Mutual Funds

What Are Mutual Funds?

A Mutual Fund is an investment vehicle that collects money from multiple investors and invests it in a diversified basket of assets such as stocks, bonds, or other securities. Instead of managing investments on their own, investors rely on a professional fund manager who makes decisions with the goal of generating returns while managing risk.

Key Features of Mutual Funds

• Pooling of Money – Contributions from many investors are combined into one large fund.
• Professional Management – Qualified fund managers research, select, and monitor investments.
• Diversification – Investments are spread across different assets, reducing the impact of a single loss.
• Units & NAV – Investors receive units of the fund. The value of each unit is tracked through the Net Asset Value (NAV).
• Accessibility – Even small investments provide access to a wide range of securities.

Why Choose Mutual Funds?

They offer simplicity, convenience, and disciplined management—making them a preferred choice for both beginners and experienced investors.

Types of Mutual Funds: Open-ended vs Closed-ended

Mutual funds can be broadly classified into open-ended and closed-ended schemes, based on how and when units can be purchased or redeemed.

Open-ended funds

• Units can be bought or sold anytime after the New Fund Offer (NFO) closes.
• The fund issues new units when investors buy and cancels them when redeemed.
• Units are priced at the day’s NAV, which reflects the value of underlying securities.
• No limit on the number of units, providing flexibility and liquidity.

Closed-ended funds

• Have a fixed capital base and issue only a limited number of units during the NFO.
• Once the NFO closes, units can’t be bought from the fund house directly.
• These units are listed on stock exchanges and trade like shares.
• Their market price may differ from NAV, influenced by demand, supply, and performance.

Key differences

• Investment window: Open-ended funds accept investments anytime, while closed-ended funds restrict purchases to the NFO period.
• Unit creation: Open-ended funds create/redeem units continually; closed-ended funds issue a fixed quantity.
• Pricing: Open-ended funds transact strictly at NAV; closed-ended funds trade at market-determined prices.
• Liquidity: Open-ended funds offer redemption via the fund house; closed-ended funds require exchange trading.

ELSS Funds and Statements

Equity-Linked Savings Schemes (ELSS) are equity-oriented mutual funds offered by Asset Management Companies (AMCs) in India. They provide dual benefits—tax savings under Section 80C of the Income Tax Act, 1961 and wealth creation over the long term.

Features of ELSS

• Lock-in period: Investments are locked for 3 years from the purchase date.
• Tax savings: Eligible for deductions up to ₹1.5 lakh under Section 80C.
• Tax on gains: Returns are subject to Long-Term or Short-Term Capital Gains tax, depending on holding duration.

You can download your ELSS statement directly through the AMC’s platform or third-party investment apps.

What is an SIP?

A Systematic Investment Plan (SIP) is a disciplined way of investing fixed amounts at regular intervals (weekly, monthly, quarterly) into a mutual fund. Instead of making a one-time large investment, SIP spreads purchases over time, reducing the impact of market fluctuations. You buy more units when prices are low and fewer when they are high, which averages out the cost.

What is a Lump-sum Investment?

A lump-sum investment involves committing the entire amount in one go. For example, investing ₹1,20,000 at once is lump-sum, whereas spreading the same amount into ₹10,000 monthly installments for a year would be a SIP. Lump-sum investments are common when investors receive bonuses, inheritances, or surplus savings.

Liquid Mutual Funds

Liquid funds fall under the category of debt mutual funds and are designed for short-term parking of money. SEBI has categorized debt funds into 16 sub-types ranging from overnight to long-duration funds (up to 7 years), making it easier for investors to choose based on their horizon. Liquid funds specifically provide high liquidity, safety, and modest returns, making them a popular short-term option.

Equity Funds

Equity mutual funds primarily invest in company stocks. They are a preferred long-term wealth-building option but come with higher risk compared to debt funds. Given the wide variety of schemes, choosing the right equity fund requires understanding your financial goals, risk appetite, and time horizon.

Hybrid Mutual Funds

Investments can be classified into three buckets—equity (high risk), debt (low risk), and hybrid (balanced risk). Hybrid mutual funds combine equity and debt to balance growth potential with stability.

What are Hybrid Funds?

Hybrid funds are mutual funds that allocate investments between equity and debt. Their mix varies depending on the fund’s objective and the investor’s risk profile.

Key features

1. Diversified portfolio: Exposure to multiple asset classes through a single scheme.
2. Balanced approach: Equities drive growth, while debt adds stability.
3. Flexible combinations: Different schemes offer conservative, balanced, or aggressive allocations.
4. Better long-term prospects: Suitable for investors with a 3–5 year horizon.

Types of Hybrid Funds

• Equity-oriented hybrids: At least 65% in equities; balance in debt.
• Debt-oriented hybrids: At least 60% in debt; remainder in equities.
• Balanced advantage/dynamic funds: Flexibly adjust equity-debt mix based on market conditions.
• Monthly Income Plans (MIPs): Primarily debt with small equity exposure; aim to provide regular income.
• Arbitrage funds: Exploit pricing differences in markets; taxed like equity funds.

How hybrid funds work

The fund manager allocates between equity and debt as per the scheme’s objective. Rebalancing occurs depending on market conditions to optimize returns and reduce risk.

Why invest in hybrid funds?

• Safer than pure equity, yet offer higher returns than pure debt.
• Good entry point for new investors exploring equities.
• Cushion against volatility through debt exposure.

Tax rules for hybrid funds

• Equity portion: Taxed like equity mutual funds (LTCG exemption up to ₹1 lakh).

Debt portion: Taxed as per the investor’s income tax slab, similar to debt funds.