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Mutual fund investment 101: Know the ‘what’, ‘how’, and ‘why’ of this investment route

For the average newbie investor, mutual fund investments may appear scary. For some others, it offers a promising way to invest in stocks without the headache of doing the research themselves. However, understanding how mutual funds work may open a new gateway for receiving higher rewards. 

This article will help shed light on mutual fund investments, their advantages and drawbacks, and ways to pick the right mutual funds for you. This should help you define your fears more clearly, if not shed them altogether. So, read on. We’ve got your back!

Table of Contents

1. What is a mutual fund?

2. How do mutual funds work?

3. Types of mutual funds

4. Reasons to invest in mutual funds

5. Limitations of mutual funds

6. General risks of investing in mutual funds

7. How to invest in mutual funds?

8. Overview of the best mutual funds to invest in India in 2022

9. How to select the best mutual fund for you

10. Kya mutual funds sahi hai?

11. Mutual funds FAQs

1. What is a mutual fund?

A mutual fund is a form of collective investment that pools money from investors and invests them in shares, debentures, bonds, etc. Since a mutual fund invests in several securities, it offers instant diversification (and, therefore, lower risk) to investors at a low cost per unit of the mutual fund.

Further, what differentiates mutual funds from other instant-diversification investment avenues like ETFs is that the mix of securities does not remain static. A mutual fund’s portfolio mix is managed actively towards specific investment criteria and goals like high-growth, liquidity, investment in a specific sector or industry, etc. This means mutual funds adapt to market realities dynamically in order to achieve optimum returns. 

To that end, mutual funds are managed actively through the expertise of fund managers at asset management companies (AMCs), for which they command a commission or fee.

Mutual funds are, therefore, a popular investment route for investors with low funds or a lack of expertise to invest directly in the market. 

2. How do mutual funds work?

When you and other investors like you buy units (or shares) in a mutual fund, the fund invests the collected money in a basket of securities according to the fund’s pre-determined objectives.  The fund manager determines the right mix of securities in real-time to keep the mutual fund’s performance in line with its objectives. The returns generated by the mutual fund are then passed back to the investors over time.

An infographic on the process of mutual fund transaction

(source :Wikimedia Commons)

Mutual funds, in essence, help you get diversified exposure to the market while you also outsource the day-to-day management of the portfolio to the fund manager. The fund’s operating expenses, including the fund manager’s time and expertise, are compensated for by the fee or commission they charge from you. 

The SEBI (Mutual Funds) Regulations, 1996 lays down comprehensive guidelines for the functioning of mutual funds in India.

2.1. Important terms related to mutual funds

To delve deeper into how mutual funds work, it is helpful to get a functional understanding of some of the jargon involved. Let’s go through a few pertinent ones in the context of this article.

  • 2.1.1. What is AUM in mutual funds?

Assets Under Management (AUM) is the sum of the market value of all the securities and assets in a fund. In a mutual fund, these assets are handled by the asset management company for its clients. This amount keeps on fluctuating with the changes in the market as well as with inflows and outflows in the mutual fund. 

As the size of AUM also depicts the strength of the mutual fund, this helps investors give a fair point of comparison of the mutual fund with its competitors.

  • 2.1.2. What is NAV in mutual funds?

Net Asset Value (NAV) is the market value of each unit of the mutual fund. It is calculated by dividing the net market value (total assets under management minus total liabilities) of all the securities of the fund by the total number of outstanding shares of the mutual fund. The NAV of mutual funds changes daily as the stock market fluctuates and is declared at the end of every trading day.

For the sake of simplicity, it can be understood as the amount that a unit holder receives if he sells one unit to the mutual fund company on any given day. However, it is important to note that NAV is different from the face value of the mutual fund unit. The face value of a unit is the price which the mutual fund records in its books of account, while the unit’s NAV is its dynamic market price. In this respect, the face value of a mutual fund is similar to the face value of a company share.

  • 2.1.3. What is an expense ratio in mutual funds?

