Investing in India has never been easier, thanks to the rise of mutual funds. Whether you’re a salaried professional, a business owner, or a student looking to grow your savings, mutual funds offer a simple and effective way to build wealth. But what exactly are mutual funds, and how do they work in the Indian context? In this guide, we’ll break down everything you need to know about mutual funds in India, from the basics to how you can start investing today.
What Are Mutual Funds?
A mutual fund is an investment vehicle that pools money from multiple investors to buy a diversified portfolio of assets, such as stocks, bonds, or other securities. In India, mutual funds are regulated by the Securities and Exchange Board of India (SEBI), ensuring transparency and investor protection.
When you invest in a mutual fund, you’re essentially buying units of the fund, which represent your share of the total investment. The value of these units fluctuates based on the performance of the underlying assets, known as the Net Asset Value (NAV).
How Do Mutual Funds Work in India?
1. Pooling Money: Investors like you contribute money to the mutual fund. This pooled money is then used to buy a variety of assets, such as stocks, bonds, or a mix of both.
2. Professional Management: The fund is managed by professional portfolio managers who make decisions about which securities to buy or sell based on the fund’s objectives. In India, fund managers are highly regulated and must adhere to SEBI guidelines.
3. Diversification: Mutual funds in India invest in a wide range of assets, helping to spread risk. For example, an equity mutual fund might invest in companies like Reliance, TCS, or HDFC Bank, while a debt fund might invest in government bonds or corporate debt.
4. Liquidity: Mutual funds in India are relatively liquid, meaning you can buy or sell your units on any business day at the fund’s current NAV.
Types of Mutual Funds in India
Mutual funds in India come in various types, each catering to different investment goals and risk appetites. Let’s dive deeper into the 11 types of equity funds and 16 types of debt funds available in India.
1. Equity Funds (11 Types)
Equity funds invest primarily in stocks and are ideal for long-term growth. Here are the 11 types of equity funds available in India:
1. Multi Cap Fund: An open-ended equity scheme investing across large cap, mid cap, small cap stocks.
2. LargeCap Fund: An open-ended equity scheme predominantly investing in large cap stocks.The minimum investment in equity and equity related instruments of large cap companies shall be 80 percent of total assets.
3. Large and Mid-Cap Fund: An open-ended equity scheme investing in both large cap and mid cap stocks. The minimum investment in equity and equity related instruments of large cap companies shall be 35 percent of total assets. The minimum investment in equity and equity related instruments of mid cap stocks shall be 35 percent of total assets.
4. Mid Cap Fund: An open-ended equity scheme predominantly investing in mid cap stocks. The minimum investment in equity and equity related instruments of mid cap companies shall be 65 percent of total assets.
5. Small cap Fund:An open-ended equity scheme predominantly investing in small cap stocks. Minimum investment in equity and equity related instruments of small cap companies shall be 65 percent of total assets.
6. Dividend Yield Fund: An open-ended equity scheme predominantly investing in dividend yielding stocks. Scheme should predominantly invest in dividend yielding stocks. The minimum investment in equity shall be 65 percent of total assets.
7. Value Fund or Contra Fund: A value fund is an open-ended equity scheme following a value investment strategy. Minimum investment in equity & equity related instruments shall be 65 percent of total assets. A contra fund is an open-ended equity scheme following a contrarian investment strategy. Mutual Funds will be permitted to offer either Value fund or Contra fund.
8. Focused Fund: An open-ended equity scheme investing in maximum 30 stocks (the scheme needs to mention where it intends to focus, viz., multi cap, large cap, mid cap, small cap). Minimum investment in equity & equity related instruments shall be 65 percent of total assets.
9. Sectoral/Thematic: An open-ended equity scheme investing in a specific sector such as bank; power is a sectoral fund. While an open-ended equity scheme investing in line with an investment theme. For example, an infrastructure thematic fund might invest in shares of companies that are into infrastructure, construction, cement, steel, telecom, power etc. The minimum investment in equity and equity related instruments of a particular sector/ theme shall be 80 percent of total assets.
10. Equity Linked Savings Scheme: An open-ended equity linked saving scheme with a statutory lock-in of 3 years and tax benefit. The minimum investment in equity and equity related instruments shall be 80 percent of total assets (in accordance with Equity Linked Saving Scheme, 2005 notified by the Ministry of Finance).
11. Flexi-cap Fund: An open-ended equity scheme where the minimum investment in equity and equity related assets are 65% of the total assets. This would be a dynamic fund where there can be investment across large cap, mid cap as well as small cap stocks.
