What is a mutual fund in simple words?

Mutual fund schemes are investment vehicles in which investors invest their money. This money is then managed by a professional who invests it in stocks, bonds, or other assets, according to the scheme's objective.

Are mutual funds safe for beginners?

Yes, mutual funds are relatively safe and beginner-friendly, especially compared to buying stocks directly.

Can I lose money in a mutual fund?

Yes, because mutual fund returns are market-linked, investors can lose money in the short term.

How do I start investing in mutual funds?

You can start investing in mutual funds via banks, AMC’s website, or third-party investment platforms like Groww.

What is the minimum amount to invest in a mutual fund?

You can start an SIP in a mutual fund with as little as ₹100.

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Blog

What are Mutual Funds?

28 November 2025

18 min read

Mutual funds (MFs) are investment vehicles that pool money from multiple investors and invest in a diversified portfolio of different asset classes, such as

Equities (stocks)
Debt instruments (bonds, debentures)
Money market instruments and/or other securities.

Managed by an Asset Management Company (AMC), mutual funds offer investors the benefits of professional fund management, diversification, and investment within a regulated structure.

Technically, investors do not invest in a mutual fund itself. But it is a medium which allows them to invest in all those securities that may otherwise be difficult to invest in directly.

Let’s understand this with an example.

Say, if you want to invest in the top 50 companies listed on the NSE (National Stock Exchange of India), like Reliance, TCS, Infosys, and HDFC Bank. Instead of buying shares in 50 stocks individually, you can simply pick any Nifty 50 Index Fund, such as the Groww Nifty 50 Index Fund.

This fund invests your money in all the companies that make up the Nifty 50 index, in the same proportion as the index itself. By investing in this fund, you get exposure to the performance of the entire Nifty 50 index without having to buy each stock.

How Do Mutual Funds Work?

The simple working mechanism of mutual funds includes,

Pooling money: Investors contribute funds to a mutual fund scheme along with other investors.

Allotment of mutual fund units: Based on the invested amount, units are allotted at the prevailing NAV (Net Asset Value). In the next section of this blog, we have explained in detail how Mutual Fund NAVs are priced.

Earnings and returns: Investors earn from mutual funds in the following ways:

Regular (or periodic) income in the form of dividends/interest
Capital gains, or appreciation, occur when the fund's value increases. It can only be realised when the units are redeemed.

How are Mutual Fund NAVs priced?

NAV represents the true value of a mutual fund scheme unit after subtracting any liabilities. It shows how much one unit of the mutual fund is worth at the end of each trading day.

As NAV increases, mutual fund value increases, and vice versa.

It is calculated using the following formula:

NAV per unit = Total Assets − Total Liabilities
Total Number of Outstanding Units

Where,

Total assets = The market value of all securities (stocks, bonds, etc.) the fund holds, along with any cash or receivables (like dividends or interest accrued).
Total liabilities = Expenses owed by the fund
Total number of outstanding units = The total number of units that investors currently hold.

Let’s say a mutual fund holds:

₹50 crore in stocks
₹10 crore in bonds
₹2 crore in cash
₹1 crore in receivables (dividends, interest)
₹3 crore in liabilities (fees, expenses)
6 crore units outstanding

NAV = (50 + 10 + 2 + 1) − 3 = 60 = ₹10
6 6

So, NAV = ₹10 per unit. This shows that each unit of the fund is worth ₹10.

If the value of investments or income increases, NAV will rise. On the contrary, if market values fall or expenses/liabilities rise, NAV will drop.

How To Invest In Mutual Funds?

To invest in an MF scheme, the investor can either start an SIP in a mutual fund or do a one-time investment, i.e., a lump sum.

SIP (Systematic Investment Plan)

What is an SIP? It is a systematic method of investing in a mutual fund on a monthly, quarterly, annual, or semi-annual basis.

Lump sum

A one-time investment of a specific amount, say ₹10,000

Before investing in any mutual fund scheme, the investor must be well-versed in the following pointers:

Different asset classes serve different purposes. Decide your financial goals, whether it is long-term wealth creation, trips, regular income, retirement planning, or tax saving.
Most importantly, your “risk appetite”.