An expense ratio is a fee charged by the mutual fund for managing the investor’s money. As the AMC applies expert management of your portfolio, it commissions a fee in return. This fee (expense ratio) is usually calculated as a percentage of AUM and differs from fund to fund. As some funds charge a lower expense ratio than their competitors, expense ratio is often a decisive factor in choosing mutual funds.

  • 2.1.3. What is an exit load in mutual funds?

Exit load is the fee the mutual fund charges for exiting or withdrawing from the mutual fund within a pre-determined period from the date of investment. This is charged over and above the fee described in the expense ratio. It disincentivises the investor from exiting the investment early, as most mutual funds are designed to accrue gains over the long term. 

However, not all mutual fund schemes charge an exit load. When a scheme does so, it is outlined clearly in the scheme documents.

With these basic concepts out of the way, let’s understand how mutual funds work in calculating returns and taxation.

2.2. How are mutual fund returns calculated?

Returns on mutual funds are calculated as the appreciation of the investment value over a specified period as compared to the original investment amount. The calculation steps may vary based on whether you have made a lumpsum investment or opted for the SIP route. However, the basis of calculating returns remains the same – returns are the percentage appreciation of current value over original investment.

The compounded annual growth rate (CAGR) method is used to calculate returns on any lumpsum investment in mutual funds. This method provides the most accurate rate of return for a value over a period. It also helps in comparing two different investments to choose the better one. If you opt for the SIP route, then the returns on your investment would be calculated using the Extended Internal Rate of Return (XIRR) method. The XIRR method calculates returns where the investment (and withdrawals) are of varying amounts and made periodically. 

2.3. How are mutual funds taxed in India?

The profits from investing in mutual funds are subject to capital gains tax. Based on the tenure of the investments, either short-term capital gains tax or long-term capital gains tax is applicable.

In the case of equity funds, long-term capital gains tax at 10% is applicable if the gains are more than Rs. 1 lakh. Upto Rs. 1 lakh, no tax is payable. Short-term capital gains tax is payable at 15% on equity gains.

For debt funds, long-term capital gains tax (investments > 3 years) is payable at 20% with the benefit of indexation on the purchase price. The highest income tax slab for individuals is applied for investments less than 3 years (short-term capital gains).

The table below summarises the current taxation on mutual fund gains:

Capital Gains Tax TypeEquity Mutual FundsDebt Mutual Funds
Long-Term for equity (> 1 year)Long-term for debt (> 3 years)10% if profits more than Rs. 1 lakh.If less than Rs. 1 lakh, no tax.20% of profits with indexation benefit.
Short Term (< 1 year)15% on profitsHighest income slab applicable for individuals.

To get a functional understanding of how mutual funds work, it is important to get acquainted with its basic terminologies along with the calculation and taxation of returns. The concepts explained above are by no means exhaustive. However, they are simple and sufficient for a beginner to get going.

3. Types of mutual funds

Various types of mutual funds are available in the market, catering to different requirements of the investors. They can be differentiated based on their investment criteria and objectives. Some of the most popular types of mutual funds are listed below:

  • Stock funds

These funds invest in the equity market and are classified as high risk with high return potential. They are particularly suitable for those in their prime earning years. Investments in stock funds should ideally be made for the long term when the greatest rewards of the stock market are realised through compounding.

  • Bond funds

Bond funds invest in debt market instruments like Government bonds, corporate bonds, money market instruments, etc. They are more attractive in terms of returns than bank accounts. Moreover, they carry low risk since they are less volatile. Therefore, bond funds are ideal for investors looking for stable returns as an alternative to money remaining idle in their savings accounts and fixed deposits.

  • Index funds

An index fund tracks a specific index and invests in the securities that constitute the index. For example, if an index fund tracks S&P500, it will invest in the same 500 companies that constitute S&P500 in proportion to the index. These funds are great for investors who prefer predictable returns over the long term, at par with the market.

  • Balanced funds

As the name suggests, a balanced fund is a well-rounded portfolio that includes securities from the equity market, debt market, and money market. The mixture enables investors to diversify their portfolios across risk categories. They provide relatively lesser returns than stock funds but carry less risk.