2. Debt Funds (16 Types)
Debt funds invest in fixed-income securities like government bonds, corporate bonds, and money market instruments. They’re less risky than equity funds and provide steady income. Here are the 16 types of debt funds available in India:
1. Overnight Fund: An open-ended debt scheme investing in overnight securities. The investment is in overnight securities having a maturity of 1 day.
2. Liquid Fund: An open-ended liquid scheme whose investment is into debt and money market securities with a maturity of up to 91 days only.
3. Ultra-Short Duration Fund: An open ended ultra-short-term debt scheme investing in debt and money market instruments with Macaulay duration of the portfolio between 3 months and 6 months.
4. Low Duration Fund: An open-ended low duration debt scheme investing in debt and money market instruments with Macaulay duration of the portfolio between 6 months and 12 months.
5. Money Market Fund: An open-ended debt scheme investing in money market instruments having maturity up to 1 year.
6. Short Duration Fund: An open-ended short-term debt scheme investing in debt and money market instruments with Macaulay duration of the portfolio between 1 year and 3 years.
7. Medium Duration Fund: An open-ended medium-term debt scheme investing in debt and money market instruments with Macaulay duration of the portfolio being between 3 years to 4 years. Portfolio Macaulay duration under anticipated adverse situation is year to 4 years.
8. Medium to Long Duration Fund: An open-ended medium-term debt scheme investing in debt and money market instruments with Macaulay duration of the portfolio between 4 years and 7 years. Portfolio Macaulay duration under anticipated adverse situation is 1 year to 7 years.
9. Long Duration Fund: An open-ended debt scheme investing in debt and money market instruments with Macaulay duration of the portfolio greater than 7 years.
10. Dynamic Bond: An open-ended dynamic debt scheme investing across duration.
11. Corporate Bond Fund: An open-ended debt scheme predominantly investing in AA+ and above rated corporate bonds. The minimum investment in corporate bonds shall be 80 percent of total assets (only in AA+ and above rated corporate bonds).
12. Credit Risk Fund: An open-ended debt scheme investing in below highest rated corporate bonds. The minimum investment in corporate bonds shall be 65 percent of total assets (only in AA (excludes AA+ rated corporate bonds) and below rated corporate bonds).
13. Banking and PSU Fund: An open-ended debt scheme predominantly investing in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds. The minimum investment in such instruments should be 80 percent of total assets.
14. Gilt Fund: An open-ended debtscheme investing in governmentsecurities across maturity. The minimum investment inG-secsis defined to be 80 percent oftotal assets(across maturity).
15. Gilt Fund with 10-year constant duration: An open-ended debt scheme investing in governmentsecurities having a constant maturity of 10 years. Minimum investment in G-secs is 80 percent of total assets such that the Macaulay duration of the portfolio is equal to 10 years.
16. Floater Fund: An open-ended debt scheme predominantly investing in floating rate instruments(including fixed rate instruments converted to floating rate exposures using swaps/derivatives). Minimum investment in floating rate instruments (including fixed rate instruments converted to floating rate exposures using swaps/derivatives)shall be 65 percent of total assets.
3. Hybrid Funds.
Hybrid funds invest in a mix of equity and debt instruments. They’re a good option for investors who want both growth and income. Examples include:
1. Conservative Hybrid Fund: An open-ended hybrid scheme investing predominantly in debt instruments. Investment in debt instruments shall be between 75 percent and 90 percent of total assets while investment in equity and equity instruments shall be between 10 percent and 25 percent of total assets.
2. Balanced Hybrid or Aggressive Hybrid Fund:
i. Balanced Hybrid Fund: An open-ended balanced scheme investing in equity and debt instruments. The investment in equity and equity related instruments shall be between 40 percent and 60 percent of total assets while investment in debt instruments shall be between 40 percent and 60 percent. No arbitrage is permitted in this scheme.
ii. Aggressive Hybrid Fund: An open-ended hybrid scheme investing predominantly in equity and equity related instruments. Investment in equity and equity related instruments shall be between 65 percent and 80 percent of total assets while investment in debt instruments shall be between 20 percent and 35 percent of total assets.
Mutual funds in India are permitted to offer either Aggressive Hybrid Fund or Balanced Fund.
3. Dynamic Asset Allocation or Balanced Advantage: It is an open-ended dynamic asset allocation fund with investment in equity/debt that is managed dynamically.
4. Multi Asset Allocation: An open-ended scheme investing in at least three asset classes with a minimum allocation of at least 10 percent each in all three asset classes. Foreign securities are not treated as a separate asset class in this kind of scheme.
