What Is a Mutual Fund? A Simple MF Guide for Beginners

A mutual fund is a financial vehicle that pools money from multiple investors to invest in a diversified portfolio of assets, such as equities (stocks), debt (bonds), and money market instruments.

Mutual funds provide a cost-effective way to access a professionally managed portfolio. Instead of buying individual stocks yourself, you purchase 'units' that represent your share of the fund’s total holdings. This allows you to benefit from expert management and a diversified range of assets through a single, simple investment.

What is a Mutual Fund and How Does It Work?

Think of a mutual fund like a group of friends pooling money to buy household items together.

One experienced person manages the buying to get better value. The savings or gains are shared based on each person’s contribution.

Here’s how a Mutual Fund Works:

1. Pooling of Capital: Investors with similar financial goals contribute money to a specific scheme.
2. Allotment of Units: Based on the amount invested, investors are allotted units at the prevailing NAV (Net Asset Value).
3. Investing in Securities: The Fund Manager invests this pool into various securities (stocks, bonds, etc.) to generate returns. These returns are then passed back to the investors in proportion to the units they hold.

For example: If you wanted to invest in the top 50 companies in India (like Reliance, HDFC Bank, and TCS), buying individual shares of all 50 would require significant capital and research. Instead, you can invest in a Nifty 50 Index Fund. This fund pools money to buy all 50 stocks in the same proportion as the index, giving you instant diversification.

What is NAV in a mutual fund?

NAV (Net Asset Value) is the price of one unit of a mutual fund, similar to the price of a single stock. It is updated every day based on the total market value of all the assets the fund owns. A low NAV doesn't mean a fund is "cheap"; your profit depends on the percentage growth of the fund, not the unit price.

Types of Mutual Funds

Mutual funds are categorised based on their asset allocation and investment objectives:

Mutual Fund Charges & Fees

Investing in mutual funds involves certain costs that impact your final returns:

1. Expense Ratio: The annual fee charged by the AMC to manage the fund. It covers the fund manager’s salary, administration, and marketing. It is deducted daily from the NAV. (To understand what the expense ratio is in a mutual fund, read this)
2. Exit Load: A fee charged if you redeem your units before a specific period (e.g., 1% if redeemed within 1 year). Not all funds have an exit load. (To understand what the exit load ratio is in a mutual fund, read this)

How to Invest in Mutual Funds?

• Step 1 - Download & Sign Up: Get the INDmoney app and register with your mobile number.
• Complete KYC: Finish your paperless KYC using your PAN and Aadhaar.
• Choose a Fund: Explore thousands of Direct Mutual Funds with zero commissions.
• Select Mode: Choose between a monthly SIP (starting at ₹100) or a one-time Lump sum investment.
• Invest: Link your bank account and pay securely via UPI or Net Banking.
• Track: Monitor your portfolio performance and health in real-time on a single dashboard.

There are no hidden costs or charges for investing in mutual funds via INDmoney. Check the pricing details here. 

Who Should Invest in Mutual Funds?

• Beginners: Those who want to start with as little as ₹100.
• Busy Professionals: Those who don't have time to track the stock market daily.
• Goal-Based Savers: Those planning for retirement, a child's education, or a house.

Mutual Funds vs. Other Investments

Benefits of Investing in Mutual Funds

• Professional Management: Expert fund managers handle the research and decision-making.
• Diversification: Reduces risk by spreading money across different sectors and companies.
• Liquidity: Most funds allow withdrawals within 1-3 business days.
• Tax Efficiency: ELSS funds offer tax deductions up to ₹1.5 lakh under Section 80C (Old Regime).

Risks to Consider

• Market Risk: Returns are not guaranteed and depend on market performance.
• No Control: Investors cannot choose which specific stocks the fund manager buys.
• Fees: High expense ratios can eat into your long-term profits.

Disclaimer: The content is meant for education and general information purposes only.  Past performance is not indicative of future returns. Mutual Funds are non-exchange traded products, and INDstocks is merely acting as a mutual fund distributor. All disputes with respect to distribution activity, would not have access to the exchange investor redressal forum or arbitration mechanism. Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing. INDstocks Private Limited (formerly known as INDmoney Private Limited) 616, Level 6, Suncity Success Tower, Sector 65, Gurugram, 122005, SEBI Stock Broking Registration No: INZ000305337, Trading and Clearing Member of NSE (90267, M70042) and BSE, BSE StarMF (6779), AMFI Registration No: ARN-254564, SEBI Depository Participant Reg. No. IN-DP-690-2022, Depository Participant ID: CDSL 12095500, Research Analyst Registration No. INH000018948 BSE RA Enlistment No. 6428.