What are Mutual Funds?
A mutual fund is a pool of money collected from many investors and invested in stocks, bonds, or other assets by professional fund managers. Instead of buying individual stocks, you buy units of the mutual fund.
Simple Example: You want to invest ₹10,000 but don’t know which stocks to buy. You give this money to a mutual fund. The fund manager uses your money (along with thousands of other investors) to create a diversified portfolio. You own units proportional to your investment.
💡 Key Benefit: Professional management + Diversification + Low minimum investment (as low as ₹100)
Types of Mutual Funds
1. Equity Funds (Stock Market Based)
Invest primarily in stocks. High risk, high potential returns.
Sub-types:
Large Cap Funds
- Invest in top 100 companies (TCS, Reliance, HDFC Bank)
- Lower risk among equity funds
- Expected returns: 10-12% annually
- Best for: Conservative equity investors
Mid Cap Funds
- Invest in companies ranked 101-250
- Moderate-high risk
- Expected returns: 12-15% annually
- Best for: Moderate risk takers
Small Cap Funds
- Invest in companies ranked beyond 250
- Highest risk and volatility
- Expected returns: 15-18% annually (but can be negative too!)
- Best for: Aggressive investors, long-term (7+ years)
Flexi Cap/Multi Cap Funds
- Invest across large, mid, and small caps
- Balanced risk
- Expected returns: 11-14% annually
- Best for: Most investors seeking diversification
Sector/Thematic Funds
- Invest in specific sectors (IT, pharma, banking)
- Very high risk
- Returns vary widely
- Best for: Experienced investors only
2. Debt Funds (Bond Market Based)
Invest in bonds, government securities, corporate debt. Lower risk than equity.
Sub-types:
Liquid Funds
- Invest in very short-term instruments (up to 91 days)
- Lowest risk among debt funds
- Returns: 4-6% annually
- Best for: Emergency funds, parking money for 1-3 months
Ultra Short Duration Funds
- Invest in instruments with 3-6 months maturity
- Very low risk
- Returns: 5-7% annually
- Best for: Short-term goals (3-12 months)
Short Duration Funds
- Invest in instruments with 1-3 years maturity
- Low-moderate risk
- Returns: 6-8% annually
- Best for: Goals 1-3 years away
Corporate Bond Funds
- Invest in high-quality corporate bonds
- Low-moderate risk
- Returns: 7-9% annually
- Best for: Conservative investors
Gilt Funds
- Invest only in government securities
- No credit risk (but interest rate risk exists)
- Returns: 6-8% annually
- Best for: Risk-averse investors
3. Hybrid Funds (Mix of Equity and Debt)
Combination of stocks and bonds in one fund.
Aggressive Hybrid
- 65-80% equity, rest in debt
- Moderate-high risk
- Returns: 9-11% annually
- Best for: Balanced approach with equity tilt
Conservative Hybrid
- 10-25% equity, rest in debt
- Low-moderate risk
- Returns: 7-9% annually
- Best for: Conservative investors wanting some equity exposure
Balanced Advantage Funds
- Dynamic allocation between equity and debt
- Moderate risk
- Returns: 8-10% annually
- Best for: Investors who want fund manager to handle allocation
4. Other Categories
Index Funds
- Passively track an index (Nifty 50, Sensex)
- Very low expense ratio (0.1-0.5%)
- Returns match the index
- Best for: Low-cost, long-term investors
ELSS (Tax Saving Funds)
- Equity funds with 3-year lock-in
- Tax deduction under Section 80C
- Returns: 11-14% annually
- Best for: Tax saving + wealth creation
International Funds
- Invest in foreign markets (US, global)
- Currency diversification
- Returns vary
- Best for: Global diversification
SIP vs Lumpsum: Which is Better?
Systematic Investment Plan (SIP)
Invest a fixed amount regularly (monthly/quarterly).
How it Works: Auto-debit ₹5,000 from your account on 5th of every month and invest in chosen mutual fund.
