Investing 101 on Mutual Funds for Beginners: A Comprehensive Guide

Embarking on the journey of investing in mutual funds can be both exciting and daunting for beginners. This comprehensive beginners guide to mutual funds unravels the intricacies of mutual fund investments, offering key insights into the fundamentals and also sheds light on how to begin investing in them. From understanding the factors that shape investment decisions to identifying the right audience for mutual fund ventures, this article equips beginners with essential knowledge for a confident start in the world of mutual funds. Learn about mutual funds for beginners and pave the way for informed financial decisions, with smallcase today!

What are Mutual Funds?

Mutual funds are popularly a favored choice for diversifying portfolios and long-term wealth growth. They pool money from various investors to acquire a diversified portfolio of assets like stocks, bonds, and securities. Professional fund managers oversee these funds, making investment decisions on behalf of investors. Various types of mutual funds, such as equity funds, debt funds, balanced funds, index funds, and sectoral funds, cater to different investment preferences. Let us now explore these mutual fund basics for beginners, in detail!

Types of Mutual Funds

Here are the various types of mutual funds that are essential to take note of as a beginner in mutual fund investments:

• Equity Funds: These equity funds focus on stocks or equity-related instruments, providing investors with a stake in company ownership.
• Debt Funds: Centered on fixed income instruments such as bonds and government securities, these debt funds offer a stable investment avenue.
• Balanced Funds: Striking a balance between equity and debt instruments, these funds create a diversified portfolio for investors.
• Index Funds: Mimicking market indices like NIFTY or BSE, these index funds offer a straightforward approach to broad market exposure.
• Sector Funds: Sectoral funds invest in specific industries like infrastructure, pharmaceuticals, or technology, these funds target niche market segments.

Who Should Invest in Mutual Funds?

Mutual funds suit a variety of investors at different stages of their investment journey. It’s crucial to focus not on the fund itself but on its underlying components to gauge its suitability for you. These funds contain a mix of assets like stocks, bonds, and commodities. Before investing, research thoroughly and comprehend the risks associated with the fund’s underlying assets. Mutual funds cater to both novice and seasoned investors, offering diversification benefits. Experienced investors can pinpoint funds targeting specific growth areas.

Factors to Consider Before Investing in Mutual Funds for Beginners

Before diving into mutual fund investments, consider these crucial factors:

• Define Your Investment Goal: Clarify your financial objectives, budget, and time horizon to determine your risk tolerance. Effective investing in mutual funds investment plans for beginners require setting specific goals.
• Choose the Right Mutual Fund Type: Selecting a mutual fund category involves more than just reading about different types. First-time investors are often advised to opt for balanced or debt funds due to their lower risk and stable returns.
• Shortlist and Evaluate: Analyze various mutual fund options within each category, considering factors like the fund manager’s qualifications, expense ratio, portfolio components, and assets under management. These elements are vital in making informed investment decisions.
• Diversify Your Assets: Strengthen your portfolio by investing in multiple mutual funds. Diversification helps mitigate risks, ensuring that the performance of one fund compensates for any underperformance in others, maintaining your portfolio’s overall value.
• Embrace Systematic Investment Plans (SIPs): Consider opting for SIPs as a gradual entry into the stock market. Spreading investments over time and across markets is more effective than a lump-sum investment. SIPs leverage rupee cost averaging, reducing investment costs and enhancing long-term profits.
• Maintain Updated KYC Papers: Ensure your Know Your Customer (KYC) details are current. Without completing this procedure, mutual fund investments are not possible. This process mandates a valid PAN card and address verification.

List of the Best Mutual Funds for Beginners

These are some of the top mutual funds in the country and might be ideal for beginners to consider; however, investors must do their own research before making a decision:

