A beginners guide for the mutual funds investment in India

A beginners guide for the mutual funds investment in India

As a beginner in mutual fund's investment, I used to have many questions. And from the experience, I can bet that you would also be seeking an answer to many of these questions. Like, What is mutual funds? How to invest in mutual funds? Is my money is safe? And so on. As we go more into the detail, the list of these questions also increases. Though there are many articles on mutual funds, I still miss a guidebook cum tutorial which encompasses all these doubts for a beginner. In this article, i have to answer all these questions of a new investor with this “A beginners guide for the mutual funds investment in India." So let’s start:

What is Mutual fund?

A mutual fund is an investment fund, which is managed by an expert or group of expert, which collects a small-small amount of money for the investor like you and invests into shares, securities, commodities and bonds, etc. Whatever the profit/loss the fund house (Group of expert) will make is distributed among all the investors i.e you.

What is an Example of a mutual fund?

So, here is an example of a mutual fund:
SBI is the group of expert, which collects 10,000 INR/- from you and other 1,000 investors like you. So in total, they have 10,000,000 INR/- with them, and they invest it in a Govt. bond which yields 8.5% interest annually.  So after one year, the total profit made by the SBI mutual fund is 850,000 INR/. And you would get your total amount 10850 INR/.

As of now take this rudimentary detail, we will be going to deep dive into this with further questions.

How does Mutual Fund work?

A mutual fund house issues an NFO (New fund offer). Which is an invitation for interested investors to invest with the mutual fund house? Please notice it is with the mutual fund house not in a mutual fund house. Why I am saying this will get clear in few seconds. 
In NFO the mutual fund house allocates a fixed value to a unit called NAV (Net Asset Value), You can compare it with the share price. In this case assume, a unit price is 10 INR/-

Ok, Now as an investor, you decide to invest 10,000 INR/. In lue of your investment, 1000 units (10,000 /10 = 1, 000) will be allocated to you. The fund house will be investing this money into equity or any other investment opportunity. With time, the value of the investment will rise (Assume, always not true) and the net asset value of unit's increases to 11 INR/. And you want to withdraw your money, then you can sell these 1000 units with you back to mutual fund house and get back your money 11,000 INR/.
Another person who wants to invest in the same mutual fund can buy these units at 11 INR/ and this cycle continues.

What are the benefits of a mutual fund?

Mutual funds offer many advantages for an Investor, who has limited knowledge, money and time. To make your decision making a bit easier, we have listed a few benefits of investing in mutual fund.

  • Professional management

Money management requires a very good amount of knowledge. If you are not, that much verse with the equity, bonds and securities and the risk of losing your money. Then mutual funds are the best tool for you to generate wealth. As when you choose to buy any mutual fund, you choose a professional with it. This money manager will put your money in a well-researched equity or bond to make a profit for you.

  • Time-saving

You are free from any decision-making process, so no need to invest your time in any kind of research.

  • Diversification of your money

A mutual fund invests its money in many stocks and securities. So your small investment also gets diversified and in case of a heavy loss in a sector, you don’t incur a heavy loss.

  • Economics of Scale

As you must be knowing, that with each transaction of stocks in the share market, you need to pay transaction charges. E.g if you need to pay Rs.50 for each transaction for 10-20 share. The mutual fund buys or sells a large number of shares so this transaction charge would be divided equally.

  • Ease of Investment & Withdrawal

The mutual fund's houses provide a great ease of transaction. Most of the funds are online you can invest or withdraw anytime.

Can You lose your money in a mutual fund? 

Yes, mutual funds are not a risk-free instrument. You can lose your money. You would have also heard “Mutual funds are subject to market risk” as a disclaimer in the TV advertisement. Although, the mutual fund offers a wide range of funds for your risk appetite. If you can take a high risk to gain higher profit, you can opt for small & mid-cap equity funds. For low-risk appetite, you can choose to buy debt fund, which comes with virtually no risk. 

What is the average rate of return of a mutual fund?

It’s a tricky question to answer. The average rate of return depends on many independent aspects like Type of fund, the period of investment, market mood, the wisdom of the fund manager and list goes on. If you carry out a survey by yourself, you would find a person who incurred huge losses and another person who made huge profits. 

Though, As per Dave Ramsey book, one can expect 12% of annual return on a mutual fund. However, it is not always true. However, in a long run, you can expect a good rate of return. Many mutual funds give 15% of annual return on 10-year-old investment.

How safe is it to invest in Mutual funds?