How much money are you willing to lose (in the short term) that won’t urge you to give up on your SIP?

Mutual fund investments can be made directly through the Asset Management Company (AMC)’s website or via distributors, banks, or online investment platforms, like Groww.

What is the Role of an Asset Management Company?

An asset management company is the intermediary that pools money from investors and is responsible for

Creating investment schemes (NFOs),
Fund management, i.e., investing investors’ money in line with the stated scheme objective and managing it effectively.
Ensuring smooth and compliant functioning of the funds under its management.

Types of Mutual Funds

*Type of Mutual Fund*	*Primary Investments*	*Risk Level*
Equity Funds	Invests in stocks/equities and equity-related instruments	Very High-Risk
Debt Funds	Invest in fixed-income securities like bonds, government securities, corporate debt, Treasury bills, etc.	Lower risk
Balanced / Hybrid Funds	Invest in a mix of equity and debt	Moderate-risk
Index Funds	Passively track a market index (e.g., Nifty 50)	Moderate-risk
ETFs	Tradeable on stock exchanges; track indices, sectors, commodities, or bonds	Low to Moderate Risk (depends on underlying assets)
FoFs (Fund of Funds)	Invest in the units of other schemes of the same mutual fund or other mutual funds.	Varies: depends on underlying funds (can be Low to High Risk)

Benefits of Mutual Funds

Professional Fund Management: By investing in mutual funds, investors benefit from professional fund management by experienced fund managers.
Diversification: Mutual funds invest in a wide range of securities across industries and asset classes. This diversification reduces overall risk, as poor performance in one security or sector can be offset by better performance in others.
Start investing with as low as ₹100: You don’t need hefty amounts to invest in mutual funds. One can start investing with just ₹100 and increase gradually as per their risk appetite.
Liquidity: Mutual funds offer liquidity. This means that if investors need their invested amount in an emergency, they can get the current market value (NAV) of the investment by selling the MF units, depending on the scheme type.
Tax Benefits: Along with all the above advantages, mutual funds also help you save on some taxes. If you are investing in any ELSS (Equity Linked Savings Scheme) fund and the ITR is filed via the old tax regime, you can claim a deduction of up to ₹1,50,000 u/s 80C of the IT Act.

Risks of Mutual Funds

No guaranteed returns: Mutual fund returns are not guaranteed, as market movements are unpredictable.
Dilemma of choosing the right scheme: There are over 4,000 mutual fund schemes in India. This makes it difficult for investors to choose the right one according to their goals and risk appetite.
Mutual fund charges: High expense ratios and other management fees and costs can reduce overall net returns.

What Fees are charged by Mutual Funds?

Expense Ratio

As stated above, AMCs offer professional fund management services for which they charge an investor fee, known as the “expense ratio”. It is the total annual cost of managing and operating a mutual fund, expressed as a percentage of the fund’s average assets.

Exit Load

If the investor sells the mutual fund units before a specified time period, say 1 year, the AMC charges an “exit load” of 1% of the asset value.

Who Should Invest in Mutual Funds?

Those who want to begin their investment journey can start with an SIP in a mutual fund with just ₹100. Whether you are risk-averse or conservative, there’s a mutual fund for every investor type.
Don't want to indulge in the know-how of stock market downturns and have less time to track markets.
If you file income tax return (ITR) via the old tax regime, invest in ELSS funds to save up to ₹1.5 lakh per year in taxes u/s 80C of the Income Tax Act.
If you have specific goals like buying a house, saving for marriage, or retirement planning.

Mutual Funds vs. Other Investment Options

Mutual Funds vs FDs

*Parameter*	*Mutual Funds*	*FDs*
Nature of investment	Market-linked investments	Fixed-income instruments where a lump sum is invested at a predetermined, fixed interest rate.
Returns	Variable, depends on market performance	Fixed; pre-decided
Risk Level	Market risk	Negligible
Liquidity	High; redeem anytime (may incur exit load depending on holding period)	Low; premature withdrawal incurs a penalty
Taxation	Capital gains tax (varies by fund type and holding period)	Depends on the investor’s income tax slab
Diversification	High; spreads risk across many securities	None
Ideal For	Investors seeking better returns with some risk appetite	Conservative investors seeking capital safety