Fund Name	Sub Category	AUM (In cr.)	Expense Ratio (%)	CAGR 3Y (%)	CAGR 5Y (%)
Quant Small Cap Fund	Small Cap Fund	17,193.09	0.70	41.55	35.71
Quant Infrastructure Fund	Sectoral Fund - Infrastructure	2,207.59	0.73	42.25	35.35
SBI Tax Advantage Fund-III	Equity Linked Savings Scheme (ELSS)	33.26	0.00	20.90	27.39
Quant ELSS Tax Saver Fund	Equity Linked Savings Scheme (ELSS)	7,237.64	0.76	32.00	32.29
Nippon India Small Cap Fund	Small Cap Fund	45,894.01	0.80	32.24	28.81
Axis Small Cap Fund	Small Cap Fund	19,530.69	0.53	25.72	26.82
Quant Mid Cap Fund	Mid Cap Fund	4,857.91	0.71	37.34	31.84
ICICI Pru Smallcap Fund	Small Cap Fund	7,415.35	0.60	26.87	25.90

Overview of the Best Mutual Funds for Beginners

Here is a brief overview of the mutual funds for beginners listed above for educational purposes:

Quant Small Cap Fund

Launched by Quant Mutual Fund, the Quant Small Cap Fund targets high-growth potential in the small-cap segment, focusing on companies with smaller market capitalisations but significant growth prospects. It’s designed for investors looking for aggressive growth strategies and higher risk tolerance.

Quant Infrastructure Fund

The Quant Infrastructure Fund is a sector-specific fund managed by Quant Mutual Fund, aimed at capitalising on the growth opportunities within the infrastructure sector. It invests in companies involved in the development, maintenance, and operation of infrastructure, offering the potential for long-term capital appreciation.

SBI Tax Advantage Fund-III

Managed by SBI Mutual Fund, the SBI Tax Advantage Fund-III is an ELSS fund that offers tax saving benefits under Section 80C along with the potential for capital growth by investing in a diversified equity portfolio.

Quant ELSS Tax Saver Fund

The Quant Tax Plan, offered by Quant Mutual Fund, is an ELSS fund designed for investors seeking both tax savings and investment growth. It focuses on equity investments with a blend of aggressive and conservative strategies to optimise returns.

Nippon India Small Cap Fund

This fund, managed by Nippon India Mutual Fund, focuses on small-cap stocks, aiming to identify and invest in small companies with the potential for robust growth and returns, suitable for investors with a long-term horizon and higher risk appetite.

Axis Small Cap Fund

Axis Small Cap Fund, offered by Axis Mutual Fund, aims to discover and invest in small-cap companies with strong fundamentals and growth potential, designed for investors seeking aggressive growth with a readiness for the associated risks.

Quant Mid Cap Fund

Managed by Quant Mutual Fund, the Quant Mid Cap Fund targets mid-cap companies with a potential for growth. It’s aimed at investors looking for a balance between the high growth potential of small caps and the stability of large caps.

ICICI Pru Smallcap Fund

ICICI Pru Smallcap Fund, from ICICI Prudential Mutual Fund, focuses on investing in small-cap stocks across various sectors, aiming for high growth potential. It’s suitable for investors with a high-risk tolerance looking for significant capital appreciation over the long term.

Why Invest in Mutual Funds?

Mutual funds, managed by investment specialists, offer a pathway to profitable opportunities tailored to your investment goals. Here are a few reasons why you can start your investment journey with mutual funds:

• Affordability: Start with minimal investment, as low as 500 Rs monthly through SIPs, establishing a foundation for long-term goals. Direct plans further cut costs by eliminating brokerage and commission fees.
• Expert Management: Industry experts conduct research, monitor market movements, and optimise portfolio performance. This professional oversight gives investors valuable insight into the fund manager’s strategy.
• Higher Returns: Mutual funds outshine low-risk alternatives, delivering substantially higher returns that can be tailored to suit your risk tolerance.
• Simplicity: Online KYC processes make investing faster, easier, and more efficient. Many fund firms offer one-click investment options.
• Disciplined Investing: Systematic Investment Plans (SIPs) foster investment discipline, allowing you to contribute small amounts regularly. Features like auto-debit make it easy to maintain a consistent investment habit, adapting the frequency to your preference.

How to Choose a Mutual Fund?

Given the array of options available, choosing the right investment fund might feel overwhelming. Start by aligning a fund’s investment goals with your long-term financial plan. For those in the early stages of their careers, a low-cost S&P 500 index fund is often a compelling choice.