Investment in Mutual funds are safe and also not safe! It’s just like riding on a motorcycle, if you are riding carefully it’s beneficial for you. But if you are not careful you can also meet a severe accident. I think this analogy would have cleared your doubt.

None of the mutual funds are risk-free (except few), by carefully using the mutual fund you can grow your wealth. Before investing you should know what is your goal, what is your risk appetite etc. Also, the funds come with a large range of risk factor. So you can choose a fund, as per your goal & strategy.

What do these mutual fund colour codes mean?

As per SEBI guidelines, the mutual funds are colour coded. These colour codes indicate risk assessment of the fund. In simple words, it shows you how much risk you would be taking investing in the fund.

Three colour codes have given to categorize all mutual funds in India based on the risk factor.

  • Blue colour - Low Risk

Debt funds such as liquid funds, Gilt funds, debt mutual funds, and fixed maturity funds come under this category.

  • Yellow colour - Medium risk

A hybrid mutual fund like balanced mutual funds, monthly income plans, etc., falls under this category.

  • Brown colour - High risk  

All equity fund come under this category e.g small-cap funds, mid-cap, diversified equity funds, index funds etc.

What is the best return on mutual fund?

It is a perception based.

However, here are few top performing funds of 2018:

Funds Returns (5 Years)
L&T India Value Fund 28.47%
Mirae Asset India Equity Fund 24.95%
SBI Magnum Multicap Fund 24.93%
Birla SL Frontline Equity Fund 20.20%


Are mutual funds safe?

Read my answer “How safe is it to invest in Mutual funds?”

How much should you invest in mutual funds?

The amount of investment is primarily driven three-factor namely

  1. Your goal - How much money you need to generate.
  2. Your Income - How much you have to invest.
  3. Period - In what period you want to achieve your target.

So, decide what is the target amount and time period and whether your income allows that much investment. E.g

If I would like to have 1 Crore rs/- after one year then I need to invest approx 8,08,261 INR/- each month as SIP.

Fund Type Debt-Liquid Equity – Large Cap
Target Amount 1,00,00,000 1,00,00,000
Investment period 1 Yr. 1 Yr.
Return per annum 6.85% 18.48%
Monthly Investment 8,08,261/- 31,976/-


Is it a Good time to Invest in Mutual Fund?

Anytime is a good time to invest in mutual funds. Based on your goals, financial planning, risk tolerance level, and investment horizon, you can choose a mutual fund of your choice and invest as a lump sum or via systematic investment plan(SIP).

Is Investing in mutual fund a good idea?

Yes, it is! Mutual fund is a fantastic instrument to grow your wealth. Though you should invest in any fund carefully after knowing all the risk associated with it.

What is best SIP mutual fund?

SIP stands for Systematic investment plan, where you invest a fixed amount at a regular interval. When comes to best SIP mutual fund then it is very hard to answer, as it depends on many factors. So, you are the best judge to analyze the best plan for yourself.

Which SIP is best for 5 years?

Few recommended, best SIP plans for high growth in the long run:

Fund Name CAGR(%)

L&T India Value Fund


Mirae Asset India Equity Fund


SBI Magnum Multicap Fund


Birla SL Frontline Equity Fund



Are mutual funds are better than stocks?

Totally depends on you. If your knowledge of stocks & its volatility is not good and you don’t want to actively spend time on market activity than mutual funds are better than stocks. If the answer is no then stocks are better.

What is the difference between direct plan and regular mutual funds?

A Direct plan, is when you buy the fund directly from the mutual fund house.

Whereas, a Regular plan you buy through a broker, advisor or distributor (intermediary).

Is SIP tax-free?

No, none of the SIP’s are income tax-free. However, if you invest in ELSS (Equity Linked Saving Scheme) SIP’s you would get a tax deduction if 1,50,000 INR/- under section 80C.

Which Company is best for SIP?

All companies funds are regulated by SEBI guideline, so all the companies are best.

However, here are a few funds you would like to explore:

  • SBI BlueChip Fund-Reg(G)

  • Franklin India Equity Fund(G)

  • Mirae Asset India Equity Fund-Reg(G)

  • HDFC Mid-Cap Opportunities Fund(G)

  • ICICI Pru Bluechip Fund(G)

How do I Choose the best mutual fund?

A best mutual fund does not mean the fund which gives you best return, However it fund which gives you good return with respect to your risk appetite and goals.

To find a good fund to fulfills your target and generate wealth, you have to do some basic research. However, most investors choose a fund just by looking higher return that also for short term. The research is based on a few criteria, which are as

  1. Choose a Direct fund

There are two options for each mutual fund, one is Direct fund (Where mutual fund house directly sell you a mutual fund plan) and another is a regular plan (Where you buy them from an advisor, brokerage house etc).

