Beginners Guide to Mutual Funds

beginners guide to mutual funds
How to invest in Mutual Funds - a beginners guide with handpicked articles written in simple English.

Mutual fund investments are becoming very popular with individual investors because of the benefits they provide. Among the many advantages, the most important factors that drive investors to mutual funds are that Investors can

  1. Start with any amount (as low as 500)
  2. Diversify across multiple stocks and other instruments like debt, gold etc.
  3. Start automated monthly investments (SIP)
  4. Invest without requiring to open DMAT account

In this mutual fund investment guide for beginners, we have selected few articles to help you learn about Mutual Funds and get started with them. We would suggest bookmarking this page so that you can read these articles at your own pace.

1. INTRODUCTION TO MUTUAL FUNDS

If you already know about mutual funds and different types of mutual funds, you can skip directly to the next section. These five articles cover the basics of mutual funds and their various types. We also cover a special article on tax saving funds.

  1. What is a Mutual Fund and how does it work
  2. Types of Mutual Funds in India
  3. Investing in mutual funds vs direct equity
  4. Advantages and Disadvantages of Mutual Funds
  5. Tax Saving (ELSS) Funds

2. BUILDING A PORTFOLIO OF MUTUAL FUNDS

The right way of investing is to build a mutual fund portfolio. A portfolio is a collection of mutual funds that helps you meet your investment goals. Your overall returns matter on your overall portfolio and not a particular fund. In this section, we learn about basics of building a mutual fund portfolio.

  1. What is Portfolio Investing
  2. How to build a Mutual Fund Portfolio
  3. Choosing the right mutual funds for your portfolio
  4. When to Sell a Mutual Fund

*Check out FREE eBook guide on selecting the right mutual fund portfolio for beginners (no sign up required)

3. INVESTING IN MUTUAL FUNDS

A lot of first-time investors do not invest in mutual funds because they find the investing process too complicated. These articles help mutual fund beginners to get started with investing.

  1. What is KYC and why is it required for investing in Mutual Funds
  2. Investing through Systematic Investment Plans

4. OTHER IMPORTANT THINGS TO KNOW

While investing in mutual funds, there are some important things beginners needs to consider. Without understanding these things, one can have serious implications on their investment returns.

  1. Tax on Mutual Funds
  2. Exit Load on Withdrawing money from Mutual Funds
  3. Expense Ratio of Mutual Funds

5. LEARNING THE JARGON

Here is a list of commonly used terms when talking about mutual funds. While mutual fund beginners do not need to learn all of these, you can use this as a gloassary to look for any term you want to learn.