  • Money market funds

This fund type invests in short-term money market securities (debt securities) like treasury bills, certificates of deposit, commercial paper, etc. The main advantage of this fund is its high liquidity. Additionally, due to the large size of these funds, they usually get a higher yield on short-term securities.

  • Income funds

Income funds concentrate on providing a fixed and regular income to investors. A dividend is a significant form of income in these funds. Income funds are the best for older people who wish to invest in a low-risk option, with some money coming in every month while enjoying more returns than banking instruments.

  • International / Global funds

A global fund invests in overseas markets by identifying the best companies in other economies. The investors of such funds enjoy a more geographically diversified portfolio with the opportunity to capitalise on stocks in foreign countries. There is a slight difference between an international fund and a global fund. An international fund, if based in India, can invest in any country except India; a global fund can, however, invest in any country, including the country of its origin.

  • Specialty funds / Sector funds

Speciality funds, also known as sector funds, invest in a specific industry or region. The performance of these funds depends on the performance of the industry. For example, a sector fund investing in the pharmaceutical industry will flourish if the industry gains in the stock market. The returns from speciality funds can be outlandishly high if invested wisely, but they can also carry a high risk.

  • Equity-Linked Saving Scheme (ELSS)

This type of equity fund helps minimise your tax burden by providing you with certain tax benefits under the Income Tax rules – namely, tax exemption under Section 80C of the Income Tax Act. It allows you a deduction of as much as INR 1,50,000 on your taxable amount. However, the catch is that your investment in ELSS stays locked for 3 years mandatorily. 

Regardless of the categorisation above, the mutual funds are further classified into two categories – open-ended or close-ended. Open-ended funds are those where the investor can enter and redeem (exit) their investment at any time, while close-ended funds have a fixed maturity period when your investment is locked.

Given the popularity and expanding market of mutual funds, there are always newer products and types being added to the list above. However, the differentiation is generally subtle, and the types mentioned above cover the broad playing field. 

4. Reasons to invest in mutual funds

Now that the basics of mutual funds are covered, let’s look at the advantages of mutual funds that make this investment instrument a promising one.

  • Mutual funds are managed by investment professionals. This means your investment is managed by an expert with a deeper knowledge of the financial markets than you.
  • You can invest small savings in mutual funds. This is excellent for the average investor who cannot put aside huge amounts of money every month.
  • Diversification helps you minimise the risk of investing by having your eggs in many baskets.
  • Mutual funds provide higher returns than those you may receive from fixed deposits or other bank instruments.
  • Systematic investment plans (SIP) ensure entry for salaried people with regular monthly income. Also, it provides excellent protection from market volatility.
  • Mutual funds are a safe option for investment, provided you understand how they work. They are regulated by SEBI, whose primary function is the protection of investors.

With the rising popularity of the slogan – Mutual Funds Sahi Hai, people have increasingly grown aware of the advantageous features of mutual funds. These are the reasons why this investment route is rapidly gaining new takers. 

5. Limitations of mutual funds

Every Greek hero has an Achilles heel, and mutual funds are no exception. Here are a few limitations of mutual funds that every investor must be aware of.

  • Mutual funds don’t wave a magic wand to grow your investments. They are susceptible to market risks and volatility. Mutual funds inherently carry risks that people with a low-risk appetite should stay wary about, as their portfolio value keeps on fluctuating daily.
  • In order to perform well, mutual funds hire various professionals, like analysts, researchers, and asset managers. The expenses borne by the fund naturally come out of your pockets. These expenses drill into your investments, and you have to pay them irrespective of whether the mutual fund delivers returns or not.
  • Black swans, a term made popular by Nassim Nicholas Taleb, are unpredictable events like the COVID-19 pandemic or the 9/11 terrorist attack that affect the markets significantly. While all kinds of investments may get affected, mutual funds in particular, fall prey to black swans because their asset management companies may go under. A study conducted by PwC observed that due to the COVID-19 pandemic, 15% of mutual funds will close shop between today and 2025.
  • The investor cannot control which securities the mutual fund invests in or their tenures, i.e. when to buy, when to sell the securities. With mutual funds, all you can do is ride pillion with your fund manager at the wheel.
  • Since mutual funds cannot be traded intra-day, i.e., they can be bought and sold only at the end of the market day, you cannot take advantage of the price fluctuations that take place during the market day.