Experienced investors or those interested in actively managed funds should investigate a fund’s approach, philosophy, and portfolio managers responsible for investment decisions.
Ultimately, focus on a fund’s performance, understanding the factors influencing its long-term success and assessing the likelihood of continued positive results. Also, factor in the fees associated with purchasing fund shares, keeping in mind that lower fees can enhance investor returns when performance is comparable.

How to Invest in Mutual Funds?

Investing in mutual funds directly through the Asset Management Company (AMC) website can be done both online and offline. To initiate the process, investors must open a new account, provide personal information, complete the FATCA form, and share bank details. KYC will be verified through Aadhar, and funds can be sent after submitting a photograph of the canceled check.

For an offline investment, one can visit the local AMC office, submit an application, KYC papers, and payment to start a mutual fund investment. Alternatively, investors can opt for online investment through their existing Demat accounts. No additional effort is required; current Demat and bank accounts can be used to invest and trade in mutual funds. Log into the Demat account, find the option to invest, select a fund, and complete the transaction by transferring the required funds online.

How to Invest in Mutual Funds Through SIP?

To invest in mutual funds through Systematic Investment Plans (SIP):

1. Complete KYC online by filling the registration form and providing self-attested identification and address verification.
2. Visit the fund house’s website, choose a suitable plan, and apply by providing name, phone number, PAN number, username, and password.
3. Enter bank account details, set up SIP auto-debit amount, and you’re done.
4. For monthly SIP investment for beginners, make the first payment online, and the second instalment 30 days later, as notified by the AMC.

How to Invest in Mutual Funds Through Lumpsum Investments?

In order to invest in mutual funds through lumpsum investments:

1. Set up a direct mutual fund investment plan with an asset management provider, either in person or online.
2. Complete KYC by submitting self-attested ID, address proof, and two passport-sized photos.
3. On the mutual fund company’s website, select the desired investment strategy, choose the One-Time option, and enter the amount.

How to Sell Your Mutual Funds?

When selling mutual funds, you can do so through an online broker or directly with the fund’s manager. You’ll place a sell order and receive the next available NAV as your price. Unlike stocks or ETFs, mutual funds don’t trade throughout the day, so you won’t know the exact selling price until the trade is completed.

Mutual funds may have early redemption fees for selling them within a short period, discouraging short-term trading. They’re better suited for long-term investment, often held in retirement accounts or for other long-term goals. Monitoring their performance quarterly or semi-annually is typically sufficient to ensure they align with your objectives, eliminating the need for daily or weekly checks.

How to Build a Mutual Fund Portfolio?

Building a mutual fund portfolio is a strategic process that aligns with your financial goals and risk tolerance. Here’s a concise guide on how to build a mutual fund portfolio for beginners:

• Define Your Objectives: Clearly outline your financial goals—whether it’s wealth accumulation, retirement planning, or saving for a specific milestone.
• Assess Risk Tolerance: Understand your comfort level with risk. Mutual funds vary in risk profiles, from conservative bonds to more volatile equities.
• Diversification Matters: Spread your investments across different asset classes (stocks, bonds, and cash) and sectors to mitigate risk. Diversification is a key principle in building a resilient portfolio.
• Research Fund Types: Explore various mutual fund types, including equity funds for stock investments, bond funds for fixed-income securities, and balanced funds for a mix of both.
• Expense Ratios and Fees: Scrutinize expense ratios and fees associated with funds. Lower expenses can contribute to higher returns over time.
• Historical Performance: While past performance doesn’t guarantee future results, analyzing a fund’s historical performance can provide insights into its consistency and volatility.

smallcase Vs Mutual Fund

smallcase and mutual funds represent two fundamentally different investment options. Exploring mutual fund investments reveals contrasts with smallcase offerings. A smallcase is essentially a collection of stocks or ETFs curated based on a specific theme or investment strategy. On the other hand, a mutual fund aggregates capital from several investors to create a diversified portfolio, which may include stocks, bonds, or other financial instruments. In a mutual fund, investors essentially buy units or shares, representing a portion of the fund’s holdings.