Term Description
80C Section under Income Tax Act that defines exemptions for income tax. More details here
AMC Short form for Asset Management Company – the company that runs a mutual fund. Examples are HDFC Mutual Fund, ICICI Prudential Mutual Fund. List of AMCs is here.
Annualised Returns Returns you would make if investments were made for one year. If you invest for less than a year or more than a year, they are aggregated to one year.
Arbitrage Funds Arbitrage Funds are special types of mutual funds that invest in equity securities but at the same time take an equal and opposite position in derivatives of these equity securities. These funds effectively give returns similar to liquid funds and risk is also similar. Also, these funds are taxed like equity funds and hence Zero tax post 1 year.
Asset Allocation Process of allocating your funds across different assets. Assets are things like equity, debt or gold. We can further classify an asset like equity into large cap, mid cap or small cap.
AUM Short form for Asset Under Management. The total fund a mutual fund scheme holds for investments.
Average Maturity Weighted average of maturity (years between today and the final payment date of a debt security, at which point the principal is due to be paid) of all debt securities held by the fund.
Balanced Funds Balanced Funds, also known as Hybrid Funds – Equity oriented invests in a mix of debt and equity. Read more about Balanced Funds here.
Benchmark Something you can compare your returns against. Typical benchmarks are Sensex and Nifty. But then there are a lot of them depending on the fund you consider.
Brokerage The fees you pay to your broker for letting you buy and sell your investments.
Credit Rating All debt issued by companies or government is rated by independent rating agencies based on the capacity to pay back. Example AAA rated debt is good. BB is not good.
Crisil Crisil is a rating agency that rates mutual funds and debts issued by companies.
Debt Funds Debt funds are mutual funds investing in debt instruments. Read more on debt funds here
Direct Funds Type of funds you do not buy from distributors. They are bought directly from AMCs. More on direct funds here
Dividend Schemes Mutual fund schemes that provide regular dividends to its investors instead of putting the profits back in the equity or debt.
ELSS Short for Equity Linked Savings Scheme. Also known as tax saving funds – special mutual funds that are exempt from tax under section 80C. Read more here
Equity Equity means stock of a company. Buying equities is same as buying stocks of a company. Equity Mutual Funds invest in stocks of public listed companies
ETF Short form for Exchange Traded Funds. ETFs are like mutual funds but traded on stock exchanges and people can buy or sell them like stocks. Read more here.
Exit Load When you sell a mutual fund, exit load can be applied for certain schemes. It can be as high as 1% for some schemes. Read more here.
Expense Ratio Expressed as a percentage of your investment, this is the money you pay each year to the fund house for managing your money. Read more here.
Face Value Notional value of any security on which dividend, share capital, etc are calculated. Not very important to make investment decisions
Fund Manager Fund manager is a person who decides where to invest your money in the mutual fund. Performance of a mutual fund largely depends on its fund Manager
Fund of Funds A fund that invests in a portfolio of other funds. Also, knows as a multi-manager investment. Most of the global mutual funds are Fund of international funds.
Gilt Gilt Funds are mutual funds that invest only in government bonds (debt). They are good for risk averse and conservative investors who wish to invest indirectly in secure government bonds.
Gold Funds Gold Funds are mutual funds that invest in various forms of gold. It can be in the form of physical gold or stocks of gold mining companies.
Growth Plan Growth plan means that any dividend that may be paid out by the stocks in the mutual fund will be reinvested for further growth.
Holdings Holdings are the contents of an investment portfolio held by a mutual fund
Index Funds An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index. Read all about Index Funds here
Investment Objective This is the objective stated by the AMC for this mutual fund. AMC will operate this mutual fund in this manner only. But most of these objectives are very vague and hence doesn’t tell you much about the intent of the AMC.
KYC Know Your Customer is a mandatory requirement by SEBI for declaring identity and address proof for the purpose of investing
Large Cap Large Cap is a category of equity fund that invests mostly in the companies with large market capitalization ~ 20,000 Cr or more
Launch Date Its the date on which a Mutual Fund is launched, through New Fund Offer.
Liquid Funds Liquid funds are such Mutual Funds that invest in money markets (FD etc.) with very short maturity and high credibility. Therefore these are almost zero-risk Mutual Funds
Lock-in Period This is the period of time, from the date or investment, for which the investment cannot be withdrawn. Tax saving Mutual Funds have a lock-in of 3 years.
Long Term A horizon of 5 years plus is considered to be long term in most of the discussion.
Market cap Market capitalization is the market value of the publicly traded company. It can be calculated by multiplying the number of shares with the current share price.
Mean Returns Mean returns are the arithmetic average of the returns earned by a fund over a period of time. It is also known as expected returns of the Mutual Fund
Mid Cap Mid Cap is a category of equity fund that invests mostly in the mid-sized companies with market capitalization in the range 5,000 Cr to 20,000 Cr.
Min Additional Investment Min additional investment, as the name suggests, is the minimum amount of money you can invest in the fund if you already have an investment in the fund.
Min Investment Min Investment is the minimum amount of lump sum investment that the fund accepts as a first-time investment.
Money Market Money market is the part of financial market where highly liquid and very short term maturities are traded
NAV Net Asset Value. It is the value per share of a mutual fund or an exchange-traded fund (ETF) on a specific date or time.
NFO New Fund Offer. A new fund offer occurs when a mutual fund is launched, allowing the firm to raise capital for purchasing securities. Investors may purchase units of a closed-end mutual fund in an NFO.
Nifty Nifty is a major stock index in India introduced by the National stock exchange. The value of Nifty is the weighted average of the value of 50 selected stocks.
Nominee Nominee is the person who receives the benefit in case of death of the concerned person.