Knowing the risks and benefits is important before entering new territory. While mutual funds are highly attractive today, and all your friends and family are pushing you to invest in them, it is crucial to first study them, learn about their pros and cons, and then make an informed decision.

6. General risks of investing in mutual funds

Mutual fund investment carries risk, as is well advertised. In fact, all of investing does. However, risk can be understood better by breaking it down into causal factors. In this light, let’s examine the risks involved in investing in mutual funds.

  • Market risk

Mutual funds are subject to market risk’ – as the ubiquitous disclaimer goes. It signifies the possibility of losses due to the price movements of the securities in the mutual fund. The term market risk captures risks of many kinds, including systematic risks such as economic recessions, as well as unsystematic risks specific to the performances of individual stocks and securities in the market. 

  • Concentration risk

This risk occurs when the mutual fund invests in a concentrated portfolio. For example, sector funds are susceptible to the sector’s underperformance due to economic factors. Diversification of your portfolio is the best safeguard against concentration risk.

  • Interest rate risk

Fluctuation in interest rates may lead to a loss in the value of your mutual fund investment. This risk is faced especially by mutual funds that invest in debt securities. 

  • Liquidity risk

Close-ended mutual funds, where the investor must undergo a compulsory lock-in period, expose you to liquidity risk. This means you cannot withdraw money during the lock-in period, and therefore the wealth created is unavailable to you. Choosing the right fund and diversifying across multiple funds is the best option against liquidity risk.

  • Credit risk

When the mutual fund is unable to repay the money entrusted to them, the risk is called credit risk. SEBI has mandated that all mutual funds need to be rated by a credit rating agency. A highly-rated mutual fund should generally be chosen to mitigate credit risk.

Despite these risks, mutual funds remain an attractive choice for investing. Understanding the kind of risk mutual funds bear will help you mitigate those in your overall portfolio.

7. How to invest in mutual funds?

Investing in mutual funds is fairly easy. You can invest by applying directly to a mutual fund, investing through a mutual fund distributor (MFD) registered with AMFI, or investing through your demat account.

  • By applying with the mutual fund directly

Most mutual fund websites provide the option to apply online. The process includes creating a login and submitting the necessary documents. Then you may choose the fund category and the style of investing (lumpsum, SIP, or STP). Investing online is easy and hassle-free, and the investments can be monitored at your convenience.

Alternatively, you may choose to visit the mutual fund’s branch office and purchase the units through a physical application form.

  • Through an MFD

A mutual fund distributor is a financial intermediary who buys and sells mutual fund units on your behalf. An MFD must be registered with the Association of Mutual Funds in India (AMFI). They are required to understand the needs of the investors and their risk profiles. If the MFD sells an unsuitable scheme to the investor, they qualify for the offence of ‘mis-selling.’ Therefore, it is relatively safe to opt for investing through a mutual fund distributor. Additionally, you can get some guidance in selecting the mutual fund based on your goals.

  • Through your demat account

A dematerialised account, or demat account, helps you hold shares and securities in an electronic format. Leading banks and brokerages allow you to create such an account, through which you can buy and sell mutual funds quite easily. 

This method saves you from the tedious process of visiting many mutual fund websites, comparing them and then applying to the ones you pick. Instead, you can view and compare the prices of all available mutual funds on a single interface. The only extra step is creating your demat account – once.

Each of the above methods is fairly simple, and getting started has never been easier.

8. Overview of the best mutual funds to invest in India in 2022

Mutual funds are categorised based on their investment function. Some may invest in safe blue-chip companies, while others focus on growth by dabbling in small-cap companies. Therefore, a standard list of top mutual funds cannot be created. The list must be differentiated across the diverse investment objectives. However, below is an overview of the best mutual funds differentiated by the simplistic classification – equity mutual funds and debt mutual funds.

