Investing Basics

Mutual funds offer several key benefits to investors, including diversification, where money is spread across many securities to reduce the impact of any single investment; professional fund management by experienced investment experts; and high liquidity, allowing investors to enter and exit most schemes with relative ease. They are also accessible through low minimum investment amounts and SIPs, operate under strong SEBI regulations, and provide transparent reporting, making them a convenient and regulated way to build long-term wealth.

An Asset Management Company (AMC) in mutual funds is a SEBI-registered financial institution that pools money from investors and manages it through various mutual fund schemes in line with each scheme’s stated objective. The AMC appoints professional fund managers and research teams to construct and monitor portfolios, handle day-to-day investment decisions, ensure regulatory compliance, and provide regular disclosures, so that investors can access expert management and diversification without tracking markets themselves.

Mutual funds work by pooling money from many investors into a common fund, which is then invested by a professional fund manager in a diversified mix of securities such as equities, debt and other instruments, as per the scheme’s stated objective. Investors are allotted units based on the fund’s Net Asset Value (NAV), and the value of their investment rises or falls with changes in the underlying portfolio, while they can typically buy or redeem units on any business day to enter or exit the fund.

Starting to invest at a young age allows your money more time to benefit from the power of compounding, where returns themselves begin to earn returns and can grow into a much larger corpus over the long term. Early investing also helps you build disciplined habits, gives you higher risk-taking capacity with fewer financial responsibilities, and makes it easier to achieve big life goals without putting pressure on your cash flow later in life.

Investing in mutual funds involves market risk, where the value of your investment can fluctuate with equity, debt or other markets and may even lead to loss of capital. Investors also face risks such as credit risk in debt funds (issuer default), liquidity risk (difficulty in redeeming at the desired time or price), and inflation risk, where returns may not keep pace with rising prices, reducing real purchasing power.

Yes, non-resident Indians can also invest in mutual funds. NRIs can find all the details pertaining to this in the offer documents of the schemes.

NAVs of mutual fund schemes are published on the respective mutual fund companies’ websites as well as on AMFI’s website daily - www.amfiindia.com.

NAV (Net Asset Value) is calculated by taking the total market value of all the securities and cash held in a mutual fund, subtracting the fund’s expenses and other liabilities, and then dividing this net figure by the total number of units outstanding. In simple terms, NAV per unit shows the current value of each mutual fund unit after accounting for all assets, costs and obligations of the scheme.

Mutual fund schemes come in multiple structures and categories, allowing investors to match products with their goals, time horizon and risk profile. Broadly, they can be understood along two dimensions: how they are structured for entry/exit, and where they primarily invest.

​By structure

* Open-ended schemes: These allow investors to buy and sell units on any business day at the prevailing NAV, offering high liquidity and flexibility for regular investing and redemption.

​* Close-ended schemes: These are launched for a fixed tenure, are generally available for subscription only during the NFO period and are usually listed on an exchange for secondary market liquidity.

​* Interval schemes: These combine features of both, remaining closed most of the time but opening for purchase/redemption during specified intervals as per the offer document.

​By asset class and objective

* Equity schemes: Invest predominantly in shares and equity-related instruments (large cap, mid cap, small cap, multi-cap, sectoral/thematic, ELSS etc.), aiming for long-term capital growth with higher risk and volatility.

​* Debt schemes: Invest in fixed income instruments like government securities, corporate bonds, money market instruments and gilts, focusing on income generation and relative stability for conservative or short- to medium-term needs.

​* Hybrid schemes: Blend equity, debt and sometimes other assets (gold, REITs etc.) in different proportions—such as conservative hybrid, aggressive hybrid, balanced advantage and multi-asset allocation—to balance growth potential and risk.

​Goal-based and passive options

* Solution-oriented schemes: Designed around specific life goals like retirement or children’s education, usually with longer lock-in or recommended holding periods to encourage disciplined investing.

​Other categories (Index, ETFs, FoFs):

* Index funds and ETFs track a specific benchmark index and aim to replicate its performance with lower active management.

* Fund of Funds (FoFs) invest in other mutual funds or ETFs, providing diversification through a single scheme.