Feature	Smallcase	Mutual Fund
Structure	A curated portfolio of stocks or ETFs, based on certain themes	A collective pool of investments from many individuals, managed by a professional
Investment Choice	Selection from theme-based curated portfolios	Limited direct control over specific investments
Management	Self-managed; invest and exit at discretion	Professionally managed with active oversight
Diversification	Theme-based, thus potentially limited	Broad diversification across sectors and asset classes
Minimum Investment	Typically low (often ₹100 or less)	Varies; generally starts from ₹500 or higher
Transparency	High transparency on investments and weightings	Relative opacity; specifics of portfolio composition may not be easily accessible
Costs	Generally lower fees (0.5-1.5%)	Typically higher fees (1-2.5%)
Flexibility	High; options to invest, adjust, or exit readily	Comparatively lower; may include lock-in periods and exit fees
Control	Greater control over investment choices and timing	Reduced control; dependent on the fund manager’s strategies
Suitability	Ideal for individuals new to investing, hands-on investors, or those pursuing specific themes	Suited for those preferring passive investment, long-term objectives, or professional asset management

Investment Strategies for Beginners Investing in Mutual Funds 

Here are a few convenient strategies for beginners willing to invest in mutual funds:

Build a Robust Portfolio

• Direct your funds into blue-chip firms and diverse sectors like banking and real estate.
• Opt for a mix of equity and debt funds for added flexibility.
• Diversify across industries and asset classes for a strong portfolio.

Clarify Investment Goals

• Clearly define your investment objectives before entering the mutual fund arena.
• Mutual funds offer flexibility, allowing you to start with as little as Rs 500.
• Choose funds aligning with your goals and enjoy the flexibility to invest and redeem, excluding ELSS schemes and closed-ended funds.

Embrace Buy-and-Hold

• Adopt the widely popular buy-and-hold strategy.
• Hold investments over the long term, letting gains offset losses over time.

Opt for Balanced Funds

• Explore balance advantage funds with a diversified mix of stocks, debt, and sometimes gold.
• During market downturns, the fund adjusts its portfolio, taking advantage of lower equity prices.

Utilize SIP for Market Volatility

• Employ a systematic investment plan (SIP) for market uncertainties by investing in the best SIP plans for beginners. 
• Benefit from rupee cost averaging, buying more units in market downturns and fewer in upswings.

Strategic Fund Closure

• Know when to exit a mutual fund strategically.
• Avoid impulsively abandoning funds during market downturns; let skilled fund managers navigate challenging periods.

Tax-Savvy Strategies

Invest in ELSS for Tax Savings

• Save on taxes under Section 80C with ELSS funds.
• Receive annual deductions for investments up to $150,000.

Long-term Capital Gains (LTCG) Tax

• Hold equity mutual funds for over a year to enjoy a 10% LTCG tax.
• Tax-free gains up to Rs 1 lakh; beyond that, pay a 15% tax on short-term gains.

Debt Fund Taxation

• LTCG on debt funds after three years attracts a 20% tax with indexation benefits.
• Short-term gains within three years are subject to regular income tax rates.

Taxation on Mutual Funds

Understanding the taxation of mutual funds involves recognizing several key factors. These include the type of fund, such as Equity, Debt, or Hybrid funds. Additionally, dividends distributed by mutual fund houses and capital gains from selling assets at a profit impact taxes.

The duration of holding mutual fund units is crucial. According to Indian tax regulations, longer holding periods result in lower tax liabilities. Essentially, the longer you hold your investment, the less tax you’ll pay on capital gains.

Fees and Charges on Mutual Funds

Entry Load

When investors initially invest in a mutual fund scheme, they may encounter an entry load. This fee covers distribution costs and used to vary among fund houses in India before 2009. However, current SEBI regulations prohibit fund houses from charging entry loads.

Exit Load

Exiting a mutual fund scheme within a specific period triggers an exit load. This fee, typically around 1% of the redemption value, aims to discourage premature withdrawals and reduce the volume of redemptions. Fund houses commonly impose an exit load if units are redeemed within a year, but exempt investors from this fee after one year of investment in the same scheme.

Transaction Charges

Investors may face a one-time transaction fee, ranging from Rs. 100 to Rs. 150, on investments exceeding Rs. 10,000. This fee also applies to SIP investments above Rs. 10,000, while investments below Rs. 10,000 are exempt from transaction charges.

