What are Mutual Funds? Everything You Need to Know About
Posted by : sachet | Wed Dec 31 2025
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A mutual fund is one of the most reliable investment options for numerous investors, helping them diversify their portfolios across various types of securities, reducing risk and delivering solid returns. Mutuals are financial instruments that pool money from multiple investors to invest in a variety of securities. Invest in the best mutual funds in India for wealth creation. A professional fund manager manages the investment. Suppose you are looking for a suitable investment option to grow your portfolio over time. This blog will help you understand what mutual funds are, how they work, how to invest in top-performing mutual funds, and their role in India.
What are Mutual Funds?
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A mutual fund is an investment process that collects & pools money from a large number of investors and invests in equities, bonds, short-term money market instruments, and other securities or assets. A professional manager effectively managed the collected funds and made informed investment decisions based on the objectives, strategies, and benefits of mutual funds.
Mutual funds are considered one of the best investment plans for beginners in India because they allow investors to access professionally managed, diversified portfolios at low cost. When you invest in mutual fund units, their value depends on market conditions. At the end, the profit and loss in the top-performing mutual funds are highly dependent on the fund’s overall performance.
How Do Mutual Funds Work?
Let’s understand the process of mutual funds and how the best mutual funds in India work. It’s convenient and straightforward. Let’s break down the steps to know how the Best mutual funds in India work.
Step 1: Mutual funds collect money from a large number of investors and effectively pool it into a single large pool.
Step 2: A professional fund manager who regulates the portfolio of the investors and makes crucial moves to meet the objectives of the fund. And they aim to earn steady returns while making risk-free investments through a rigidly managed allocation and asset selection.
Step 3: Mutual funds invest in a variety of baskets, including stocks, bonds, and other securities. The diversification of the mutual fund helps in the diversification of risk in various forms of securities. It helps in eradicating poor performance in any one investment.
Step 4: When an individual invests in mutual funds, they acquire an ownership stake in accordance with their investment. The amount invested in the mutual fund is proportional to the stakes in the overall portfolio.
Step 5: Net asset value (NAV) is calculated to determine the per-share market value of the fund. Fund. It is calculated based on the total fund value, and the total number of units equals the NAV. Investors generally trade at the NAV price—the price of the assets fluctuates according to market conditions.
Step 6: Mutual funds provide investors with easy access to enter and exit investments. It provides liquidity options to the investors that allow them to deal in buying and selling shares at the NAV price.
Step 7: Mutual fund calculations, returns, and distributions through appreciation in the capital market and interest and dividend payments from securities. Distributions of profits among investors in the form of cash or shares. Investors are also liable to receive regular income distributions.
History of Mutual Funds in India
The mutual fund industry in India began in 1963, when the government of India established the Unit Trust of India. Mutual funds offer consistent investment options for thousands of investors. The mutual fund industry is in high demand, with rising investor participation. Assets under management of the country’s mutual funds grew more than 6 times in just 10 years, from ₹7.46 million to ₹46.58 million. Indian history has 44 registered asset management companies.
The Indian mutual fund industry is six decades old. However, India’s development over the past 60 years is impressive. The history of Indian mutual funds is divided into six phases of growth as follows:
- The first phase (1964 to 1987) introduced the Unit Trust of India.
The first phase of development in Indian mutual funds began in 1963 with the establishment of the Unit Trust of India by the government and the RBI. It was the most suitable investment option for retail investors willing to accept a moderate level of risk.
- The Second Phase (1987 to 1993): Commencement of public sector Mutual Funds
The second phase was launched in 1987 when the public sector banks and institutions came into existence and launched their own mutual funds. During this period, the best-performing mutual funds in India experienced substantial growth in operations, as the State Bank of India launched new non-UTI mutual funds. At the same time, many other public sector banks have launched their mutual funds by the end of the phase, including Canara Bank, PNB, India Bank, Bank of Baroda, and more. By the end of 1993, the AUM of mutual funds had grown by ₹47,000 crore, an exponential increase.
- The Third Phase (1993 to 2003): The launch of private sector Mutual Funds
The third phase of growth of the mutual fund is linked with the commencement of SEBI in April 1992. SEBI regulates the Indian market and protects investors’ interests. It was when the shape of the best mutual funds in India changed, enabling them to grow further with the launch of private-sector mutual funds. By the end of the third phase, the mutual funds industry comprises 33 schemes with a Total AUM of ₹1,21,705 crores.