8.1. Best-performing equity mutual funds in 2022

There are three main categories of equity funds based on market capitalisation of the companies they invest in – large-cap (INR 20,000 crore or more), mid-cap (INR 5000 – 20,000 crore), and small-cap ( below INR 5,000 crore). Generally speaking, Large-cap funds are the safest since they are invested in established companies with a proven market record, followed by mid-cap and small-cap funds. Consequently, both the risk and rewards with small-cap funds tend to be greater.

Keeping this in mind, below is a list of the top equity mutual funds in India in the three categories.

Top large-cap funds

Nippon India Large Cap Fund – Direct Plan – Growth11.15%20.12%12.98%
HDFC Top 100 Fund – Direct Plan – Growth9.43%16.56%11.45%
Canara Robeco Bluechip Equity Fund – Direct Plan – Growth0.37%21.11%15.08%
Axis Bluechip Fund – Direct Plan – Growth–3.63%16.41%14.56%

(As of August 2022)

Top mid-cap funds

Quant Midcap Fund – Direct Plan – Growth21.15%39.92%21.96%
PGIM India Midcap Opportunities Fund – Growth11.57%43.60%21.29%
SBI Magnum Midcap Fund – Growth17.09%32.82%15.55%

(As of August 2022)

Top small-cap funds

Canara Robeco Small Cap Fund – Direct Plan – Growth20.61%43.69%    –
Nippon India Small Cap Fund – Direct Plan – Growth16.13%38.09%19.22%
Kotak Small Cap Fund – Direct Plan – Growth10.52%38.94%19.61%

(As of August 2022)

8.2. Best-performing debt mutual funds in 2022

Mutual funds investing in debt securities earn relatively low returns, and a comprehensive list of such mutual funds can be found on various informative websites. However, for debt mutual funds, the rate of return isn’t the most important criterion for selection. Usually, investors park some portion of their investment in debt funds as they are relatively safe compared to equity funds. Here’s a list of top debt mutual funds in India for your reference:

Top debt funds

ICICI Prudential Credit Risk Fund – Direct Plan – Growth5.32%8.19%8.05%
Axis Banking & PSU Debt Fund – Direct Plan – Growth3.19%6.19%7.24%
Sundaram Corporate Bond Fund– Direct Plan – Growth2.78%6.63%6.77%

(As of August 2022)

Here, the top debt mutual funds are ranked purely based on their rate of returns. However, please note that it is only one of the many criteria for evaluating the best mutual funds for you. 

9. How to select the best mutual fund for you

The best-performing mutual funds are the ones that consistently provide excellent returns over a long period of time. However, the best-performing ones aren’t necessarily the right ones for you. Below are a few steps and criteria that should go into the selection.

  1. Define your investment objective

When choosing a fund, it is important to decide your investment objective. Such objectives may be – children’s education, buying a house, planning for your retirement, or plain long-term investing. It is important to translate your financial goals into hard numbers. You should be able to answer these questions:

  • How much money do I want to make?
  • By when do I need to make that amount?
  • How much money can I commit to it today and over time?

With these in mind, you should be able to calculate your desired CAGR or XIRR to meet the target. Once your goals are charted out, you can check for the different mutual funds available in the market that align best with those goals.

  1. Understand your risk appetite

As with any investment, mutual funds carry risk. Watching your investment’s value fluctuate daily can be quite stressful, and your health must never be the trade-off. That aside, your risk appetite also depends on your age – particularly, the number of years of earnings you have left. Younger investors can naturally take on higher risks as they have time to make up for any losses that may occur. Conversely, investors closer to retirement would prioritise safety.

Mutual funds cater to both requirements by investing in high-risk equity or relatively safer debt or money market instruments (or a mix of both). If you have the stomach for high risk, you should ideally choose equity mutual funds. For those with a low-risk appetite, debt equity funds are a better fit. 