Expense Ratio

The expense ratio, expressed as a percentage of a fund’s daily net assets, is an annual fee charged by asset management companies for managing mutual fund schemes. It encompasses various costs such as sales, marketing, administration, distribution, and fund manager fees. Calculated by dividing total expenses incurred by an AMC’s total assets under management, the expense ratio tends to be higher for regular plans compared to direct plans, as discussed further in the subsequent section.

Mutual Funds Jargons

Now that you have understood the basics of mutual funds, let’s look at mutual funds jargons that you must know.

Term	Description
80C	Section under the Income Tax Act that defines exemptions for income tax.
AMC (Asset Management Company)	The company that manages a mutual fund. Examples include HDFC Mutual Fund and ICICI Prudential Mutual Fund.
Annualized Returns	The returns you would make if investments were made for one year. Adjusted if the investment period is different.
Arbitrage Funds	Mutual funds that aim to exploit the price difference between the cash and derivatives markets to generate returns.
Asset Allocation Funds	Funds that spread investments across various asset classes like equity, debt, or gold.
AUM (Assets Under Management)	The total value of the investments managed by a mutual fund.
Average Maturity	The weighted average time until all debt securities in a fund are due to be paid off.
Balanced Funds	Also known as Hybrid Funds, these invest in a mix of debt and equity securities.
Benchmark	A standard against which the performance of a mutual fund can be compared.
Brokerage	Fees paid to a broker for buying and selling investments.
Credit Rating	An assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation.
Crisil	A rating agency that evaluates mutual funds and corporate debts.
Debt Funds	Funds that invest primarily in debt instruments.
Direct Funds	Mutual funds purchased directly from AMCs, bypassing intermediaries.
Dividend Schemes	Mutual fund schemes that offer regular dividends to investors.
ELSS (Equity Linked Savings Scheme)	Tax-saving mutual funds that offer tax exemptions under section 80C.
Equity Mutual Funds	Funds that invest in the stocks of publicly listed companies.
ETF (Exchange Traded Funds)	Mutual funds traded on stock exchanges similar to stocks.
Exit Load	A fee charged for withdrawing investments from a mutual fund within a specified period.
Expense Ratio	The annual fee expressed as a percentage of AUM, covering fund management expenses.
Face Value	The nominal value of a security that indicates its worth at issuance.
Fund Manager	The professional responsible for making investment decisions in a mutual fund.
Fund of Funds	A mutual fund that invests in other mutual funds.
Gilt Funds	Mutual funds that invest solely in government bonds.
Gold Funds	Mutual funds investing in various forms of gold, including physical gold and gold mining companies’ stocks.
Growth Plan	A mutual fund option where dividends are reinvested in the fund.
Holdings	The securities held within a mutual fund’s portfolio.
Index Funds	Funds designed to replicate the performance of a specific market index.
Investment Objective	The goal set by an AMC for the performance of a mutual fund.
KYC (Know Your Customer)	Mandatory identity verification for investors as per SEBI guidelines.
Large Cap Funds	Funds that invest in companies with a large market capitalization.
Launch Date	The date on which a mutual fund scheme is introduced.
Liquid Funds	Mutual funds investing in short-term, high-liquidity money market instruments.
Lock-in Period	A specified period during which investors cannot withdraw their investments from a fund.
Long Term	An investment horizon of more than 5 years.
Market Cap (Market Capitalization)	The total market value of a company’s outstanding shares.
Mean Returns	The average returns generated by a fund over a specified period.
Mid Cap Funds	Funds investing in mid-sized companies with moderate market capitalization.
Min Additional Investment	The minimum amount required for subsequent investments in a mutual fund.
Min Investment	The minimum initial investment required to buy into a mutual fund.
Money Market Fund	Funds that invest in short-term, high-credit-quality financial instruments.
NAV (Net Asset Value)	The per-share value of a mutual fund’s assets minus its liabilities.
NFO (New Fund Offer)	The initial offering period for a new mutual fund, allowing it to raise capital.
Nifty	A major stock index in India representing the weighted average of 50 of the largest Indian companies.
Nominee	The designated individual to receive the benefits of an investment in the event of the investor’s death.
PAN (Permanent Account Number)	A unique identifier issued by the Indian Income Tax Department for financial transactions.
Portfolio	The collection of investments held by an individual or institution.