Advantages: ✅ Rupee cost averaging (buy more units when markets are down) ✅ Disciplined investing ✅ No need to time the market ✅ Start with as low as ₹100/month ✅ Power of compounding over long term
Example:
SIP of ₹10,000/month for 10 years at 12% returns
Total Invested: ₹12,00,000
Maturity Value: ₹23,23,391
Profit: ₹11,23,391
Best For:
- Salaried individuals
- First-time investors
- Long-term wealth building
- Market volatility protection
Lumpsum Investment
Invest a large amount at once.
How it Works: Invest ₹1,00,000 today in one go.
Advantages: ✅ Full amount starts compounding immediately ✅ Good when markets are low ✅ Suitable for sudden windfalls (bonus, inheritance) ✅ No recurring effort
Example:
Lumpsum of ₹12,00,000 today for 10 years at 12% returns
Total Invested: ₹12,00,000
Maturity Value: ₹37,28,956
Profit: ₹25,28,956
⚠️ Risk: If invested at market peak, can lead to negative returns initially.
Best For:
- Experienced investors
- Market corrections/crashes
- Sudden windfall money
- Retirees investing corpus
Which Should You Choose?
Choose SIP if:
- Regular monthly income
- New to investing
- Don’t want to time the market
- Long-term goals (5+ years)
Choose Lumpsum if:
- Have sudden windfall
- Markets are significantly down
- Short-term debt fund investment
- Experienced with market timing
💡 Best Strategy: Combine both! Do monthly SIP + invest lumpsum during market corrections.
Step-by-Step: How to Start Investing
Step 1: Complete KYC (One-time Process)
KYC = Know Your Customer. Mandatory for all investments in India.
Documents Required:
- PAN card (mandatory)
- Aadhaar card
- Bank account details
- Passport-size photo
- Signature
How to Complete KYC:
Option 1: In-Person Verification (IPV)
- Visit KRA office or broker office
- Submit documents
- Verification in 2-3 days
Option 2: Video KYC (eKYC)
- Most convenient method
- Takes 10 minutes
- Available on all platforms (Groww, Zerodha, etc.)
- Instant verification
Process:
- Upload PAN and Aadhaar
- Bank account verification (penny drop)
- Video call with KYC official
- Show PAN card and sign on paper
- KYC approved in 24-48 hours
⚠️ Important: Once KYC is done, it’s valid across all platforms. You don’t need to repeat it.
Step 2: Choose Investment Platform
| Platform | Best For | Pros | Cons |
|---|---|---|---|
| Groww | Beginners | User-friendly, simple UI, good support | Slightly higher charges |
| Zerodha Coin | Cost-conscious | Lowest charges (direct plans), comprehensive | Complex for beginners |
| Paytm Money | Casual investors | Integrated with Paytm, easy UPI | Limited features |
| ET Money | Research | Good recommendations, SIP tracking | Interface can be cluttered |
| Kuvera | Serious investors | Advanced features, tax harvesting | Steep learning curve |
| Direct AMC Websites | DIY investors | No intermediary, direct plans | Need to manage multiple logins |
💡 Recommendation for Beginners: Start with Groww or Paytm Money. Switch to Zerodha Coin once comfortable.
Step 3: Select Mutual Funds
For Beginners (First ₹50,000):
- 1 Flexi Cap Fund (e.g., Parag Parikh Flexi Cap)
- 1 Index Fund (e.g., Nifty 50 Index Fund)
For Intermediate (₹50,000 - ₹2,00,000):
- 1 Large Cap Fund
- 1 Mid Cap Fund
- 1 Flexi Cap Fund
- 1 Debt Fund (for stability)
For Advanced (₹2,00,000+):
- 2 Large Cap Funds
- 2 Mid Cap Funds
- 1 Small Cap Fund
- 1 Flexi Cap Fund
- 1-2 Debt Funds
- 1 International Fund (optional)
Step 4: Start SIP
On Groww:
- Search for fund
- Click “Start SIP”
- Enter amount (min ₹100)
- Select date (5th, 10th, 15th, 20th, 25th)
- Choose duration or perpetual
- Authorize via net banking/UPI
- First installment processed in 2 days
SIP Date Selection:
- Choose 2-5 days after salary credit
- Most common: 5th or 10th of month
- Ensure sufficient balance
Step 5: Monitor (Don’t Obsess!)