Mutual Funds vs Stocks

*Parameter*	*Mutual Funds*	Stocks
Nature of Investment	Pooled investment in a diversified portfolio	Direct ownership of company shares
Returns	Market-linked; depends on the fund’s portfolio	Market-linked; depends on individual stock performance
Risk level	Moderate; diversified among multiple holdings	High; concentrated in one stock
Liquidity	Less than stocks, as liquidity depends on the type of MF scheme. For instance, debt funds redemption requests are often processed within 24 hours on business days, while for equity funds it usually takes 1–3 business days	High; sell shares anytime during market hours
Diversification	High; invests in multiple companies/sectors	Low; depends on the investor’s stock selection
Management	Managed by professional fund managers with years of experience	Self-managed; requires knowledge & monitoring
Taxation	Depends on the MF scheme For equity funds: LTCG > ₹1.25 lakh at 12.5%, STCG at 20% For debt funds: Taxed as per investor tax slab	LTCG > ₹1.25 lakh at 12.5%, STCG at 20%

Learning the Jargon about Mutual funds

Here is a list of commonly used terms when talking about mutual funds. You can use this as a glossary to look for any time you want to learn.

Term	Description
80C	Section under Income Tax Act that defines exemptions for income tax.
AMC	Short form for Asset Management Company – the company that runs a mutual fund. Examples are HDFC Mutual Fund and ICICI Prudential Mutual Fund.
Annualized 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 particular 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. As a result, these funds effectively give returns similar to liquid funds, and risk is also identical. Also, these funds are taxed like equity funds, hence have Zero tax post one year.
Asset Allocation Funds	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 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 invest in a mix of debt and equity.
Benchmark	Something you can compare your returns against. Typical benchmarks are Sensex and Nifty. But then there are many 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	Independent rating agencies rate all debt issued by companies or governments based on the capacity to pay back. For example, AAA-rated debt is good. BB is not good.
Crisil	Crisil is a rating agency that rates mutual funds and company debts.
Debt Funds	Debt funds are mutual funds investing in debt instruments.
Direct Funds	Type of funds you do not buy from distributors. They are purchased directly from AMCs.
Dividend Schemes	Mutual fund schemes provide regular dividends to their investors instead of putting the profits back into equity or debt.
ELSS	Short for Equity Linked Savings Scheme. Also known as tax-saving funds – special mutual funds are exempt from tax under section 80C.
Equity Mutual Funds	Equity means the stock of a company. Buying equities is the same as buying stocks of a company. Equity Mutual Funds invest in stocks of publicly listed companies.
ETF	Short form for Exchange Traded Funds. ETFs are like mutual funds but traded on stock exchanges,; people can buy or sell them like stocks.
Exit Load	Exit load can be applied to specific schemes when selling a mutual fund. It can be as high as 1% for some projects.
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.
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. Therefore, the 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 known as multi-manager investment. Most global mutual funds are Fund of international funds.
Gilt Funds	Gilt Funds are mutual funds that invest only in government bonds (debt). Therefore, they are suitable 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. For example, it can be in the form of physical gold or stocks of gold mining companies.
Growth Plan	A growth plan means that any dividend the stocks may pay 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.
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 don’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 investing
Large Cap Funds	Large Cap is a category of equity fund that invests mainly in companies with a large market capitalization of ~ 20,000 Cr or more.
Launch Date	It's 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 from the date or investment for which the asset cannot be withdrawn. For example, tax-saving Mutual Funds have a lock-in of 3 years.
Long Term	A horizon of 5 years plus is considered long-term in most of the discussions.
Market cap	Market capitalization is the market value of a publicly traded company. It can be calculated by multiplying the number of shares by the current price.
Mean Returns	Mean returns are the arithmetic Average of the returns earned by a fund over some time. It is also known as the expected returns of the Mutual Fund.
Mid Cap Funds	Mid Cap is a category of an equity fund that invests mainly in mid-sized companies with a market capitalization of 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 if you already have an investment in the fund.
Min Investment	Min Investment is the minimum lump sum investment the fund accepts as a first-time investment.
