What is a Mutual Fund?

A mutual fund is a type of investment where money from many people is collected and then invested in things like stocks, bonds, and other financial assets.

This money is managed by a company called an Asset Management Company (AMC). The AMC invests the money based on the fund’s goals, such as growth, income, or safety.

How do AMCs manage MF Investments?

A mutual fund is managed by an Asset Management Company (AMC), which collects money from investors and invests it in stocks, bonds, etc., based on the fund’s investment goal.

If the goal is growth, the fund invests in shares.

If the goal is income, it invests in interest-paying securities.

Investors get units of the fund, which represent their share. The fund manager actively manages investments to meet the fund’s objective.

AMCs charge a small fee for their services, which is adjusted in the unit price.

Mutual fund prices are called NAVs (Net Asset Values) and are calculated daily after market hours.

What are Open Ended & Close Ended Mutual Funds?

Two types of mutual funds:

Open-Ended Schemes
(a) You can invest or withdraw anytime.
(b) Offers high liquidity.
(c) Some funds (like ELSS) have a lock-in period.
(d) Exit load may apply if withdrawn early.

Close-Ended Schemes
(a) Available only during a limited NFO period.
(b)Have a fixed maturity—withdrawal only after that.
(c) Some are listed on stock exchanges, but liquidity is low.
(d) Ownership stays the same—no new units issued after NFO.

What are the advantages of mutual funds?

Top 5 Benefits of Mutual Funds:

1. Risk Diversification
   Invest in a wide mix of stocks/sectors to reduce risk—starting with as little as ₹5,000. Fund managers handle the selection.
2. Lower Costs
   Mutual funds trade in bulk, so per-unit transaction costs are much lower than direct stock buying.
3. Tax Benefits
   Equity funds are tax-efficient. ELSS funds offer 80C tax deductions. Debt fund taxation changed from April 2023—now taxed as per slab.
4. High Liquidity
   Open-ended funds let you redeem anytime—fully or partially—easily and quickly.
5. Wide Variety & Flexibility
   Choose from equity, debt, hybrid, ELSS, liquid funds. Invest via lump sum or SIP, and switch between schemes anytime.

What are Mutual Fund Units?

Units represent your share of the mutual fund’s total money.

When the fund launches (NFO), each unit is priced at ₹10.

Example: If you invest ₹1,00,000 in a fund with ₹10/unit, you get 10,000 units.

As the value of the fund’s assets rises or falls, so does the unit price.

If the fund value grows from ₹100 crore to ₹110 crore, the unit price becomes ₹11.

Your percentage ownership in the fund changes when others invest or redeem.

What is NAV in mutual funds?

NAV is the price of a mutual fund unit, calculated daily.

It’s the value of the fund’s assets (securities and cash) minus liabilities, divided by total units.

Unlike share prices, NAV is updated once a day based on closing market prices.

Important: High NAV doesn’t mean the fund is overpriced, and low NAV doesn’t mean it’s cheap.

What matters is the percentage change in NAV, which shows the return on investment.

What is an Expense Ratio?

Expense ratio is the annual cost of managing a mutual fund, shown as a percentage of total assets.

It includes costs like fund manager’s fees, transactions, marketing, and distribution.

Example: If the fund size is ₹500 crore and the expense ratio is 1.5%, the annual cost is ₹7.5 crore (1.5% of ₹500 crore).

This cost is deducted from the fund’s assets, so the NAV you see is after the expense ratio.

What are Regular Plans and Direct Plans?

Regular Plan: Invest through a mutual fund distributor who provides advice, helps with KYC, and handles transactions. Distributors earn commissions from the AMC.

Direct Plan: Invest directly with the AMC (online or offline). No distributor involved, so lower expense ratio and higher returns. However, you need to manage your own investments and handle all paperwork.

What is an Exit Load?

Exit Load: A fee charged by AMCs if you redeem (sell) units within a certain period, usually within 12 months.

Example:

Invest Rs 1 lakh, buy 5,000 units at Rs 20 each.

After 8 months, the NAV rises to Rs 23, so your units are worth Rs 1.15 lakh.

Exit load is 1%. For each unit, 23 paise will be deducted (1% of Rs 23).

Total exit load = Rs 1,150.

You’ll get Rs 1.13 lakh after the deduction.

Note: Exit load also applies to switches, STPs, and SWPs within the specified period.

What are Growth and Dividend Options in a Mutual Fund Scheme?

Growth Option: Profits are reinvested to generate more returns, leading to higher capital appreciation over time. NAV increases due to compounding.