You do not need to have a Demat account to invest or transact in mutual funds. Investors can invest and hold mutual fund units in “statement/folio” form directly through AMCs, RTAs like CAMS/KFintech, banks or online platforms, which makes mutual fund investing accessible even without opening or maintaining a Demat account.

A Direct Plan is a mutual fund option where investors invest directly with the Asset Management Company (AMC) without any intermediary, resulting in a lower expense ratio because no distributor commission is built into the cost. A Regular Plan is the same mutual fund scheme purchased through a distributor, bank or advisor, where commissions are included in the expense ratio, making costs slightly higher but providing ongoing guidance and service for investors who prefer advisory support.

Regular and Direct Plans are two cost structures of the same mutual fund scheme, with the same portfolio and fund manager, but different ways of investing and charging expenses. In a Regular Plan, you invest through a distributor or intermediary and the expense ratio includes distributor commissions, making costs slightly higher; in a Direct Plan, you invest directly with the AMC without any intermediary, so commissions are not paid and the expense ratio is lower, which can result in a marginally higher NAV and return over the long term.

A New Fund Offer (NFO), or new fund offer, is the initial launch period of a brand‑new mutual fund scheme during which an Asset Management Company invites investors to subscribe to units at a fixed face value, typically around ₹10 per unit. Once this limited subscription window closes, the money collected is invested as per the scheme’s stated objective and the fund then operates like any other mutual fund, with its NAV moving daily based on the value of its underlying portfolio.

The dividend / IDCW option (Income Distribution cum Capital Withdrawal) in a mutual fund is a payout option where the scheme periodically distributes part of its income and/or capital to investors. After an IDCW is paid, the NAV typically falls by approximately the amount distributed, making this option more suitable for investors seeking regular cash flows rather than maximum long-term growth.

In a mutual fund, the growth option is where all profits are retained and reinvested within the scheme instead of being paid out to investors as IDCW/dividends. This causes the NAV to grow over time (if the fund performs well), making the growth option suitable for investors focused on long-term capital appreciation rather than regular income.

A Systematic Investment Plan (SIP) is a disciplined way of investing in mutual funds where you commit a fixed amount at regular intervals—such as monthly or quarterly—into a chosen scheme instead of investing a lump sum. SIPs help average out purchase costs over time, build a habit of regular saving, and allow investors to benefit from the power of compounding for long-term wealth creation.

A Systematic Withdrawal Plan (SWP) is a facility that lets you withdraw a fixed amount from your mutual fund investment at regular intervals—such as monthly, quarterly or annually—rather than redeeming the entire amount at once. Each withdrawal is funded by redeeming the required number of units at the prevailing NAV, providing a steady cash flow while the remaining units stay invested with the potential to continue growing over time.

A Systematic Transfer Plan (STP) is a facility that allows you to automatically transfer a fixed amount (or only the gains) from one mutual fund scheme to another within the same AMC at regular intervals. Typically used to move money gradually from a debt or liquid fund into an equity or hybrid fund, STP helps manage risk, smoothen entry into volatile markets, and align your allocation with changing financial goals.

In mutual funds, a Switch is a transaction where you move your existing investment from one scheme or plan to another within the same AMC, such as from an equity fund to a debt fund, or from Regular to Direct, without first taking the money out to your bank account. It is processed as an internal redemption from the source scheme and purchase into the target scheme at the applicable NAVs, and may attract exit loads and capital gains tax as per the rules of the schemes involved.

Exit Load is a fee charged by a mutual fund when you redeem (sell) your units before a specified minimum holding period defined by the scheme. It is calculated as a percentage of the redemption amount or NAV, and is intended to discourage short-term trading and compensate the fund for the costs of early withdrawals.

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Rupee Cost Averaging is an investing approach where you put in a fixed amount at regular intervals, regardless of market levels, instead of trying to time your entry. As prices fall you automatically buy more units, and when prices rise you buy fewer, which helps reduce the average cost per unit over time and cushions the impact of market volatility on your overall investment.

CAGR (Compound Annual Growth Rate), often referred to as annualised return, is the rate at which an investment would have grown each year if it had increased at a steady, compounded pace from the starting value to the ending value over a given period. It smooths out short-term volatility and provides a single, comparable annual growth number, making it useful for evaluating and comparing long-term mutual fund performance across different time frames.