Mutual funds in India are investment vehicles that pool money from many investors to purchase a diversified portfolio of securities, such as stocks, bonds, and other assets. The securities held by a mutual fund are managed by professional fund managers, who use the pooled money to buy a diverse portfolio of securities that align with the fund’s stated investment objective.

In India, mutual funds are classified based on the type of assets they invest in and their investment objectives. Some of the most common types of mutual funds in India include Equity Funds, Debt Funds, Hybrid Funds, Index Funds, Sector Funds, International Funds, Tax Saving Funds, Gilt Funds, Fund of Funds, and Exchange-Traded Funds (ETFs). Each of these funds has its own unique investment strategy, risk level, and return potential.

Investors in a mutual fund buy shares, which represent a portion of the fund’s holdings. The value of an individual investor’s share in the fund is determined by the fund’s net asset value (NAV), which is calculated by dividing the total value of the fund’s assets minus its liabilities by the number of shares outstanding.

Investing in mutual funds in India has several advantages, such as Professional management, Diversification, Liquidity, Affordability, Convenience, Tax Benefits and Risk Mitigation.

Additionally, mutual funds are regulated by the Securities and Exchange Board of India (SEBI), which requires them to disclose information about their investments and performance to investors on a regular basis.

Type of Mutual Funds 

There are two different types of mutual funds that have different investment strategies and management styles. Actively managed mutual funds and passively managed mutual funds.

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Actively managed mutual funds are managed by professional fund managers who make investment decisions based on research and analysis of individual securities. The fund manager will try to outperform the market by making investment decisions based on their expertise and experience. These funds tend to have higher expense ratios as compared to passively managed mutual funds because of the active management.

Passively managed mutual funds, also known as index funds, are designed to track the performance of a specific market index, such as the Nifty 50 or the Sensex. These funds are managed using a rules-based approach, where the portfolio is constructed to match the composition of the index it is tracking. These funds have a low expense ratio as compared to actively managed funds.

In India, most of the mutual funds are actively managed and there are fewer passive funds available. However, in recent years, the popularity of passive funds has been increasing due to their low expense ratio and ability to provide market returns.

It’s recommended to consult with a financial advisor or professional to understand the difference between actively managed and passively managed mutual funds and to choose the one that aligns with your investment goals and risk tolerance.

Different type of mutual funds in India

In India, mutual funds are classified based on the type of assets they invest in and their investment objectives. Some of the most common types of mutual funds in India include:

Equity Funds: These funds invest primarily in stocks and are further divided into subcategories such as large-cap, mid-cap, and small-cap funds. Equity funds offer the potential for higher returns but also carry a higher level of risk.

Debt Funds: These funds invest primarily in bonds and other fixed-income securities. Debt funds tend to be less risky than equity funds but also offer lower potential returns.

Hybrid Funds: These funds invest in a combination of stocks and bonds in order to achieve a balance between growth and income. They are also known as balanced funds.

Index Funds: These funds are designed to track the performance of a specific market index, such as the Nifty 50 or Sensex.

Sector Funds: These funds invest in companies within a specific sector such as technology, healthcare, energy, etc. This type of funds has a higher level of risk as it is concentrated on a specific sector.

International Funds: These funds invest in companies located outside of India. This type of funds has a higher level of risk due to currency fluctuations and political and economic instability.

Tax Saving Funds: These funds offer tax benefits to the investors, under Section 80C of the Income Tax Act.

Gilt Funds: These funds invest in government securities and bonds, which are considered to be the safest debt investments.

Fund of Funds: These funds invest in other mutual funds rather than directly investing in stocks or bonds.

Exchange-Traded Funds (ETFs): These funds are similar to index funds, but they are traded on stock exchanges just like stocks.

Equity Fund Categories as per SEBI guidelines

SEBI (Securities and Exchange Board of India) has categorized Equity Funds into several categories based on the market capitalization of the stocks they invest in. The main categories are:

• Large Cap Funds: These funds invest in the stocks of companies with large market capitalization (typically the top 100 companies by market capitalization). These companies are considered to be well-established and financially stable, and are generally considered to be less risky than small-cap or mid-cap companies.
• Mid Cap Funds: These funds invest in the stocks of companies with medium market capitalization (typically between 101st and 250th companies by market capitalization). These companies are considered to be less established and financially stable than large-cap companies, and therefore carry a higher level of risk.
• Small Cap Funds: These funds invest in the stocks of companies with small market capitalization (typically the companies below 250th by market capitalization). These companies are considered to be the most risky as they are less established and financially stable than large-cap or mid-cap companies.
• Multi-Cap Funds: These funds invest in stocks across large, mid and small-cap companies. These funds have the flexibility to allocate assets across different market capitalization and provide diversification in the portfolio.
• Diversified Equity Funds: These funds invest in a wide range of stocks across various sectors and market capitalization. These funds offer a high level of diversification, but also come with a higher level of risk.

