Mutual funds in India, explained in plain words

Most people we talk to have heard of mutual funds, and many already have a SIP running somewhere. But ask what a mutual fund actually is, or where the money sits, and the answers get vague. So here is the plain version.

What a mutual fund is

A mutual fund pools money from many people and invests it together. A professional fund manager decides what to buy, following the fund's stated objective: shares of companies, government and company bonds, gold, or a mix. For your money you receive units of the fund. As the investments rise or fall, so does the value of each unit, called its NAV (net asset value), which is worked out every business day.

Who looks after your money

This is the part most people never hear about.

• Every mutual fund in India is registered with the Securities and Exchange Board of India (SEBI), the market regulator, and follows its rules on what each kind of fund may hold and how it reports.

• The fund house runs the fund and employs the fund manager.

• The investments themselves are held by a custodian, separate from the fund house.

• Your units are recorded in your name by a registrar or depository, and you can see them with your own login at any time.

• A distributor like us helps you choose and stays with you, but your money never passes through us. It goes from your bank straight to the fund house.

The main kinds of funds

SEBI groups funds by what they invest in, so funds with the same label behave in broadly the same way.

• Equity funds invest mainly in shares. They can grow the most over long periods, and they can also fall the most in bad years, so they suit goals that are many years away.

• Debt funds lend money to governments and companies. They usually move less than equity funds, and suit shorter goals or money you want to keep steadier.

• Hybrid funds hold a mix of the two, and sometimes gold.

• Index funds follow a market index, such as an index of India's 50 largest companies, rather than a manager's picks, usually at a lower cost.

Every fund also carries a riskometer, a dial from Low to Very High that shows how risky its investments are. You will find it on every fund's documents.

A SIP or a lump sum

You can invest a larger amount at once, or set up a SIP (a systematic investment plan), which invests a fixed amount every month from your bank account. Most people start with a SIP. It builds the habit, and it spreads your buying over good months and bad ones, so you are not trying to guess the right day. Many funds let you start with as little as ₹500 a month.

What it costs

Every fund charges a yearly fee, called the expense ratio. It is taken out inside the fund before the NAV is worked out, so you never pay it separately. Some funds also charge a small exit load if you sell within a set period, often a year.

Every fund comes in two versions. A Regular plan is bought through a mutual fund distributor like us. The distributor's commission comes out of the fund's yearly costs, and in return you have someone who helps you choose and stays with you through the ups and downs. A Direct plan is one you buy yourself. It costs less, and you choose and keep track on your own, or pay a SEBI-registered investment adviser separately for advice.

What to keep in mind

• Returns are never guaranteed, and a fund's past returns don't tell you what it will do next.

• Match the fund to the goal. Money you need in two years shouldn't sit in the same place as money for a retirement twenty years away.

• The hardest part is staying invested. Often, the damage comes from stopping a SIP or selling in a falling market, more than from picking a slightly different fund.

How to start

You complete KYC once, with your PAN, your Aadhaar and a bank account (NRIs need a few more documents). Then you choose your funds, start a SIP or invest a lump sum, and your units appear in your account within a few days.

If you'd like help working out which kind of fund fits a goal of yours, book a call with us.