PSU (Public Sector Undertaking)	Government-owned corporations in India.
Rating	An evaluation of a financial instrument’s creditworthiness or quality.
Redeem	The process of selling mutual fund units back to the fund.
Redemption	The act of withdrawing funds from a mutual fund.
Regular Funds	Mutual funds purchased through an intermediary, such as an advisor or broker.
Returns	The profit or loss generated from an investment over a certain period.
Risk	The potential for losing money on an investment.
Risk-Free Rate	The theoretical rate of return of an investment with zero risk.
RTA (Registrar and Transfer Agent)	A firm that keeps track of the issuance and transfer of mutual fund units.
Sector Allocation	The distribution of a mutual fund’s investments across different sectors.
Sector Funds	Funds that invest specifically in sectors or industries.
Sensex	A stock market index representing 30 of the largest and most established companies in India.
Sharpe Ratio	A measure of risk-adjusted return, developed by Nobel laureate William F. Sharpe.
Short Term	An investment period of less than 12 months.
SID (Scheme Information Document)	A detailed document that provides information about a mutual fund.
SIP (Systematic Investment Plan)	A method of investing a fixed amount in a mutual fund at regular intervals.
SIP Minimum	The minimum amount required to invest in a mutual fund through SIP.
Small Cap Funds	Funds investing in companies with a small market capitalization.
Standard Deviation	A statistical measure of the variance of a fund’s returns.
STP (Systematic Transfer Plan)	A plan that allows investors to transfer investments from one mutual fund to another within the same AMC.
SWP (Systematic Withdrawal Plan)	A plan allowing investors to withdraw a specific amount from a mutual fund at regular intervals.
Ultra Short-Term Funds	Mutual funds that invest in debt securities with very short maturities, offering slightly higher returns than liquid funds.
UTR (Unique Transaction Reference)	A number provided by banks for identifying NEFT or RTGS transactions.
XIRR (Extended Internal Rate of Return)	A method used to calculate returns on investments that have multiple cash flows at irregular intervals.
Suspended Fund	A mutual fund that has halted new investments either through SIPs or lump-sum payments.
Units	Represent the portion of ownership an investor holds in a mutual fund.
Folio	A unique identification number assigned to an investor’s holdings in mutual funds.
YTM (Yield to Maturity)	The total return expected on a bond if held until maturity.
Modified Duration	A measure of the sensitivity of a bond’s price to changes in interest rates.
IFSC Code	An 11-character code used in India to uniquely identify a bank branch for electronic payments.
Biller	An entity authorized to collect payments from individuals or organizations.
ISIP (Internet-based Systematic Investment Plan)	A completely paperless method of setting up SIPs.
Stocks	Shares that represent ownership in a corporation.
Shares	Units of stock that represent an ownership interest in a company.
Bonds	Debt securities issued by corporations or governments to raise funds.
Open-ended Funds	Mutual funds that continuously issue and redeem units based on demand.
Closed-ended Funds	Mutual funds that have a fixed number of shares and are traded on stock exchanges.
Global Funds	Mutual funds that invest in assets located around the world.
Min Withdrawal	The minimum amount that must be withdrawn by an investor from a mutual fund.
KIM (Key Information Memorandum)	A document providing essential information about a mutual fund scheme.
Indexation	The adjustment of the income thresholds in tax calculations to account for inflation.
Income Funds	Funds that aim to provide regular income to investors through dividends or interest payments.
Government Securities	Bonds issued by a government authority with a promise of repayment upon maturity.
Securities	A broad term for financial instruments that represent some form of financial value.
Floating Rate	An interest rate that varies over the lifetime of the loan or investment.
Equity Schemes	Mutual fund schemes that primarily invest in stocks.
AMFI (Association of Mutual Funds in India)	An industry standards organization for mutual funds in India.
SEBI (Securities and Exchange Board of India)	The regulator for securities and commodity market in India under the jurisdiction of Ministry of Finance, Government of India.

To Wrap It Up…

Before buying a mutual fund, investors should conduct thorough due diligence. This advice stands for any investor, beginner or otherwise. While certain aspects may seem convenient, it’s crucial to consider key factors, features and strategies. Investing in mutual funds has multiple reasons, and conducting even a small amount of research can be the deciding factor, providing a sense of security.

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