Dividend Option: Profits are distributed to investors on a regular basis (monthly, quarterly, etc.). NAV is adjusted when dividends are paid.

Dividend Reinvestment Option: Dividends are reinvested to buy more units, offering similar growth as the growth option. The key difference: growth comes from NAV in the growth option, while in dividend reinvestment, it’s through additional units.

What are different types of returns in mutual funds?

1. Absolute Return

Absolute return shows the overall growth of your investment in percentage terms, regardless of time. For example, if you invest ₹1 Lakh and it grows to ₹1.4 Lakhs, your absolute return is 40%. The time it took for this growth doesn’t matter here.

2. Annualized Return

Annualized return shows your investment growth on a yearly basis, factoring in compounding. If your ₹1 Lakh grows to ₹1.4 Lakhs in 3 years, your annualized return will be around 11.9%, which includes the effect of compounding.

3. Total Return

Total return includes both capital gains and dividends. If your ₹1 Lakh grows to ₹1.1 Lakhs and you receive ₹10,000 as dividends, your total return is ₹20,000, or 20%.

4. Trailing Return

Trailing return is the annualized return over a certain period, like 1 year, 3 years, or 5 years, up until the current date. This return is commonly shown on mutual fund websites but can be influenced by market conditions.

5. Point to Point Return

Point to point return calculates the annualized return between two specific dates, like from 2012 to 2014. You need the start and end NAV to calculate it.

6. Annual Return

Annual return is the return achieved from January 1st to December 31st of any year. For example, if the NAV goes from ₹100 to ₹110 in a year, the annual return is 10%.

7. Rolling Returns

Rolling returns measure the performance over a set period (like 1 year or 3 years) over different intervals. It gives you a more comprehensive view of a fund’s consistency over time.

8. Quartile Ranking

Quartile ranking compares mutual funds in the same category. Funds in the top 25% by returns are ranked “Top Quartile”, the next 25% as “Upper Middle Quartile”, and so on. Consistency in rankings is key.

9. SIP Returns / XIRR

SIP returns (Systematic Investment Plans) are calculated using XIRR, which measures returns from multiple cash flows (e.g., monthly SIPs). It’s more complex than lump sum returns but gives a more accurate view of SIP growth.

What are the different types of Mutual Funds?

Equity Funds

Equity funds invest in stocks to generate capital growth over the medium to long term. They are high-risk investments, best suited for those seeking long-term growth. These funds include:

1. Diversified Equity Funds
   These funds invest across various sectors and market segments (large, mid, small, and micro cap stocks). They spread risk and aim for the highest risk-adjusted returns.
2. Large Cap Funds
   These funds invest in large, well-established companies with market caps over ₹70k crore. They are more stable and less volatile. Examples: TCS, HDFC Bank.
3. Mid Cap Funds
   Investing in companies with market caps between ₹25k – ₹70k crore, mid-cap funds are riskier and more volatile but offer higher growth potential.
4. Small Cap Funds
   These funds invest in smaller companies with market caps between ₹10k – ₹25k crore. They are riskier, more volatile, and less liquid.
5. Sectoral Funds
   Sectoral funds focus on specific industries, like real estate, pharmaceuticals, or technology. They can be very volatile, depending on sector performance.

Balanced Funds

Balanced funds mix equity (65%) and debt (35%) to offer both growth and income with reduced risk. They are a more stable option, benefiting from both the high return potential of stocks and the stability of bonds.

What are fixed income or debt mutual funds?

Debt Mutual Funds

Debt funds invest in fixed-income securities like treasury bills, corporate bonds, and government bonds with varying maturities (from 3 months to over 30 years). The main goals depend on the maturity profile:

Short-Term Debt Funds: Focus on generating income with low risk and shorter maturities.

Long-Term Debt Funds: Aim for both income and capital appreciation over longer periods.

Unlike bank deposits, debt funds carry two types of risk:

Interest Rate Risk: Long-term debt funds are more affected by interest rate changes, while short-term funds are less sensitive.

Credit Risk: Corporate bond funds take on more credit risk, but most debt funds have low credit risk, with a majority of bonds being rated AAA or AA.

What are the different types of debt mutual funds?

1. Gilt Funds

Invest in government bonds with varying maturities (15-30 years). Highly sensitive to interest rates, with potential for capital appreciation. Suitable for moderate to high-risk investors.

2. Income Funds

Invest in a mix of bonds, debentures, and government securities across different maturities (7-20 years). Moderate sensitivity to interest rates. Suitable for investors seeking income and capital appreciation.

