What is a mutual fund? A simple guide for Indian investors
Written and reviewed by Omm · Last reviewed · General information, not investment advice
A mutual fund pools money from many investors and invests it in a basket of securities such as company shares, government and corporate bonds, or gold. A professional fund manager at an asset management company (AMC) decides what to buy and sell, following the objective written in the scheme’s documents.
How it works
When you invest, you receive units of the scheme. The price of one unit is the NAV. If the scheme’s investments gain value, the NAV rises and so does the value of your units. If they fall, so does your investment. You can usually sell (redeem) units on any business day at that day’s NAV, except in schemes with a lock-in such as ELSS.
Who is involved
- The AMC (for example SBI Mutual Fund or HDFC Mutual Fund) creates and manages the schemes.
- The trustees and the custodian protect investors’ assets, kept separate from the AMC’s own money.
- SEBI sets the rules, including how schemes must be categorised and how costs are limited.
- AMFI publishes the NAV of every scheme each day. This site uses that official data.
Main types of schemes
- Equity funds invest mainly in shares. They aim for growth over long periods and carry higher short-term risk.
- Debt funds invest in bonds and money-market instruments. They aim for steadier returns, but are not risk free.
- Hybrid funds mix equity and debt in one scheme.
- Index funds and ETFs simply follow an index such as the Nifty 50. See index funds vs ETFs vs active funds.
SEBI places every scheme into a defined category so that similar funds can be compared. See mutual fund categories in India.
Costs and options
Every fund charges a yearly fee called the expense ratio. Each scheme also comes in a Direct and a Regular plan and in a Growth or IDCW option. Picking the right plan and option matters as much as picking the scheme.
Before you invest
Mutual fund investments are subject to market risks. Past returns do not predict future returns. Compare funds within the same category, look at returns over several periods rather than one, and check the risk, not just the return. The screener on this site shows these side by side for every active scheme.