Additionally, examine the category of risk that would suit you better. For example, suppose you need to be able to withdraw from your mutual fund in case of emergencies. In that case, you may prefer taking on lesser liquidity risk – which makes close-ended mutual funds with lock-in periods as well as schemes with high exit loads bad options for you.

  1. Research fund histories

In light of your investment objectives and risk appetite, you will be able to reduce all the mutual fund options available to you down to a few. You may even organise this list by the mutual fund types discussed above. Additionally, compare the funds’ past performance – its 3-year and 5-year CAGR against your desired CAGR.

While such history is not a guarantee for future performance, it gives a fair idea for making the selection. A mutual fund’s history is easily available on the website of its AMC. Here, you can also check the fund’s historical returns, the fund manager’s experience, the size of their AUMs, and various other useful details. Additionally, such websites also contain scheme documents that would provide you with all the information you need.

  1. Factor in the expense ratios

A key differentiator between the mutual funds that make your shortlist is their expense ratio. Ideally, you should select a fund with a low expense ratio. The expense ratio is generally calculated as a percentage of AUM and is available in the Scheme Information Document (SID) of the mutual fund. SIDs for different mutual funds are available online on the AMC’s website, and it is recommended that before buying into any mutual fund, you should read it carefully. Usually, the details of the expense ratio are charted out in the section for ‘fees and expenses’. 

Apart from the four steps outlined above, make sure the mutual fund you select has a high credit rating. Ultimately, the purpose of investing in mutual funds is to enjoy great returns. These can only be enjoyed if the fund is managed well and invests in a great portfolio that balances risk and reward. 

10. Kya mutual funds sahi hai?

Mutual funds are certainly an attractive investment instrument given their key feature – instant diversification at a low cost. However, a prudent investor would note that it is not the only instrument that provides the feature. The benefit can also be availed through other instruments like Exchange Traded Funds (ETFs), without having to part with some money as fees for active management of the portfolio, as charged by mutual funds. Also, even stable and diversified indexes like S&P 500 are largely known to outperform fund managers in the long term.

Similarly, you may enjoy the low-cost benefits and a meaty diversification option by using Appreciate’s Fractions feature. Fractions lets you invest even Rs. 10 in high-value stocks like Google, Apple, and Amazon, as well as ETFs. Further, you can build many such fractional investments into a diversified portfolio yourself. Alternatively, you may use the Goals feature to start your own SIP based on your investment horizon and risk appetite, and let the power of AI build a diversified portfolio – effectively a personalised ETF for you.

Therefore, it makes sound investing sense to consider the many investment options available before rushing headlong into mutual funds. And only after careful consideration will you discover: Kya mutual funds aap ke liye sahi hai?

11. Mutual funds FAQs

1.  Are mutual funds safe?

As mutual funds invest in equity markets, they carry some inherent risk. However, with the practice of diversification, mutual funds minimise this risk by not putting all your eggs in one basket. Contrarily, a mutual fund is susceptible to the fund manager’s ability. A good option against this risk is to invest in ETFs, that don’t require any active management, earn good returns, and are as diversified as mutual funds.

2.  Can mutual fund shares be sold at any time?

Not all mutual funds provide the facility to sell their units at any time. While you can sell your investment in some mutual funds, in the case of close-ended funds, there is a lock-in period where you cannot sell your units. You should read the offer document before investing in any mutual fund.

3.  What is a target date mutual fund?

A target date mutual fund periodically rebalances its portfolio as the ‘target date’ comes closer. This fund usually goes on to take a conservative approach as the target date approaches. Such a fund is best for investors looking for a retirement fund as the fund would initially focus on earning more returns but invest in safer options as you near retirement age.

4.  How to choose the right mutual funds for investment?

In order to choose the right mutual fund, you need to first determine your investment objective, liquidity needs and risk appetite. This will help you select the type of mutual fund best suited to your expectations. Further, you may also compare the rate of returns of different mutual funds in your preferred category. However, please ensure that the rate of returns is not the deciding factor in choosing the mutual fund. You should also evaluate the fund’s history, expense ratio, lock-in periods, and other factors. 