5. Arbitrage Fund: An open-ended scheme investing in arbitrage opportunities. The minimum investment in equity and equity related instruments shall be 65 percent of total assets.
6. Equity Savings: An open-ended scheme investing in equity, arbitrage and debt. The minimum investment in equity and equity related instruments shall be 65 percent of total assets and the minimum investment in a debt shall be 10 percent of total assets. The minimum hedged and unhedged investment needs to be stated in the SID. Asset Allocation under defensive considerations may also be stated in the SID.
5. Solution Oriented Schemes
1. Retirement Fund: An open-ended retirement solution-oriented scheme having a lockin of 5 years or till retirement age (whichever is earlier). This is meant for long term planning related to acquiring a corpus for retirement.
2. Children’s Fund: An open-ended fund for investment for children having a lock-in for at least 5 years or till the child attains the age of majority (whichever is earlier). This is meant to invest to build a corpus for the child and their needs in the coming years.
6. Other Schemes
1. Index Funds/Exchange Traded Fund: An open-ended scheme replicating/tracking a specific index. This minimum investment in securities of a particular index (which is being replicated/ tracked) shall be 95 percent of total assets.
2. Fund of Funds (Overseas/Domestic): An open-ended fund of fund scheme investing in an underlying fund. The minimum investment in the underlying fund shall be 95 percent of total assets.
Advantages of Mutual Funds in India
1. Diversification: By investing in a variety of assets, mutual funds reduce the risk of losing money.
2. Professional Management: You don’t need to be an expert; the fund manager handles all the research and decision-making.
3. Affordability: With mutual funds, you can start investing with as little as ₹500 through a Systematic Investment Plan (SIP).
4. Liquidity: You can easily buy or sell your units on any business day.
5. Tax Benefits: Certain mutual funds, like ELSS, offer tax benefits under Section 80C.
Disadvantages of Mutual Funds in India
1. Fees and Expenses: Mutual funds charge management fees (expense ratios), which can eat into your returns over time.
2. No Guaranteed Returns: Like all investments, mutual funds are subject to market risk.
3. Lock-In Periods: Some funds, like ELSS, come with a lock-in period, meaning you can’t withdraw your money for a certain period.
4. Taxes: Mutual funds can generate capital gains taxes, even if you don’t sell your units.
How to Invest in Mutual Funds in India
1. Set Your Goals: Determine why you’re investing (e.g., retirement, buying a home, or building wealth).
2. Choose the Right Fund: Research different funds based on your risk tolerance, investment horizon, and goals.
3. Open an Account: You can invest through a Mutual Fund Distributor (MFD), a Registered Investment Advisor (RIA), or online platforms like Groww, Coin by Zerodha, or Kuvera.
4. Start Investing: Decide how much you want to invest and whether you want to make a lump-sum investment or contribute regularly through a SIP.
5. Monitor Your Investment: Keep an eye on your fund’s performance, but avoid making impulsive decisions based on short-term market fluctuations.
Top Platforms to Invest in Mutual Funds in India
Here are some popular platforms where you can start investing in mutual funds:
1. Groww: A user-friendly app for beginners with zero commission on direct mutual funds.
2. Coin by Zerodha: Offers direct mutual funds with no hidden charges.
3. Kuvera: A free platform for investing in direct mutual funds.
4. ET Money: Provides research tools and recommendations to help you choose the right funds.
5. Paytm Money: Allows you to invest in mutual funds directly through the Paytm app.
FAQs About Mutual Funds in India
1. Are mutual funds safe in India?
While mutual funds are generally considered safe due to diversification and SEBI regulation, they are not risk-free. The value of your investment can go up or down based on market conditions.
2. How much money do I need to start investing in mutual funds in India?
You can start with as little as ₹500 through a SIP or a lump-sum investment.
3. Can I lose all my money in mutual funds?
It’s highly unlikely to lose all your money in a diversified mutual fund, but you can experience losses if the market performs poorly.
4. What’s the difference between direct and regular mutual funds?
Direct mutual funds have lower expense ratios because they don’t involve intermediaries. Regular funds are sold through brokers or agents and have higher fees.
5. Are mutual funds better than fixed deposits (FDs)?
Mutual funds have the potential to offer higher returns than FDs, but they also come with higher risk. FDs are safer but offer lower returns.
Final Thoughts
Mutual funds are an excellent way for Indians to grow their wealth over time. Whether you’re saving for retirement, a child’s education, or a dream vacation, mutual funds offer flexibility, diversification, and professional management. With platforms like Groww and Coin by Zerodha, getting started has never been easier.
So, what are you waiting for? Start your investment journey today and take the first step toward financial freedom.
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