3. Short-Term Debt Funds

Invest in low-duration bonds (2-3 years) and commercial papers. Use an accrual strategy for stable income. Suitable for low-risk investors looking for consistent returns.

4. Credit Opportunities Funds

Invest in lower-rated corporate bonds, aiming for higher yield (AAA, AA rated). Short maturities (2-3 years) with less interest rate risk. Ideal for low-risk investors seeking slightly higher income.

5. Fixed Maturity Plans (FMPs)

Close-ended schemes that invest in fixed-income securities matching the scheme’s maturity. Stable returns with no re-investment risk. Suitable for low-risk investors seeking stable returns and tax benefits.

6. Liquid Funds

Invest in money market instruments (like treasury bills and commercial papers) with maturities under 91 days. Offer higher returns than savings accounts and provide easy liquidity. Ideal for those with idle cash in savings accounts.

7. Monthly Income Plans (MIPs)

Hybrid funds investing 75-80% in debt and 20-25% in equities. Provide regular income with some growth potential but with slightly higher risk compared to pure debt funds.

What are money market mutual funds?

Money Market Funds

These are open-ended debt funds investing in short-term, highly liquid fixed income securities like treasury bills, certificates of deposit, commercial papers, and term deposits. They aim to offer returns while maintaining capital safety and liquidity. The securities typically have short maturities, from a few days to a few months, which helps meet investor redemption demands. Money market funds are commonly used by institutions and retail investors for short-term parking of cash.

Types of Money Market Funds:

1. Liquid Funds
   Invest in money market instruments with a maturity of up to 91 days. They provide returns without sacrificing liquidity and are ideal for short-term investments.
2. Ultra Short-Term Bond Funds
   Invest in money market instruments with maturities ranging from 6 to 12 months. These offer higher returns than liquid funds, but also come with slightly higher volatility.

What are liquid funds?

Liquid Funds

Liquid funds are a type of money market mutual fund that mainly invests in short-term, low-risk instruments like treasury bills, commercial papers, and term deposits. Their primary goal is to offer higher returns than savings accounts while maintaining high liquidity. These funds typically invest in securities with maturities of up to 91 days, allowing easy access to your money when needed.

Key Benefits of Liquid Funds:

1. High Liquidity
   No exit load, so you can redeem your investment anytime without penalties.
2. Better Returns than Savings Accounts
   While savings accounts offer around 4-5% interest, liquid funds can provide higher returns, especially when bond yields rise.
3. Low Volatility
   Liquid funds are less volatile because they invest in short-duration securities, reducing the risk of interest rate changes.

What is the difference between ULIPs and mutual funds?

Unit Linked Insurance Plans (ULIPs)

ULIPs combine life insurance with investment. Unlike traditional life insurance plans (like endowment or money-back plans), ULIPs are market-linked, meaning they have the potential for higher returns. However, they don’t guarantee capital safety. ULIPs provide both life cover and the option to invest in funds of your choice.

Mutual Funds

Mutual funds are purely market-linked investments that pool money from multiple investors to invest in various financial securities, like stocks and bonds. Each investor owns units of the fund, representing a share of its holdings.

Key Difference:

You can think of a ULIP as a mutual fund with life insurance attached. While ULIPs perform similarly to mutual funds in terms of returns, their net returns are typically lower due to various fees (like premium allocation and administration fees) deducted from the investment amount before it’s invested.

What is the difference between ETFs and mutual funds?

Exchange Traded Funds (ETFs)

ETFs are a collection of stocks that mirror the composition of an index like Sensex or Nifty. The price of an ETF reflects the combined value of the stocks in it. ETFs are traded on exchanges like stocks and are available in different categories such as Equity, Gold, World Indices, and Debt.

Key Differences Between ETFs and Mutual Funds:

1. Price Changes:

ETFs: Their price changes throughout the day based on the stock market.

Mutual Funds: The price (NAV) is calculated once at the end of the day.

2. Management Style:

ETFs: Passively managed to track a specific index.

Mutual Funds: Actively managed to outperform a market benchmark.

3. Investment Objective:

ETFs: Only aim to replicate an index.

Mutual Funds: Have specific goals like capital growth or income generation.

4. Risk:

ETFs: Expose you to only market risk since they reflect the entire market.

Mutual Funds: Expose you to both market risk and specific stock risks.

5. Demat Account:

ETFs: Require a demat account for investment.

Mutual Funds: Do not necessarily need a demat account.