose funds based on goals

·         Stay invested long term

·         Avoid frequent switching