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Mutual Funds

What is a Mutual Fund?

A Mutual Fund is a trust that collects money from multiple investors who share a common investment objective. The pooled money is invested in a diversified portfolio of financial instruments such as equities (shares), debt instruments (bonds/debentures), and money market instruments, in line with the scheme’s stated objectives.

The investments are managed by professional fund managers. The income generated and capital appreciation, if any, are distributed among investors in proportion to the number of units held by them. Due to diversification, professional management, and relatively lower investment amounts, mutual funds are considered a suitable investment option for retail investors.

How Can You Earn from Mutual Funds?

Investors may earn returns from mutual funds in the following ways:

  1. Income Distribution
    Mutual fund schemes may declare income distribution (subject to availability of distributable surplus), which is paid to unit holders from time to time.

  2. Capital Gains on Sale of Units
    When the fund sells securities at a profit, the Net Asset Value (NAV) of the scheme may increase. Investors who redeem their units at a price higher than their purchase cost may realize capital gains.

  3. Appreciation in NAV
    If the value of the securities held by the scheme increases, the NAV rises even if the securities are not sold. Investors may benefit by redeeming their units at a higher NAV in the future.

  4. Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Past performance is not indicative of future returns.

What are the different types of Mutual Funds?

Mutual Fund schemes may be classified on the basis of their structure and their investment objective.

  • By structure


    Open-ended Funds

    An Open-ended Fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices.


    Close-ended Funds

    A Close-ended Fund has a stipulated maturity period, which generally ranges from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the new fund offer and thereafter they can buy or sell the units of the scheme on the Stock Exchanges, if they are listed. The market price at the stock exchange could vary from the scheme's NAV on account of demand and supply situation, unit holders' expectations and other market factors.

  • By investment objective


    Growth Funds

    The aim of Growth Funds is to provide capital appreciation over the medium to long term. Such schemes normally invest a majority of their corpus in equities. Growth schemes are ideal for investors who have a long-term outlook and are seeking growth over a period of time.


    Income Funds

    The aim of Income Funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities.

    Income Funds are ideal for capital stability and regular income. Capital appreciation in such funds may be limited, though risks are typically lower than that in a growth fund.


    Balanced Funds

    The aim of Balanced Funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. This proportion affects the risks and the returns associated with the balanced fund - in case equities are allocated a higher proportion, investors would be exposed to risks similar to that of the equity market.

    Balanced funds with equal allocation to equities and fixed income securities are ideal for investors looking for a combination of income and moderate growth.


    Money market Funds

    The aim of Money Market Funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit, Commercial Paper and Inter-Bank Call Money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market.

    These are ideal for corporate and individual investors as a means to park their surplus funds for short periods.

  • Other equity related schemes


    Tax saving schemes

    These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws, as the Government offers tax incentives for investment in specified avenues.

    Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction under Section 88 of the Indian Income Tax Act, 1961.

    Index schemes

    Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE S&P CNX 50.

    Sectoral schemes

    Sectoral Funds are those which invest exclusively in specified sector(s) such as FMCG, Information Technology, Pharmaceuticals, etc. These schemes carry higher risk as compared to general equity schemes as the portfolio is less diversified, ie restricted to specific sector(s) / industry (ies).