- The Fourth phase (2003 to 2014): Consolidations and Restructuring
The fourth phase is known for consolidation and restructuring in the Indian mutual fund industry. The Unit Trust of India split. The specific undertaking of the Unit Trust of India and the UTI Mutual Fund. SEBI introduced rules and regulations to be followed strictly, imposed entry loads, and facilitated several mergers, helping stabilise the industry.
- The Fifth Phase (2014) The Digital Transformation
The fifth phase marked a digital transformation in the Indian mutual fund industry, enabling paperless onboarding, instant KYC, and seamless investing. The “Mutual Fund Sahi Hai” campaign, launched in phases, has created awareness across nations.
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What are the benefits of mutual funds?
Before investing in the best mutual funds in India for wealth creation, investors benefit from a diversified portfolio, consistent returns, and professional fund management. Have a look at some of the benefits of mutual funds.
- Diversification
The best mutual funds in India help in diversifying a portfolio by investing in different types of securities. This allows investors to help minimise risk by investing in the best-performing mutual funds. This helps protect investors’ baskets from market sentiment.
- Professional Management
Professional fund managers manage mutual funds. They manage investments for a large number of investors with the same objective. The fund manager aims to make better investment decisions and help investors grow their wealth and achieve steady returns by choosing the best mutual funds for long-term investment.
- Transparency
Mutual funds offer safety and transparency in their investment, as the Securities and Exchange Board of India highly regulates them. It provides a reliable platform for maintaining and tracking your investment performance.
- Low initial investment
The best mutual funds in India for wealth creation are considered an affordable investment option for investors who can start with a small amount. It offers 1000+ mutual fund schemes to invest in, starting at ₹100.
- liquidity
Mutual funds are highly liquid investments. It allows investors to buy and sell their units at any time. It is considered an ideal investment option for short-term investors due to its ease of entry and exit.
- Tax Benefits
Mutual funds offer tax benefits to investors through ELSS funds, which offer up to a ₹1.5 lakh deduction under section 80C, but such funds have a 3-year lock-in period.
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Types of mutual funds
There are many different types of mutual funds in India. The most popular types of mutual funds are:
- Equity Mutual Funds:
These funds primarily invest in companies’ stock. The companies are categorised as mid-, mid-d, and small-cap stocks based on market capitalisation. These types of investments are hazardous and highly rewarding.
- Debt Mutual Funds:
Debt mutual funds invest in government or corporate debt and other debt-related instruments. This type of fund is best suited for stable returns, lower risk, and meeting short-term and medium-term goals.
- Hybrid Mutual Funds
Hybrid mutual funds consist of both equity and debt and are also categorised as balanced funds. These investments are a mix of both to achieve a suitable balance between growth and profits.
- Index Mutual Funds:
Index funds are replicas of an index, such as the Nifty 50 or the Sensex. Index funds are low-cost and low-risk. Index mutual funds are best for beginners and passive investors, as they support long-term wealth creation and offer market-like returns.
- Liquid Mutual Funds
Liquid mutual funds are considered highly liquid investment options. This is the kind of debt that mutual funds invest in: short-term money market instruments like treasury bills, commercial paper, and certificates of deposit. Here, the risk is low, and highly liquid assets offer instant withdrawal, making them the best short-term investment option.
- Target Date funds
Target-date funds are a type of mutual fund designed to invest to a specific date or to achieve a financial goal by a due date, such as retirement, college education, or buying a house. Target-date funds are goal-oriented and ideal for long-term wealth creation.
List of Best Mutual Funds in India for Long-Term
Here is a list of the best mutual funds in India for the long term. Best suited for investors seeking the best mutual funds for long-term investment in India.