Review Frequency:
- First 6 months: Monthly (to understand)
- After that: Quarterly
- Annual rebalancing if needed
When to Review:
- Major life changes (marriage, child)
- Goal coming closer (within 2 years)
- Fund performance consistently poor (3+ years)
Best Investment Strategies
Strategy 1: Core-Satellite Approach
Core (70-80%): Stable, diversified funds
- Large cap / Index funds
- Flexi cap funds
Satellite (20-30%): Higher risk, higher returns
- Mid/Small cap funds
- Sector funds
- International funds
Example Portfolio (₹10,000/month):
Core:
- ₹4,000 in Nifty 50 Index Fund
- ₹3,000 in Flexi Cap Fund
Satellite:
- ₹2,000 in Mid Cap Fund
- ₹1,000 in US Index Fund
Strategy 2: Goal-Based Investing
Match funds to goals based on time horizon.
Short-term (1-3 years):
- Liquid funds
- Ultra-short duration funds
- Short duration funds
Medium-term (3-5 years):
- Conservative hybrid funds
- Large cap funds
- Arbitrage funds
Long-term (5+ years):
- Equity funds (any category)
- ELSS for tax saving
- Index funds
Example:
Goal: Child's education in 10 years, need ₹20 lakhs
Investment:
- ₹8,000/month in Flexi Cap Fund
- ₹5,000/month in Mid Cap Fund
- ₹2,000/month in Index Fund
Strategy 3: Step-up SIP
Increase SIP amount annually.
Example:
Year 1: ₹5,000/month
Year 2: ₹6,000/month (+20%)
Year 3: ₹7,200/month (+20%)
Year 4: ₹8,640/month (+20%)
Result: Much higher corpus due to increasing investments with salary hikes
💡 Auto Step-up: Many platforms offer automatic annual increase feature.
Tax Implications
Equity Mutual Funds
Short-term Capital Gains (holding < 1 year):
- Tax: 20% (previously 15%, changed in Budget 2024)
Long-term Capital Gains (holding > 1 year):
- Tax: 12.5% on gains above ₹1.25 lakh per year
Example:
Invested: ₹5,00,000
After 2 years: ₹7,00,000
Profit: ₹2,00,000
Tax:
First ₹1,25,000: Exempt
Remaining ₹75,000: 12.5% = ₹9,375
Debt Mutual Funds
All gains taxed as per your income tax slab (no separate capital gains rate).
Example:
If you're in 30% tax bracket:
Debt fund return: 7%
Post-tax return: 4.9%
💡 SIP Tax Benefit: Each SIP installment treated separately for calculating holding period. Can optimize tax by redeeming oldest units first.
Common Mistakes to Avoid
❌ Mistake 1: Chasing past returns “This fund gave 40% last year!” → Past performance doesn’t guarantee future returns.
❌ Mistake 2: Too many funds Having 15 funds = overlapping stocks = no real diversification.
❌ Mistake 3: Stopping SIP during market crash Market down = buying units at discount = BEST time to continue!
❌ Mistake 4: Not aligning with goals Investing in equity for a goal 2 years away = High risk of loss.
❌ Mistake 5: Ignoring expense ratio Regular plans have 1-2% higher expense than direct plans. Over 20 years, this compounds to huge difference!
❌ Mistake 6: Panic selling Market down 20% → sold in panic → missed the recovery.
❌ Mistake 7: Investing in NFOs blindly New Fund Offers aren’t always good. Prefer funds with track record.
How to Evaluate Mutual Funds
1. Returns Analysis
Don’t just look at 1-year returns!
