Mutual Funds in India: Types, Returns, Taxation & Investment Guide

Do you know what the most important thing is when it comes to trading and investing? While some investors may suggest it is starting early, others might say selecting the right tenure. But there is one more important factor to know. This is the selection of the asset to invest in.

This is where mutual funds in India play an important role. Known for their balanced approach and expert management, these have been a choice of investment for many. But the important question here is what a mutual fund? 

Well, if you are an investor looking for answers, read this guide. Know the meaning, types, and all the pros and cons well here. So, start investing with the right information here.

What Is a Mutual Fund?

A mutual fund is a simple way to invest your money. This is an option where you are not required to pick any individual stock. But you invest in a portfolio of funds. This creates a pool of investors who hold some units of mutual funds each. This combined amount is then invested. This is done in various assets like shares, bonds, or others. The choice is based on the objective of the fund.

The fund is managed by the fund managers. They are the ones who decide where to invest and when to make changes. As an investor, you own units of the fund, and their value moves up or down with market performance. This structure makes mutual funds suitable for both beginners and long-term investors who want diversification and managed risk.

Features of Mutual Funds

Mutual funds are easy to understand and manage. These funds offer the investor great benefits that support planning and risk management. The main features to know are:

1. Professional Fund Management

Mutual funds are handled by experienced fund managers. They are the ones who study the market and invest in the assets. They are the ones who manage the funds on behalf of the investors. 

2. Diversification of Investments

Your money is spread across multiple stocks, bonds, or other instruments. This type of portfolio diversification reduces the risk. It also helps in improving the results and helps create a better strategy. 

3. Low Entry Cost

You can start investing with a small amount, often from Rs. 500, through SIP. This ensures that anyone who is planning to save can start anytime. Later, you can decide on SIP or a lump sum as you wish. 

4. High Liquidity

Mutual funds are traded on the stock exchange. You can track their performance easily. It also allows you to sell them anytime. This is usually with open-ended mutual funds. 

5. Transparency and Disclosure

Mutual funds publish NAV, portfolio details, and performance regularly. This allows investors to track investments clearly and make informed decisions.

6. Regulated and Secure Structure

All mutual funds follow the guidelines of SEBI. This means all the transactions are regulated and follow the proper guidelines. This builds trust. 

Types of Mutual Funds Based on Investment in India

Mutual funds in India are broadly classified based on where they invest. Based on the same, the key types of mutual funds are as follows:

1. Equity Mutual Funds

These mainly invest in shares of companies. These funds aim for long-term capital growth. These funds are good for investors who are seeking growth and are comfortable with high risk. The returns are also highest in these.

2. Debt Mutual Funds

Debt mutual funds invest in fixed-income instruments like government bonds, corporate bonds, and treasury bills. They are considered relatively stable and are preferred by investors looking for predictable returns with lower risk.

3. Hybrid Mutual Funds

These funds invest in both equity and debt. The ratio of investment will vary based on the aim. Say, an aggressive hybrid fund invests more in equity. These funds aim for growth and stability. This is why they are suited for all investors.

4. Index Funds

Index funds track a specific market index. These can be any index, like Nifty or Sensex. They follow a passive investment style. This ensures their expense ratio is low. Their aim is to maintain the benchmark and offer returns around or above the same.

5. ELSS or Tax Saving Mutual Funds

ELSS funds invest primarily in equities. These funds are known for the tax benefits that they offer. They come with a lock-in period of around 3 years, which is a must. This is perfect for those who have long-term goals.

6. Money Market Mutual Funds

These funds invest in short-term instruments. They are highly liquid in nature. Most of the investors use these funds to park money for temporary periods, which can be from a few days to months. The returns are moderate in nature.

Types of Mutual Funds Based on Structure

Mutual funds are also classified based on how and when investors can enter or exit the scheme. These are as follows:

1. Open-Ended Mutual Funds

These funds allow investors to buy and sell units at any time at the current NAV. There is no lock-in period or maturity date. This means the investor can sell the units they wish at any time. 

2. Closed-End Mutual Funds

These funds have a fixed maturity period. Investors can invest only during the initial launch period. Then post listing, you can sell these funds when the maturity period is reached.

Mutual Fund Returns and Taxation in India

Now that you know the types and features, it is important to understand the returns and taxation. So, the table below gives you a quick view of the same.

Pros and Cons of Mutual Funds

Mutual funds offer a balanced way to invest. But at the same time, there are certain risks as well. Knowing the pros and cons is quite important.

Pros

• Managed by expert fund managers.

• Helps you with the diversification.

• Can be started with a low investment.

• Perfect for all types of investors.

• Risk management and return analysis are easy.

• High level of liquidity and transparency.

• Protects investors as follows: SEBI rules.

Cons

• Market-linked and no guarantee on performance.

• The Expense ratio reduces overall gains.

• Volatility can be there.

• Lock-in period makes it hard to buy or sell.

Conclusion

Mutual funds remain one of the most practical ways to build wealth in India. But this is only when you plan and invest logically. And for this, you would need expert guidance and access to the right tools. With Rupeezy, you can get all these and create a stable portfolio.

FAQs

What is the minimum amount needed to invest in mutual funds?

There is no minimum amount defined to start investing in mutual funds. You can start SIP with Rs. 500 as well. 

Are mutual funds safe in India?

Mutual funds are regulated by SEBI. This makes them transparent and safe for the investors. 

Can I withdraw money from mutual funds anytime?

Yes. If you invest in open-ended funds, then you can withdraw the funds anytime. But ELSS has a lock-in period where withdrawal is restricted.

How are mutual fund returns taxed?

The tax is based on the nature of the mutual funds. It is different for equity and debt funds. Mostly, it is calculated as per your income slab.

Is SIP better than a lump sum investment?

SIP helps invest gradually and reduces the impact of market volatility. Lump sum investing may work better when markets are low, and you have surplus funds.