Money Market Fund	The money market is the part of the financial market where highly liquid and concise 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 primary stock index in India introduced by the National stock exchange. The value of Nifty is the weighted Average of the importance of 50 selected stocks.
Nominee	The nominee is the person who receives the benefit in case of the death of the concerned person.
PAN	A permanent Account Number is a ten-character alpha-numeric code issued by the 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 fund's current holdings in various financial securities.
PSU	Public Sector Undertaking is state or union government-owned corporates.
Rating	Rating is the score given to a product after careful evaluation or assessment of securities based on multiple factors.
Redeem	Redeem means withdrawing the invested money by selling the mutual funds
Redemption	A redemption is an act of withdrawing invested money in a mutual fund
Regular Funds	Regular funds are funds bought through an intermediary like an advisor, broker, or distributor.
Returns	Return is a profit or loss on an investment. It is the change in value/principal amount.
Risk	Risk typically means uncertainty in investment. It is the deviation from the standard or the expected value.
Risk-Free Rate	A 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 the risk-free rate.
RTA	Registrar and Transfer Agent is an agency appointed by a mutual fund to handle the 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 is essentially a figure which indicates the relative price of 30 companies weighted on free-float market capitalization. The base year of Sensex is FY 1979, and the base value of 100
Sharpe Ratio	It's defined as Mean Returns earned more than the risk-free rate per unit of risk (Std Dev). So it’s a measure of risk-adjusted returns. Nobel laureate William F. Sharpe developed it.
Short Term	Short-term is less than 12 months.
SID	A scheme Information Document (SID) 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 regularly investing money in mutual funds. The most famous frequency is monthly.
SIP Minimum	This is the minimum investment amount you need to invest every month (SIP) in this mutual fund. Mutual funds decide this.
Small Cap Funds	Small cap is a category of companies with a market cap less than Rs. 3,000 Cr. Mutual funds primarily investing in small-cap companies are categorized as Small Cap Funds.
Standard Deviation	Standard Deviation (represented by the Greek letter sigma σ) is a measure used to quantify the amount of variation of returns from mean returns.
STP	A systematic Transfer Plan (STP) is a combination of a Systematic Withdrawl Plan (SWP) and a Systematic Investment Plan (SIP). This money is redeemed regularly from one fund invested in another at the same time. It only works in the same AMC funds.
SWP	A systematic Withdrawl Plan is the opposite of a Systematic Investment Plan (SIP). In this, money is redeemed from a fund at regular intervals.
Ultra Short-Term Funds	Ultra Short Term is a type of Debt Mutual Fund that invests in debt securities with an Average Maturity of less than one year.
UTR	Unique Transaction Reference (UTR) No. It is provided by the bank when you do an NEFT or RTGS transaction.
XIRR	XIRR is a modified form IRR (Internal Rate of Return) that help calculate overall returns when the number of transaction (Invest or Redeem) is more than two and at irregular intervals. Therefore, 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 new investments via 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. For example, if the Modified Duration is one and the 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 an entirely paperless way of setting up a 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 that borrows the funds for a defined period at a variable or fixed interest rate.
Open-ended Funds	A type of mutual fund that does not have a limitation on the 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 is traded like a stock on the stock exchange.
Global Funds	A type of mutual fund 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 annually.
KIM	Short for Key Information Memorandum, which is another form of scheme information document, for the investors by mentioning the critical sections of the offer document
Indexation	It is a technique to adjust income payments using a price index, which is used to maintain the purchasing power of investors after inflation.
Income Funds	Income funds are mutual funds, ETFs, or any other type used to generate 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	Security is a financial instrument that represents some monetary value
Floating Rate	A floating rate is an interest rate that shifts up and down along the rest of the market or is based on an index.
Equity Schemes	A mutual fund that invests mainly in stocks is called an equity scheme/funds
AMFI	The Association of Mutual Funds in India is an industry standards organization.
SEBI	The Securities and Exchange Board of India is the regulator of the securities market in India.

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. Groww Invest Tech Pvt. Ltd. (Formerly known as Nextbillion Technology Pvt. Ltd) Ltd. do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.

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