Check:
- 3-year returns
- 5-year returns
- 10-year returns (if available)
- Rolling returns (how consistently it performed)
2. Compare with Benchmark and Category
Example:
Fund returned 15% in last 1 year
Benchmark (Nifty 50) returned 18%
Category average: 16%
Verdict: Underperformed both benchmark and peers
3. Risk Metrics
Standard Deviation: Lower is better (less volatility) Sharpe Ratio: Higher is better (risk-adjusted returns) Beta: <1 is less volatile than market, >1 is more volatile
4. Fund Manager Track Record
- How long managing this fund?
- Performance across market cycles
- Management of other funds
5. Expense Ratio
Direct Plans: 0.5-1.5% Regular Plans: 1.5-2.5%
💡 Always choose direct plans to save 1% annually!
6. AUM (Assets Under Management)
Too Small (<₹100 crore): May lack diversification Very Large (>₹50,000 crore): May face difficulty deploying funds efficiently Sweet Spot: ₹1,000 - ₹10,000 crore for most funds
Top Mutual Funds in Each Category (2024)
Disclaimer: These are for reference only. Do your own research!
Large Cap Funds
- ICICI Prudential Bluechip Fund
- Axis Bluechip Fund
- Mirae Asset Large Cap Fund
Mid Cap Funds
- Motilal Oswal Mid Cap Fund
- Edelweiss Mid Cap Fund
- PGIM India Mid Cap Opportunities Fund
Small Cap Funds
- Nippon India Small Cap Fund
- Axis Small Cap Fund
- Quant Small Cap Fund
Flexi Cap Funds
- Parag Parikh Flexi Cap Fund
- JM Flexi Cap Fund
- Canara Robeco Flexi Cap Fund
Index Funds
- HDFC Nifty 50 Index Fund
- ICICI Prudential Nifty 50 Index Fund
- UTI Nifty 50 Index Fund
ELSS (Tax Saving)
- Mirae Asset Tax Saver Fund
- Axis Long Term Equity Fund
- Canara Robeco Equity Tax Saver
Debt Funds
- ICICI Prudential Liquid Fund
- Aditya Birla Sun Life Liquid Fund
- HDFC Short Term Debt Fund
FAQs
Q1: Can I lose all my money in mutual funds? In equity funds, yes theoretically, but highly unlikely if diversified and held long-term. In debt funds, risk of total loss is extremely low.
Q2: What’s better - Regular or Direct plans? Always Direct! Save 1% expense ratio annually. Over 20 years with ₹10,000 SIP, you save ₹2-3 lakhs!
Q3: Can I stop SIP anytime? Yes! SIP can be paused or stopped anytime (except ELSS which has 3-year lock-in after each installment).
Q4: How long should I stay invested? Minimum 5 years for equity funds, 3 years for debt funds to ride out volatility.
Q5: Should I invest when market is high? With SIP, market level doesn’t matter much. Lumpsum should wait for corrections.
Q6: How many mutual funds should I have? 5-7 funds are sufficient for most investors. Don’t over-diversify.
Q7: What happens if AMC shuts down? Your investment is safe. SEBI will transfer units to another AMC.
Action Checklist
This Week:
- Complete KYC if not done
- Download Groww/Zerodha app
- Research 2-3 funds in your category
- Decide monthly SIP amount
This Month:
- Start your first SIP (even if ₹500)
- Set up auto-debit
- Note down investment date in calendar
Next 3 Months:
- Monitor first investment
- Learn about different fund categories
- Consider adding second fund
Within 6 Months:
- Review portfolio performance
- Increase SIP if possible
- Share knowledge with family
Tools & Resources
Investment Platforms:
- Groww: https://groww.in
- Zerodha Coin: https://coin.zerodha.com
- Paytm Money: https://www.paytmmoney.com
Research Platforms:
- Value Research Online: https://www.valueresearchonline.com
- Morningstar India: https://www.morningstar.in
- Moneycontrol: https://www.moneycontrol.com
Learning Resources:
- Freefincal blog
- SEBI Investor Education portal
- YouTube: CA Rachana Ranade, Sharan Hegde
Disclaimer: The information provided is for educational purposes only and should not be considered as financial advice. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. Past performance is not indicative of future returns. Consult with a certified financial advisor before making investment decisions. BigSoch is not responsible for any financial losses.