5.  Which is the best way to invest in mutual funds?

The best way to invest in mutual funds is by subscribing to the mutual fund through your demat account. This method is hassle-free and easy to navigate as you may already be acquainted with your demat account interface. Plus, you can explore and invest in multiple mutual funds as well as other investment products through the same portal.

Alternatively, you may also purchase mutual fund units through their individual online websites by submitting their online application forms. 

6.  Which are the best mutual funds to invest in for 1 year?

Money market mutual funds invest in short-term debt securities and provide a reasonable return. They are also highly liquid, and you can withdraw your money whenever required.

Alternatively, you can also use Appreciate’s Goals feature to determine a target-based time-bound investment plan to suit your needs. The feature gives you complete control over the variables – your SIP amount, time invested, and risk appetite – to effectively achieve your short- and long-term financial goals.

7.  What is SIP in mutual funds?

A Systematic Investment Plan allows you to invest a fixed monthly amount in mutual funds. SIP is excellent for investors with a regular monthly income, and they also benefit from cost averaging in the long term.

8.  Who regulates mutual funds in India?

Mutual funds are regulated by the Securities and Exchange Board of India (SEBI). SEBI has formulated the SEBI (Mutual Funds) Regulations, 1996, to provide a comprehensive framework for the working of mutual funds in India.

9.  What is an expense ratio in mutual funds?

The expense ratio is the commission charged by the mutual funds from the investors for managing their money.

10.  What is XIRR in mutual funds?

Extended Internal Rate of Return (XIRR) is the formula to calculate mutual fund returns where there are multiple transactions taking place at multiple times. XIRR is usually used in the case of SIP or STP investments.

11.  What is AMC in mutual funds?

An Asset Management Company is a company that pools the investors’ money (in the form of a mutual fund, usually) and invests it for them.

12.  How much returns do mutual funds enjoy? 

Mutual funds generally enjoy around 11 – 15% returns in case of long-term investments. This is a fairly high rate of return as compared to bank deposits.

13.  What is NFO in mutual funds?

When a new mutual fund is launched, it offers a first-time subscription to the public. This is known as New Fund Offer (NFO).

14.  How to analyse mutual funds?

Mutual funds are analysed based on their past performance, the fund manager’s history, its portfolio, and the type of securities it invests in (debt or equity, small-cap or blue-chip, etc.).

15.  What are close-ended mutual funds?

Close-ended mutual funds are those where a lock-in period is applicable once you invest your money. During this period, you cannot withdraw your investment; it stays locked in.

16.  What is CAGR in mutual funds?

Compounded Annual Growth Rate is a method to calculate mutual fund returns over a period. It measures your returns on an annual compounded bases, giving you a more accurate picture of the returns on your mutual fund investment.

17.  What is the difference between SIP and mutual funds?

SIP is a form of investing in a mutual fund where you invest a certain fixed amount in periodic intervals, usually monthly.

18.  What are tax-saving mutual funds?

Tax-saving mutual funds offer tax benefits to investors under the tax laws as prescribed from time to time.

19.  What is a lock-in period in mutual funds?

A Lock-in period is a period during which the investor cannot withdraw his investment, i.e., it stays locked in. Close-ended funds have a lock-in period and they are usually chosen by investors who can comfortably keep some money locked away.

20.  What are growth mutual funds?

Growth mutual funds invest with the objective of growing the investment rapidly. They invest aggressively in the equity market and usually carry high risk but deliver very high returns.

21. Who should invest in mutual funds?

Investing in mutual funds is beneficial for students, working professionals, and retired senior citizens. Mutual funds are definitely a better option than keeping your money idle in the bank. It is important to start investing in mutual funds early in your life to reap maximum benefits. In the long term, mutual funds provide high returns on your investment. As a senior citizen looking for safety more than risk, mutual funds can offer you safer schemes and better returns than bank instruments. There are funds available for people with different objectives and risk appetites.

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