Mutual Funds 101: A Beginner's Guide
💡 Key Takeaway
Mutual funds pool money from multiple investors to invest in diversified portfolios managed by professionals. They offer an easy, affordable way for beginners to start investing with as little as ₹500 per month through SIP.
What are Mutual Funds?
Imagine you and 999 other people each contribute ₹10,000 to create a pool of ₹1 crore. A professional fund manager uses this money to buy a diversified portfolio of stocks, bonds, or other securities. That's essentially what a mutual fund is!
How Mutual Funds Work
You Invest
Buy units of a mutual fund scheme through SIP or lump sum
Fund Manager Invests
Professional manager buys stocks, bonds based on fund objective
Portfolio Grows
Your investment value increases (or decreases) with market performance
You Redeem
Sell units anytime and get money in 1-3 working days
Types of Mutual Funds
Equity Funds
Invest primarily in stocks. High risk, high return potential. Best for long-term goals (5+ years).
Debt Funds
Invest in bonds, government securities, corporate debt. Low risk, stable returns. Good for short to medium-term goals.
Hybrid Funds
Mix of equity and debt. Balanced risk-return profile. Suitable for moderate risk investors.
Index Funds
Passively track market indices like Nifty 50 or Sensex. Low expense ratio, good for long-term passive investing.
SIP vs Lump Sum Investment
SIP (Systematic Investment Plan)
Invest fixed amount monthly (₹500, ₹1000, ₹5000, etc.)
Lump Sum Investment
Invest large amount at once (₹50,000, ₹1 lakh, etc.)
Pro Tip
For most investors, SIP is the better choice. It removes emotion from investing and builds wealth systematically. Use lump sum only when you have surplus money and markets are down 15-20% from peak.
How to Choose the Right Mutual Fund
Define Your Goal & Time Horizon
Check Past Performance
Look at 3-year and 5-year returns. Compare with benchmark index and category average. Don't chase last year's top performers.
Expense Ratio Matters
Lower is better. For equity funds, aim for <1.5%. For debt funds, <0.75%. Index funds should be <0.5%.
Fund Manager Track Record
Check if the same manager has been handling the fund for 3+ years. Consistency matters.
AUM (Assets Under Management)
Not too small (<₹100 crore) or too large (>₹50,000 crore for mid/small cap). Sweet spot: ₹500-5,000 crore.
Tax on Mutual Funds (2024)
| Fund Type | Holding Period | Tax Rate |
|---|---|---|
| Equity Funds | < 1 year (STCG) | 15% |
| Equity Funds | > 1 year (LTCG) | 10% above ₹1 lakh gain |
| Debt Funds | Any period | As per income tax slab |
Common Mistakes to Avoid
Chasing Past Returns
Last year's top performer may not repeat. Focus on consistency over 3-5 years.
Over-Diversification
Don't invest in 15-20 funds. 4-6 well-chosen funds across categories are enough.
Stopping SIP in Market Fall
Market falls are buying opportunities. Continue SIP to buy more units at lower prices.
Ignoring Exit Load
Most equity funds charge 1% exit load if redeemed within 1 year. Plan accordingly.
Start Your SIP Journey
Calculate how much your monthly SIP can grow over time with our SIP calculator.
Calculate SIP Returns →Where to Invest in Mutual Funds
Direct Plans (Recommended)
Lower expense ratio, higher returns. Invest through AMC website or platforms like Groww, Zerodha Coin, Paytm Money.
Regular Plans (Through Advisor)
Higher expense ratio due to distributor commission. Only if you need hand-holding.
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