Imagine 1,000 friends each put ₹1,000 into one pot, and a trained manager invests the whole ₹10 lakh for them in many different shares or bonds. Each friend owns a share of the pot. That, in simple words, is a mutual fund.
How it works
Mutual funds in India are run by asset management companies (AMCs) and regulated by SEBI. When you invest, you get units of the fund. The value of one unit is called the NAV (net asset value). It is worked out at the end of each business day from the value of everything the fund owns, minus its costs, divided by the number of units.
Example: you invest ₹5,000 in a made-up fund when its NAV is ₹50, so you get 100 units. If the NAV later becomes ₹55, your units are worth ₹5,500. If it becomes ₹45, they are worth ₹4,500. The NAV can go up or down.
Different kinds of funds
- Equity funds mostly invest in shares. Their value can move a lot.
- Debt funds mostly invest in bonds and other loans. They usually move less, but they still carry risk.
- Hybrid funds mix both.
- Index funds simply copy an index like the Nifty 50, instead of a manager picking shares.
Costs and risk labels
Funds charge a yearly fee called the expense ratio, taken out of the fund's value. Many funds have a "direct" plan (bought straight from the fund house) and a "regular" plan (bought through a distributor, who is paid a commission), and the regular plan's expense ratio is higher.
Every fund also shows a riskometer, a scale from low to very high risk, so you can see how much its value may move.
What to remember
You will often hear: "Mutual fund investments are subject to market risks, read all scheme related documents carefully." It's a required warning, and it's true. A fund's past returns don't promise future returns, and no one can guarantee you a fixed profit from an equity fund. Anyone selling or advising on funds should be registered: see How to check SEBI registration.