| Fund Name | AUM | 3-year CAGR | 10-year CAGR | Expense Ratio |
| Nippon India Small Cap India | 68,571.85 | 21.23% | 19.89% | 1.39% |
| Quant ELSS Tax Saver Fund | 12,514 | 15.28 | 22.04 | 0.58 |
| Quant Infrastructure Fund Growth | 3,187.57 | 15.46% | 19.11% | 1.91% |
| Axis Small Cap Fund | 26,769 | 17.21% | 18.20% | 1.59% |
| Quant Small Cap | 30,169.71 | 19.86% | 19.03% | 1.58% |
| Axis Small Cap Fund | 26,769.08 | 18.50% | 19.69% | 0.56% |
| HDFC Small Cap fund | 38,020.31 | 19.83% | 17.99% | 1.54% |
| Invesco India Midcap Fund | 10,006.30 | 26.30% | 18.55 | 1.72% |
| SBI Small Cap Fund | 36,272.00 | 13,78% | 19.07% | 0.75% |
| Quant Flexi Cap Fund | 6,866.66 | 16.47% | 20.11% | 0.66% |
Modes of Investing in Best Mutual Funds in India
There are mainly two methods by which investors can invest in the best mutual funds in India and generate high returns. Here are two modes of investing in mutual funds:
- Lump sum investment
A lump-sum investment means investing the entire amount in a mutual fund at once, without dividing it into parts over months or years. The main benefit of the lump-sum advantage is that it yields high returns when the market is up. A lump-sum investment is a quick, simplified, and convenient method widely adopted by investors who are confident about market sentiment and want to invest immediately. Lump-sum investments are designed for investment, insurance premiums, retirement plans, and more.
- Systematic Investment Plan (SIP)
A systematic investment plan is a method of investing in mutual funds in a fixed amount of money at regular intervals, such as monthly or quarterly. A systematic investment plan is a popular investment method among mutual fund investors, as it offers a simple option that does not consider market conditions. A SIP is regarded as the best mutual fund in India for wealth creation and generates higher returns with low risk.
Who Are the Ideal Investors for Mutual Fund Investment?
Mutual funds are designed for investors seeking to work with experienced professionals and diversify their investments to reduce risk. Here are the ideal investors for the mutual fund:
- Beginners Investors
Professional fund managers manage to invest in the best mutual funds in India. These fund managers help investors by managing mutual funds for those who are new to investing and lack knowledge or may not have time to pick stocks or bonds.
- Long-Term Investors
This is a highly recommended method for investors seeking long-term goals such as retirement, children’s education, and buying a house. Long-term investors benefit the most from investing in the best mutual funds in India, which give high returns over time.
- Investors with a moderate risk appetite
The best mutual funds in India are well-suited for moderate-risk investors seeking a moderate-risk mix. Mutual fund investments offer both low- and high-risk opportunities.
- Investors with a low capital amount
Mutual funds offer investors the option to invest with a low capital amount through a systematic investment plan, starting as low as ₹100. This is the ideal investment method for investors to grow their wealth in the long term.
- Retirement Savers
Retirement savers are investors who want to invest in a specific type of mutual fund for a particular period. The primary purpose of choosing the best mutual funds in India is long-term growth and building wealth over time. These investment options are suitable for individuals saving for their future.
- Income seekers
Mutual fund investments are also designed to earn daily income. Income seekers invest in the best mutual funds in India for a steady cash flow, so they are highly focused on bond and dividend funds.
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Role of the Best Mutual Funds in India
Mutual funds in India play a crucial role in the Indian financial market. It supports investor growth and the economy by helping individuals invest in the best mutual fund in India for wealth creation and capital gains for future growth. Investing in the best mutual funds in India makes investment decisions easy, convenient, and professionally managed for a large number of investors who lack knowledge of the stock market or the time to manage their investments. Key roles of mutual funds are:
- Creation of wealth
Investing in the best mutual funds in India helps investors build their wealth over time by diversifying their portfolios, which can include equities, debt, and a mix of both. Diversification helps reduce the risk of asset loss in any investment.
- Professional Management
These are professional managers whom investors appoint to make informed investment decisions on their behalf. It is the responsibility of professional fund managers to study market conditions, market trends, and company financial performance to make informed investment decisions and invest in the top-performing mutual funds in India.
- Promoting Saving and Investment
A mutual fund helps individuals to save and invest their wealth. It encourages them to save for their retirement plans and offers suitable mutual funds. With the introduction of mutual funds as an investment method in India, there has been a shift in Indian households’ savings from traditional savings to market-linked investments. A SIP is considered the best mutual fund for wealth creation in India, as it allows investors to invest a small amount of money each month to promote savings and growth.
- Boost economic growth
Investment in mutual funds supports overall economic growth, as money can be invested in stocks, bonds, and infrastructure development. Ultimately, it helps generate employment and build the nation.