PAN Permanent Account Number is a 10 character alpha-numeric code issued by Income Tax department. PAN is mandatory for doing any financial transactions in India.
Portfolio For an individual, a portfolio is a collection of financial investments held by the person. For a Mutual Fund, a portfolio is the current holdings of the fund in various financial securities.
PSU Public Sector Undertaking is state or union government-owned corporates.
Rating Rating is the score given to product after careful evaluation or assessment of securities based on multiple factors.
Redeem Redeem means to withdraw the invested money by selling the mutual funds
Redemption Redemption is an act of withdrawing invested money in a mutual fund
Regular Funds Regular funds are the funds bought through an intermediary like advisor, broker or a distributor
Returns Return is a profit or loss on an investment. It is basically the change in value/principle amount
Risk Risk typically means uncertainty in an investment. It is the deviation from the standard or the expected value
Risk-Free Rate Risk-free rate is a theoretical rate of return on an investment with no risk. We can use SBI 3 month FD rate as a proxy for risk-free rate
RTA Registrar and Transfer Agent is agency appointed by a mutual fund to handle allocation/ redemption of mutual fund units.
Sector Allocation Split of holding of mutual funds in various sectors like Financial Services, IT, etc.
Sector Funds A fund that invests only in businesses that operate in a particular sector or industry. Because the funds belong to the same sector, such funds are not diversified.
Sensex It is an indication of an overall stock market. It essentially a figure which indicates the relative price of 30 companies weighted on free float market capitalization. Base year of Sensex is FY 1979 and the base value if 100
Sharpe Ratio Its defined as Mean Returns earned in excess of risk-free rate per unit of risk (Std Dev). It’s a measure of risk-adjusted returns. It was developed by Nobel laureate William F. Sharpe
Short Term Short-term is a period of time of less than 12 months.
SID Scheme Information Document (SID) is which provides all information about a mutual fund. It’s generally a 50+ page document explaining everything. In some cases mutual fund issue a combined SID for a whole category.
SIP Systematic Investment Plan (SIP) is a way of investing money in mutual funds at regular interval. Most famous frequency is monthly.
SIP Minimum This is minimum investment amount you need to invest every month (SIP) in this mutual fund. This is decided by mutual funds
Small Cap Small cap is a category of companies that have a market cap less than Rs. 3,000 Cr. Mutual funds that primarily invest in small cap companies is categorized as Small Cap Fund.
Standard Deviation Standard Deviation (represented by the Greek letter sigma σ) is a measure that is used to quantify the amount of variation of returns from mean returns.
STP Systematic Transfer Plan (STP) is a combination of Systematic Withdrawl Plan (SWP) and Systematic Investment Plan (SIP). In this money is redeemed regularly from one fund invested in another fund at the same time. It only works in same AMC funds.
SWP Systematic Withdrawl Plan is an opposite of Systematic Investment Plan (SIP). In this money is redeemed from a fund at regular interval.
Ultra Short Term Ultra Short Term are a type of Debt Mutual Funds that invest debt securities with Average Maturity of less than 1 year.
UTR Unique Transaction Reference (UTR) No. is provided by the bank when you do a NEFT or RTGS transaction.
XIRR XIRR is a modified form IRR (Internal Rate of Return) than help calculate overall returns when number transaction (Invest or Redeem) are more than two and at irregular intervals. The only way to measure the returns if you are doing a SIP or multiple transactions in a single fund is XIRR.
Suspended Fund Mutual Funds that stop taking fresh investment via both SIP or Lumpsum are considered Suspended Funds like DSP BR Micro Cap.
Units Units specify the extent of ownership one possesses in a mutual fund
Folio Folio is a grouping of financial assets such as stocks, bonds, mutual funds etc.
YTM Average interest rate to be earned by an investor at today’s market price, assuming that all debt securities (bond, loan, etc) will be held until maturity
Modified Duration It is the sensitivity of debt securities to the interest rate. If Modified Duration is 1 and interest rate increases by 1%, the value of the debt securities will reduce by 1%.
IFSC Code Short for Indian Financial Code System used to identify the particular branch of a bank for electronic funds settlement in India like NEFT and RTGS
Biller Biller is someone or something that processes bills and payments
ISIP Internet-based Systematic Investment Plan(SIP), which is a completely paperless way of setting up SIP
Stocks Stocks are ownership certificates of any company
Shares Shares are the stock certificates of any company
Bonds It is a debt instrument in which the investor lends some money to an entity which borrows the funds for a defined period of time at a variable or fixed interest rate
Open-ended Funds A type of mutual fund that does not have a limitation on a number of shares that it can issue
Closed-ended Funds It is like a mutual fund that raises a fixed amount of capital through an initial public offering and which is traded like a stock on the stock exchange
Global Funds A type of mutual fund, which invests in companies located anywhere in the world.
Min Withdrawl The required minimum distribution is the minimum amount that should be withdrawn from your account every year.
KIM Short for Key Information Memorandum which is another form of scheme information document, for the investors by mentioning the key sections of the offer document
Indexation It is a technique to adjust income payments by means of a price index, which is used to maintain the purchasing power of the investors after inflation
Income Funds Income funds are mutual funds, ETFs or any other type of fund that are used to generate an income for shareholders by investing in securities that offer dividends or interest payments
Government Securities It is a bond issued by the government authority, with repayment upon maturity
Securities A security is a financial instrument that represents some type of financial value
Floating Rate Floating rate is an interest rate that shifts up and down along the rest of the market or on the basis of an index
Equity Schemes A mutual fund that invests mainly in stocks are called equity schemes/funds
AMFI Association of Mutual Funds in India is an industry standards organization
SEBI Securities and Exchange Board of India is the regulator for securities market in India