A mutual fund is an investment instrument that pools money from numerous investors to invest in a diversified pool of securities such as equities, bonds, and other money market instruments. Mutual funds have become one of the most widely invested instruments as they make up for effective diversification, which spreads the risks across numerous securities and offers steady returns to investors. Among numerous investment instruments you can invest in, mutual funds ensure investment discipline through systematic investment over time. Since professional portfolio managers manage the investments, they carry lower risk than other investment instruments.
If you are an investor or are looking to invest to build wealth over time, it is ideal to add mutual funds to your portfolio. This blog will help you understand what is a mutual fund and how it can help you earn good returns in the long term.
Mutual funds offer diversification, professional management, and the potential for long-term wealth creation. Start exploring different options to find the right fund for your goals. Compare Mutual Fund Options Now!
What are mutual funds?
A mutual fund’s meaning refers to an investment instrument that invests in several other securities to create an individual portfolio by pooling money from numerous investors. Once the individual portfolio of various securities is created, investors are given mutual fund units based Features
on their investment amount. The pooled money and the resulting investments are managed by professional fund managers who make investment decisions based on the fund’s objectives and strategies.and benefits of mutual funds
There are numerous types of mutual funds, such as equity funds, bond funds, money market funds, debt funds, hybrid funds, etc. The value of the mutual fund is determined daily based on the total value of its assets minus liabilities. The price at which you buy or sell shares is based on the Net Asset Value (NAV) per share.
Here is a simple example to understand what is a mutual fund in simple words:
Imagine you are having a get-together at your house and want to buy snacks for the party. The kind of snacks you want to buy will cost Rs. 100. You and your three friends pool Rs. 25 each and buy a variety of snacks such as chips and drinks. You bought 4 bags of chips and 4 drinks, and as per individual contribution, each person will receive a bag of chips and a drink. Just like your group pools money to buy snacks, investors pool their money into a mutual fund.
How do mutual funds work?
Here's how mutual funds work:
Aspect |
Description |
Pooling of funds |
Mutual funds aggregate capital from multiple investors to create a pooled investment fund. Each investor holds shares, and the fund's total value is determined by the net asset value (NAV), calculated based on the collective value of assets. |
Professional management |
Expert portfolio managers oversee mutual funds, making strategic investment decisions to meet the fund's objectives. Their goal is to optimise returns while prudently managing risk through careful asset allocation and selection. |
Diversification |
Mutual funds invest in a diversified range of securities, including stocks, bonds, or a blend of both. This diversification spreads risk across different assets, mitigating the impact of poor performance in any single investment. |
Investor shares |
Individuals purchasing mutual fund shares acquire ownership in proportion to their investment. The quantity of shares an investor possesses reflects their stake in the overall fund. |
Net asset value (NAV) |
NAV represents the per-share market value of the mutual fund. It's computed by dividing the total value of assets within the fund's portfolio by the number of outstanding shares. Investors buy or sell shares at the NAV price, which fluctuates based on market conditions. |
Liquidity |
Mutual funds provide liquidity, enabling investors to buy or sell shares on any business day at the closing NAV. This flexibility allows for relatively easy entry into or exit from positions, enhancing investment accessibility. |
Returns and distributions |
Mutual funds generate returns through capital appreciation, interest income, and dividends from underlying securities. Profits are distributed to investors in the form of cash or additional shares, often accompanied by periodic income distributions. |
Must know facts about the Indian mutual fund industry
- Rapid Growth in Assets Under Management (AUM): The Indian mutual fund industry's AUM has surged from Rs. 12.02 trillion in February 2015 to Rs. 64.53 trillion by February 2025, marking a more than fivefold increase over a decade.
- Historical Milestones: The industry achieved significant AUM milestones, crossing Rs. 10 trillion in May 2014, Rs. 20 trillion in August 2017, and Rs. 30 trillion in November 2020.
- Investor Participation: As of February 2025, the total number of mutual fund accounts, or folios, stood at 23.23 crore (232.3 million). Notably, equity, hybrid, and solution-oriented schemes, primarily favored by retail investors, accounted for approximately 18.42 crore (184.2 million) folios.
- Inception and Evolution: The Indian mutual fund journey began in 1963 with the establishment of the Unit Trust of India (UTI) by an Act of Parliament, operating under the Reserve Bank of India's guidance. UTI launched its first scheme, Unit Scheme 1964 (US '64), and by the end of 1988, managed assets worth Rs. 6,700 crores.
- Regulatory Framework: The Securities and Exchange Board of India (SEBI) oversees the mutual fund industry, ensuring transparency and investor protection. The Association of Mutual Funds in India (AMFI), a non-profit organization established in 1995, works alongside SEBI to promote ethical practices and disseminate information.
- Diverse Investment Options: The industry offers a wide array of schemes catering to various investor needs, including equity, debt, hybrid, and solution-oriented funds, providing avenues for wealth creation and financial planning.
- Geographical Reach: Efforts are ongoing to deepen the penetration of mutual funds beyond top cities, aiming to enhance financial inclusion across the country.
Features and benefits of mutual funds
Here are some of the key features and benefits of mutual funds:
Feature |
Benefit |
Description |
Diversification |
Reduced risk |
Spread your investment across multiple assets, lowering risk compared to investing in individual stocks. |
Professional management |
Expertise & active management |
Fund managers with expertise actively manage your investments, monitoring and rebalancing the portfolio. |
Transparency |
Informed decisions |
Access Scheme Information Documents and daily NAV (Net Asset Value) to track your investment. |
Liquidity (Open-ended funds) |
Easy access to funds |
Redeem your investments on business days and receive funds within 1-3 days (except close-ended and ELSS funds with lock-in periods). |
Tax savings (ELSS) |
Reduced tax liability |
Up to Rs. 1.5 lakh invested in ELSS qualifies for tax deduction under Section 80C of the Income Tax Act. |
Wide investment choice |
Align with your goals |
Choose from various funds like liquid funds, flexi-cap funds, or solution-oriented funds to suit your investment needs. |
Cost-effective |
Economies of Scale |
Pooled investments allow access to a broader range of assets at lower costs compared to individual investing. |
Potential for high returns |
Long-term growth |
Equity funds have the potential for double-digit annual returns, while debt funds can outperform bank deposits. |
Well-regulated industry |
Investor protection |
SEBI regulations ensure investor protection, risk mitigation, liquidity, and fair valuation of mutual funds. |