- Diversification
Mutual funds provide diversification in investments by reducing risk through a portfolio spread across equities, bonds, and other securities.
- Managing risk
Mutual funds manage individual investors’ investment risk by spreading the portfolio and appointing fund managers to help investors diversify and mitigate the risk of a single investment’s poor performance.
- Gaining Financial Inclusion
Mutual funds have made investing a convenient and straightforward way for individuals without deep financial knowledge or significant initial income. Mutual funds are crucial for achieving financial inclusion and economic growth, as they help expand investment opportunities, offer diversification, and raise financial literacy.
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Mutual Funds Fees & Charges
A mutual fund offers a convenient way to diversify your portfolio and create long-term wealth. However, investors must understand the fees associated with their mutual fund investments. Let’s deep dive into the fees & charges of the mutual fund.
- Expense ratio
The expense ratio is the annual fee that a mutual fund house charges for a specific scheme, payable by the investors. The fund house charges this fee for managing the overall mutual fund scheme. The expense ratio is reflected as a percentage of the fund’s average assets under management. The expense ratio consists of numerous costs, such as management, administrative, marketing, and distribution costs.
- Entry load
An entry load is a charge imposed by a mutual fund house on investors when they buy mutual fund units in a specific scheme. It’s a one-time charge that covers the fund’s distribution costs and initial expenses. However, in 2009, the SEBI of India abolished entry loads for mutual funds.
- Exit load
An exit load is a fee imposed by a mutual fund house on investors when they sell or withdraw their existing mutual fund units within a specified time period. The primary motive for levying an exit load on investors is to discourage them from selling their mutual fund units within a short period and to ensure they remain invested over a long period.
- Management fee
The management fee is included in the expense ratio of the mutual fund scheme. The management fee compensates the fund manager for their work and expertise in managing numerous investors’ portfolios. The management fee varies with the fund’s level of innovation. Actively managed funds have higher costs than passively managed funds because they require more knowledge, time, and research.
How to Invest in Mutual Funds With Univest
- Univest offers expert recommendations to help you choose the best investment based on your financial needs.
- You can easily sync your current mutual fund investments to get a complete view of your portfolio with a one-stop solution app.
- Set your short-term and long-term goals, and Univest aligns its recommendations with them.
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Mutual Fund Taxation – How Mutual Funds Are Taxed?
When you invest in the best mutual funds in India, the profit earned on redemption is called capital gains. These gains are taxable, and the rate of tax depends on two main factors: the type of mutual fund (equity or debt) and how long you stay invested (the holding period)
- Taxation on Equity Mutual Funds:
Short-term gains: If you sell before 1 year, 15% is paid on the total profit.
Long-term gains: If you sell after 1 year, no tax is levied on profits up to ₹1 lakh. 10% tax is levied on profit above ₹1 lakh.
- Taxation on Debt Mutual Funds:
Investment in debt securities, money market instruments, Govt securities, and corporate bonds has a holding period of 24 months. As per the short-term capital gain, it is taxed at the standard slab rate, and as per the long-term capital gain, the tax rate applied is 12.5%.
- Taxation on Dividends:
If your mutual funds pay dividends, those amounts are added to your annual income and taxed according to your slab. If dividends are above ₹5,000 in a year, the fund company deducts 10% TDS.
- STT (Securities Transaction Tax)
When selling equity mutual funds, a small STT is also charged, but it is significantly lower. The government (Ministry of Finance) levies an STT of 0.1% on the purchase and sale of mutual fund units in equity funds or hybrid equity-oriented funds (those investing at least 65% in equities). However, STT is not applicable on the sale of debt fund units.
Risks of Investing in Mutual Funds
Before investing in mutual funds, it is vital to understand the risks involved, which helps mitigate risk by diversifying the portfolio.
- Uncertain risk:
Investments made in mutual funds are highly affected by market price fluctuations. Equity mutual funds are highly affected by their stock market performance. In contrast, debt funds can be highly affected by movements in interest rates. So, return on investment is not fixed and may change due to uncertain circumstances. Investors who ignore how to choose the right mutual funds for the long term can impact their financial objectives.
- High charges
High charges are levied on the mutual fund investment, such as the expense ratio, which includes management fees, administrative costs, and distribution charges. With time, high expense ratios can reduce your overall returns. And exit loads are also charged for withdrawal of investment, which adds to the investor’s expenses.