When you purchase a regular mutual fund you are required to pay your broker (as transaction charge and distribution expense). Which is zero in case of a direct fund.

Here is a comparison between the direct fund and the regular fund for your appreciation:


HDFC equity fund

Aditya Birla Sun life liquid fund

Mr. A (Regular plan)

Rs. 5,70,860

Rs. 4,89,173

Ms. B (Direct Plan)

Rs. 5,85,449

Rs. 4,90,261


Rs. 14,589

Rs. 1,088

Earlier it was difficult to buy a direct mutual fund, but after 2017 it’s even easier than ordering a pizza. Many mobile apps and service provider like Paytm Money, ET money, Zerodha are available, which provides you, direct mutual funds at your fingertips.

  1. Pay Attention at the Expense Ratio

The expense ratio is per unit cost for managing the fund. All fund management expenses such as salary of fund manager & his staff, Office charges etc. are deducted from the fund. So higher the expense ratio lower will be your return.

Though expense ratio is capped by SEBI guidelines, the lower the expense ratio higher will be your return.

  1. Fund Manager

A Fund manager is just like a captain of a boat, It is his wisdom based on which your money can sail to the highlands while passing through rough waters of the market.

Check the past performance of fund manager, of the funds he manages.  Go with a good fund manager, in case of a change in fund manager, don’t panic, wait for a quarter and look for his performance.

  1. Fund Diversification.

Diversification is key, to save your money during tough times. A fund which is less diversified is also very risky, if, during a tough time for a particular sector in which fund has invested, you can lose all your money. Here are few guidelines

  • Don’t buy a fund which bet on one sector.

  • Don’t keep all of the investment in one type of fund.

  • Don’t buy funds which only invests in thin stocks like real state stocks.

  1. Performance / Returns

This is one aspect, where everyone is more focused on. But merely 5% people look at it correctly. The correct performance analysis consists of comparison with its peers, Index and other instrument returns.

Decide your investment window and analyze with respect only to that window. It would be very wrong to select a fund which gives 25% return over a quarter if your investment window is of 10 years.

What are the best mutual funds to invest?

Any fund which meets your requirement!

Here are a few funds which you might prefer

  • Birla SL Frontline Equity Fund (Large-cap Fund Category)

  • ICICI Prudential Value Discovery Fund (Multi-cap Category)

  • HDFC Mid-cap Opportunities Fund (Mid-cap Category)

  • DSP Micro Cap Fund (Small-cap Category)

  • Axis Long Term Equity Fund (ELSS/Tax Saving Category)

Are mutual funds a good retirement investment?

Yes, mutual funds are far better investment instrument than any other investment for a long run. A good portfolio for retirement must be a diversified fund, which should include equity fund to grow the wealth and debt fund to ensure the risk balance.

What is the difference between mutual funds and shares?

Shares are the physical representation of a small portion of a company's value that is traded in the stock market.

However, Mutual funds are the collection of equity stocks, bond or other securities, which are managed by a fund manager. In other words, a mutual fund is a basket of many companies shares.

Is Demet required for SIP?

No, Demet is not required for investing in SIP. Only mandatory requirement for any mutual fund is Know Your Customer or KYC.

What is NAV?

NAV is an acronym for Net Asset Value (NAV), which indicates the value of each unit issued by the mutual fund. It is calculated based on the total value of the entity's assets minus the total value of liability divided by the number of outstanding units.

So the NAV is calculated by

NAV = (Assets - Liabilities) / Total number of outstanding shares

Example of NAV calculation

Assume, a mutual fund house has 100,000,000 INR/- as its total investments in securities like equities, bonds, and other securities. This total value of the investment is calculated based on the closing prices of each asset.

The fund house also has 7,000,000 INR/- as cash in hand. They are supposed to get 4,000,000 INR/- from the today's sale of assets. In addition to this, they had made 750,000 profit.

From the liability point of view, the fund house needs to pay 13,000,000 INR/- as a short-term liability and 2,000,000 INR- as a long-term liability. On daily office, expenses house has spent 150,000 INR/-. Total no of the unit the mutual fund house has issued till the end of the day is 5,000,000.

So the NAV is calculated by

NAV (Assets - Liabilities) / Total number of outstanding shares

NAV = ((100,000,000+7,000,000+4,000,000+750,000) - (13,000,000+2,000,000+150,000))/5,000,000

          = 19.32 INR/-

So, the value of your NAV is 19.32 INR/-