What is a mutual fund and how does it work?

A mutual fund pools money from many investors and invests it in a diversified portfolio such as equity, debt or a mix. A fund manager runs the portfolio and the fund publishes a daily NAV (net asset value) so investors can track performance.

How do mutual funds generate returns?

Returns come from price appreciation of the underlying securities (NAV growth) and, where applicable, dividends/interest. Debt funds primarily earn interest; equity funds are market-linked and more volatile.

Are mutual funds safe?

They carry market and interest-rate risk. Diversification reduces single-security risk but does not eliminate loss. Choose funds that match your risk tolerance and time horizon.

NAV (Net Asset Value) is the per-unit value of the fund after accounting for the portfolio’s market value, cash, and expenses. It is typically published daily.

What is the difference between SIP and lump sum?

A SIP invests a fixed amount at regular intervals, smoothing volatility and enforcing discipline. Lump sum invests all at once, which can be more sensitive to market timing.

What costs apply to mutual funds?

The Total Expense Ratio (TER) covers management and operating costs and is deducted within NAV. Some funds levy an exit load if you redeem within a defined period.

How are mutual fund returns taxed in India?

Tax depends on the fund category and holding period. Dividends are usually taxed at your slab. Capital gains tax rules differ for equity vs. debt and by holding period. Confirm current rules with your broker or tax advisor.

How do I choose the right mutual fund?

Align the fund’s objective and risk with your goal and horizon. Look for a consistent process, suitable asset allocation, costs (TER), and a track record across market cycles. Avoid chasing recent top performers.

How long should I stay invested?

Match horizon to the fund type. Equity funds suit multi-year goals; debt funds can suit near-term needs and income stability. Review annually and after major life changes.

How do I redeem and what is an exit load?

Redemptions can be placed through the AMC or platform; units are sold at the next applicable NAV. Some funds charge an exit load if redeemed within a specified period—check the scheme document.

Mutual Funds in Summary

Mutual funds pool money from investors and deploy it into a diversified portfolio across equity, debt, money markets—or a mix. A professional fund manager runs the portfolio and the fund publishes a daily NAV (net asset value), so performance is transparent and easy to track.

Key benefits ↓ Worked example ↓ FAQs ↓

Why investors use mutual funds

Diversification: Lowers single-stock/issuer risk by spreading across many securities and sectors.
Professional management: Research-driven security selection, rebalancing and risk control.
Choice of objectives: Equity (growth), debt (income/stability), hybrid (balanced), and more.
Transparency: Daily NAV, factsheets, holdings and expense ratio disclosures.
Convenience: SIP/STP/SWP, online KYC, and consolidated tracking.

Returns are market-linked and not guaranteed. Expenses and taxes (TER, loads, capital gains) apply.

A quick example (illustrative)

Suppose a large-cap equity fund’s NAV rose from ₹17.01 (18-Jan-2013) to ₹81.05 (29-Apr-2024). That’s about 4.76× over ~11 years, roughly ≈15% annualised (CAGR) before costs and taxes.

Example fund growth chart — Source: fund factsheet / AMFI / platform chart. Past performance is not indicative of future results.

What to remember

Match fund choice to your goal, horizon, and risk comfort.
Prefer process, consistency and cost over chasing last year’s winners.
Use SIPs for discipline; review annually—not daily.

Frequently Asked Questions

What is a mutual fund and how does it work?
A pooled vehicle that invests across securities; a manager runs the portfolio and NAV is published daily.
How do mutual funds generate returns?
From NAV appreciation and, where applicable, dividends/interest from the underlying holdings.
Are mutual funds safe?
They carry market/interest-rate risk. Diversification helps but does not eliminate loss. Pick funds to match risk and horizon.
What is NAV?
The per-unit value of the fund after valuing holdings and expenses; typically published daily.
What’s the difference between SIP and lump sum?
SIP invests periodically to smooth volatility; lump sum invests all at once and is more timing-sensitive.
What costs apply?
The TER (Total Expense Ratio) is charged within NAV. Some funds have exit loads for early redemption.
How are mutual fund returns taxed in India?
Dividends are usually taxed at your slab. Capital gains depend on fund category and holding period; confirm current rules.
How do I choose a fund?
Align to goal/horizon, check process and asset allocation, review costs and track record across cycles.
How long should I invest?
Multi-year for equity funds; shorter horizons for debt funds depending on rate risk. Review annually.
How do I redeem and what is exit load?
Submit redemption via AMC/platform; units sell at next applicable NAV. Exit load may apply within a set period—check scheme docs.

Education only. Product features and taxation can change—confirm current rules with your broker/platform and tax advisor.