- Lack of control
A mutual fund collects investments from a large number of investors. Those investments are managed by a professional manager who decides which securities to buy or sell. Investors have no control over their portfolios in mutual funds.
- Results depend on the fund manager.
The performance of the mutual fund portfolio is wholly dependent on the informed investment decision, experience, and judgment of the fund manager. Poor decision-making can lead to poor returns in stable market conditions.
- Risk of diversification
Diversifying a portfolio in mutual funds helps mitigate risk, but over- or under-diversification can increase risk to investment returns.
- Liquidity constraints
Some mutual funds, such as ELSS funds, have a 3-year lock-in period during which withdrawals are restricted.
Returns Calculation For Mutual Funds
There are different types of mutual funds, such as equity, debt, hybrid, index, thematic, sectoral, and multi-asset funds. But do you know how to calculate mutual fund returns? Mutual funds are calculated in many different ways. Each method helps in understanding investment performance.
Here are the common types of returns.
- Absolute returns:
Absolute returns are used to assess the fund’s profit and loss over a specific period (usually 1 year).
Formula:
Absolute Return = (Present NAV – Initial NAV × 100
- Annualised Returns:
Annualised returns: Convert short-term returns into a yearly format to make comparisons easier.
Formula:
SAR=[(1+Absolute Rate of Return)^(365/number of days)] -1
- Compounded Annual Growth Rate
CAGR provides an average growth rate over multiple years, offering a standardised measure.
Formula:
CAGR = {[(Present NAV/Initial NAV)^(1/Number of years)]-1} × 100
- Extended Internal Rate of Return (XIRR):
XIRR is an advanced method for calculating the timing and amount of cash flows. It is essential for investments of different durations, such as Systematic Investment Plans (SIPs).
Formula:
XIRR = (Values, Dates, Guess)
Strategies For Mutual Funds
Let’s discuss strategies for investing in these funds.
- Diversification, Not Over-Diversification
Diversification means spreading your investment across different stocks, sectors, and assets to reduce overall risk. However, over-diversification dilutes portfolio returns because of the impact of high-performing assets. A balanced, well-diversified strategy is the best approach.
- Be Strategic With Your Time
The time horizon in investment is crucial: for short-term goals, low-risk funds like debt funds are best, and for long-term goals, equity mutual funds are best, as they benefit from compounding. So choose a fund with proper research on how long you plan to invest.
- Focus on Value-Added Investments.
Always choose a mutual fund that provides actual value, such as consistent performance, a low expense ratio, an effective fund manager strategy, and stability in balancing risk and return.
- Actively Monitoring Portfolio.
Actively monitoring the mutual fund portfolio, reviewing its performance regularly, and making timely adjustments based on the market conditions.
- Maintain a Disciplined Approach
One of the most important mutual fund strategies is to stay disciplined. The market will rise and fall, and a disciplined approach is essential because early selling and overinvesting can affect long-term returns.
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Conclusion
A mutual fund is a smart investment option for beginners and experienced investors alike.
It helps create long-term wealth through professional management and portfolio diversification. Each fund’s risk level varies, so it is crucial to select the best mutual fund for wealth creation in India based on financial goals, time frame, and risk appetite. There are many types of mutual funds, each designed to help investors meet their financial goals. Mutual funds are a better option to create a financially strong future. Overall, learning how to choose the right mutual funds for the long term is crucial to managing risk and achieving financial objectives. So start investing in mutual funds.
FAQs
What are Mutual Funds?
A mutual fund is a pool of money collected from several investors to invest in a diversified portfolio of asset classes, such as equity and debt.
Which yields a higher yield, SIP or FD?
SIP usually gives higher returns than FD, as it offers the benefits of market-linked growth and compounding, whereas FD offers fixed, lower interest.
Should I invest in mutual funds as a beginner?
Yes, you can invest in a mutual fund as a beginner. There is no need for deep expertise in the stock market, because professional fund managers manage the portfolio and make investment decisions.
Mutual funds: are they good or bad?
Mutual funds are considered suitable for long-term investing because they provide expert management and diversification. They are also risky due to market-linked linkage.
What are the risks of a mutual fund?
There are many types of risks involved in mutual funds, such as market risk, liquidity risk, diversification risk, and manager risk.
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