Additionally, Equity funds can also be classified based on the sectors they invest in, such as technology, healthcare, energy, etc. These funds are known as sectoral funds or thematic funds.

What is NET ASSET VALUE (NAV)

Net Asset Value (NAV) is a measure of the per-unit value of a mutual fund’s portfolio. It is used to determine the price at which units of a mutual fund are bought or sold. The NAV of a mutual fund is calculated by dividing the total value of the fund’s assets by the number of units outstanding. The NAV is typically calculated on a daily basis and is published on the mutual fund company’s website and in newspapers.

When you purchase units of a mutual fund, you pay the NAV on the day of the transaction. Similarly, when you sell your units, you receive the NAV on the day of the transaction. The NAV is important because it reflects the performance of the underlying assets in the mutual fund’s portfolio. A higher NAV indicates that the fund’s assets have performed well, while a lower NAV indicates that the fund’s assets have not performed as well.

It’s important to note that NAV does not represent the past or future performance of the mutual fund and it does not include any sales load or any other charges which a investor has to pay at the time of purchase or redemption. It is only the value of the underlying assets of the fund which is divided by the number of outstanding units to arrive at NAV.

What are the Advantages of Investing into a Mutual Fund in India

Investing in mutual funds in India has several advantages, some of which include:

• Professional Management: Mutual funds are managed by professional fund managers who have the knowledge and expertise to make informed investment decisions. This can help to ensure that your investments are well-diversified and aligned with your investment objectives.
• Diversification: Mutual funds invest in a wide range of securities, which can help to spread risk and reduce the impact of any individual investment on the overall value of your portfolio.
• Liquidity: Mutual funds are considered to be a liquid investment, as shares can be bought and sold on a daily basis at the net asset value (NAV) price on the stock exchange.
• Affordability: Mutual funds can be a cost-effective way to invest, as they allow for small investments and also have low management expense ratio.
• Convenience: Investing in mutual funds is relatively simple and convenient. Many mutual funds can be bought and sold online, which makes the process quick and easy.
• Tax Benefits: Some mutual funds offer tax benefits to the investors, under Section 80C of the Income Tax Act.
• Risk Mitigation: Mutual funds offer a way to mitigate risk by providing a diversified portfolio. The risk is spread out among the different securities held within the fund, which can help to reduce the overall risk of the portfolio.
• Accessibility: Mutual funds are widely available and accessible to investors of all levels, including small investors and retail investors.

It’s always recommended to consult with a financial advisor or professional to understand the advantages and disadvantages of mutual funds and to ensure that they align with your investment goals and risk tolerance.

How to Start investing in Mutual Fund in India

Starting to invest in mutual funds in India is a relatively simple and straightforward process. Here is an in-depth look at the steps you should follow:

• Research and select the mutual funds that align with your investment goals and risk tolerance: Before investing in mutual funds, it’s important to research and select the funds that align with your investment goals and risk tolerance. You can research mutual funds by looking at their past performance, expense ratio, and the fund manager’s track record. Additionally, you can also use various online tools, such as mutual fund screener, to help you identify funds that align with your investment criteria.
• Open a demat account and a trading account: To invest in mutual funds, you will need to open a demat account and a trading account with a SEBI-registered broker or a mutual fund house. A demat account is used to hold your mutual fund units in electronic form, while a trading account is used to buy and sell mutual funds.
• Submit the necessary documents: Once you have selected a broker or mutual fund house, you will need to submit the necessary documents such as PAN card, address proof, and proof of income to open your account. You may also be required to submit a copy of your signature or passport-sized photograph.
• Start investing: Once your account is set up, you can start investing in mutual funds. You can choose to invest a lump sum or set up a systematic investment plan (SIP) to invest regularly. Some mutual funds also offer the option to invest through the systematic transfer plan (STP) which allows investors to transfer a fixed amount from one scheme to another scheme at regular intervals.
• Track your investments: It’s important to track your investments regularly by checking your account statement or by using the mutual fund’s website or mobile app. This will help you monitor the performance of your investments and make any necessary changes to your portfolio.
• Redeem or Switch your investments: You can redeem or switch your mutual fund investments as per your convenience. Redeeming means selling your mutual fund units, while switching means moving your investment from one scheme to another scheme.
• Taxation: It’s important to be aware of the tax implications of mutual fund investments in India. Different types of mutual funds have different tax implications and it’s recommended to consult with a financial advisor or professional to understand the tax implications of your investments.
• Fees and Charges: Be aware of the fees and charges associated with mutual fund investments, such as expense ratios and entry/exit loads. These charges can impact the overall returns of your investment and should be taken into consideration when choosing a mutual fund.

