Our Guide to Mutual Fund Investment for Beginners


Mutual funds are a type of investment products which pools money from various investors and the money will be invested in stocks, bonds and money market instruments to deliver best returns. A mutual fund house designs various kinds of products to fulfill the needs of customers. Investors should choose the right kind of scheme to achieve targeted results. The selection of fund should be done as per the risk appetite, age and short-term or long-term needs.

Features of mutual funds

Mutual fund investment offers the following benefits:


  • Diversification – Asset diversification is the beauty of mutual fund investment. The investment will be done a variety of stocks, bonds, government bills, and international securities. As diversified portfolio will be maintained by the mutual fund company, the risk factor will be low.
  • Liquidity – There is great ease in investing and redeeming the units of mutual funds. The fund performance can be noticed through the NAV (Net Asset Value). No entry load will be applicable for investment. However, some funds apply exit load. Hence, you should be aware of the charges so that the profitability will not be lost while exiting the fund.
  • Flexibility – You can invest in a fund for a few days to few years as per your convenience. It is possible to invest a lump sum amount or in installments (SIP). If you invest in Equity Linked Savings Scheme (ELSS), a lock-in period of 3 years will be applied. However, you will enjoy the tax exemption and higher returns are expected.
  • Professional management – Professional fund managers manage the funds pooled in by customers. They will study the performance of stocks and choose the right kind of stocks to deliver maximum returns for investors.
  • Higher returns – The returns obtained by mutual fund investment is higher than the traditional investment options such as bank deposits and savings schemes. Even though you invest in low-risk debt funds, there will be moderate returns which will be higher than interest paid on a savings account. It is possible to multiply your money by investing in long-term equity funds. The long-term financial goals such as children’s education and retirement can be fulfilled with long-term plans.
  • Income tax exemption – The returns obtained on mutual funds will be exempted from the income tax. If you sell units in less than one year, you will want to pay STCG (Short-Term Capital Gains) tax. If you hold units for more than one year, you will enjoy LTCG (Long-Term Capital Gains) exemption up to Rs. 1 lakh in a financial year. The principal amount contributed towards ELSS will be exempted from income tax up to Rs. 1.5 lakh in a financial year.


Types of funds

There are following three basic types of mutual funds:


  • Equity mutual funds – You can choose equity mutual fund investment option to maximize your returns. The risk perception of equity mutual fund is very high. However, they will deliver best returns in the long run.
  • Debt funds – The debt funds invest in government bonds and fixed income instruments. Hence, there is very little chance to lose your principal amount. The deft funds offer moderate returns as the risk posed for these funds is very low.
  • Balanced funds – Balanced fund offer the best results of equity funds as well as debt funds. A certain percentage of return is guaranteed by balanced funds.


Subscription of a mutual fund scheme


  • Open-ended fund – Open-ended mutual fund can be subscribed at any time and you can exit from the fund at any point of time. However, you should be aware of the exit loads. If you exit the fund today, the money will be credited into your account on the same day or on the next business day.
  • Close-ended fund – Close-ended funds come with a lock-in period. You will be able to subscribe to these funds during the offer period only. Unless the funds are listed on the stock exchange, you will not be able to sell these funds during the lock-in period.


Investment in mutual funds

To invest in mutual funds, you should become KYC-complaint. If you are the first-time investor into mutual funds, the KYC form can be submitted along with the mutual fund subscription form. You should provide your residence proof, identify proof, bank account and PAN details along with the KYC-form. The mobile number and email address should be provided so that the alerts will be sent on regular basis. If you fulfill the KYC-obligation with one fund house, you will not want to perform the task again with another fund house.

Regular or direct option

The subscription to mutual fund scheme can be done directly (by using online channel) or through the distributor or agent. When you subscribe directly, you will earn higher returns. If you subscribe through the agent, the commission will be deducted from your investment.

Growth or dividend option

There are growth funds as well as dividend funds. Growth fund will deliver higher returns as you will take advantage of the cumulative growth of the fund. Dividend fund can be opted to get regular returns on monthly basis or annual basis.

Lump sum or SIP

You can invest in mutual funds by choosing lump sum option or SIP (Systematic Investment Plan). Most of the funds stipulate a minimum subscription of Rs. 5000 for lump sum investment. There are some schemes for which the minimum investment amount is Rs. 1000/-.

SIP is a convenient investment option. You will buy units on monthly or quarterly basis. The money will be deducted from your account automatically (as per your choice exercised with the fund house) and units will be credited to your account (mutual fund folio). The SIP will absorb the market fluctuations and you will buy units at average price.


Mutual fund investment is meant to reap the returns from the market. Instead of investing in shares and debentures directly, you will invest with the help of fund managers. As professionals will deal with the stocks, you can expect best returns and the risk factor will be reduced.


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