It’s always recommended to consult with a financial advisor or professional to ensure that the mutual funds you choose align with your investment goals and risk tolerance, and to understand the tax implications of mutual fund investments in India. It’s also important to be aware of the fees and charges associated with mutual fund investments, such as expense ratios and entry/exit loads.

History of Mutual Funds in India

The history of mutual funds in India dates back to the 1960s when the government of India established the Unit Trust of India (UTI) to mobilize savings from the public and channel them into the capital market. The UTI was set up under an Act of Parliament and was initially owned by the Reserve Bank of India and the Government of India.

In the early years, the UTI’s schemes were the only mutual fund options available to Indian investors. The UTI’s flagship scheme, the Unit Scheme 1964 (US 64), was launched in 1964 and quickly became popular among investors. The UTI enjoyed a monopoly in the Indian mutual fund market until the late 1980s when the government allowed private sector companies to enter the industry.

The entry of private sector mutual funds led to increased competition and innovation in the industry. The number of mutual fund schemes increased, and investors had more options to choose from. In the late 1990s, the Indian mutual fund industry saw significant growth in the number of schemes and a rise in the number of investors.

However, in the early 2000s, the Indian mutual fund industry faced a crisis due to poor performance, lack of transparency and mis-selling of schemes. The government and the Securities and Exchange Board of India (SEBI) intervened to improve the regulation and governance of the mutual fund industry. The industry has since recovered, and has seen steady growth in the number of schemes and investors.

In recent years, the Indian mutual fund industry has seen the emergence of new types of schemes such as ETFs, index funds, and alternative investment funds. The industry is also seeing growing interest from retail investors, with more and more people choosing mutual funds as an investment option.

• The first mutual fund in India, the Unit Trust of India (UTI), was launched in 1964.
• UTI enjoyed a monopoly in the Indian mutual fund market until the late 1980s.
• In 1987, the government allowed private sector companies to enter the mutual fund industry.
• The entry of private sector mutual funds led to increased competition and innovation in the industry.
• In 1993, the Securities and Exchange Board of India (SEBI) was established to regulate the mutual fund industry and protect the interests of investors.
• In the late 1990s, there was a significant growth in the number of mutual fund schemes and a rise in the number of investors.
• In the early 2000s, the Indian mutual fund industry faced a crisis due to poor performance, lack of transparency and mis-selling of schemes.
• The government and SEBI intervened to improve the regulation and governance of the mutual fund industry.
• The industry has since recovered, and has seen steady growth in the number of schemes and investors.
• Recently, the Indian mutual fund industry has seen the emergence of new types of schemes such as ETFs, index funds, and alternative investment funds.
• As of 2021, the mutual fund industry in India is growing rapidly and it has become an important investment option for the retail investors, with more than 50 AMC’s and thousands of schemes to choose from.

Myths & Facts About Mutual Funds

There are several myths and misconceptions about mutual funds that may cause confusion for investors. Here are some common myths and facts about mutual funds:

Myth: Mutual funds are only for rich people.

Fact: Mutual funds are accessible to investors of all levels and can be a cost-effective way to invest, as they allow for small investments and also have low management expense ratio.

Myth: Mutual funds are too risky.

Fact: Mutual funds offer a level of diversification that may be difficult to achieve by investing in individual securities. They spread the risk across a variety of assets, which can help to reduce the overall risk of the portfolio.

Myth: Actively managed mutual funds always outperform passively managed mutual funds.

Fact: Actively managed mutual funds and passively managed mutual funds (also known as index funds) have different investment strategies and management styles. While actively managed funds may outperform in some market conditions, passively managed funds have the advantage of lower expense ratios and the ability to provide market returns.

Myth: Past performance of a mutual fund is an indicator of future performance.

Fact: Past performance is not always indicative of future performance. It’s important to also consider other factors such as the fund’s investment objectives, risk.

Myth: Mutual funds are not transparent.

Fact: Mutual funds are required to disclose a significant amount of information to the public, including their portfolio holdings and performance history. This information is readily available to investors through the fund’s website and other public disclosures.

Myth: Mutual funds have high fees and charges.

Fact: Mutual funds do have fees and charges, such as management fees and expense ratios, which can reduce returns. However, these fees have been reducing over the time and expense ratios of mutual funds are lower than the traditional investment options, and many low-cost index funds are also available for investors, so it’s important for investors to carefully review the fees and charges before investing in a mutual fund.

Overall, it’s important for investors to do their own research and consult a financial advisor before investing in mutual funds. This will help to ensure that the investments are well-suited to the investor’s financial goals, risk tolerance, and investment horizon.