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What are Mutual Funds & How Do They Work?

What are Mutual Funds & How Do They Work?
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As individuals, it is essential to have a basic understanding of personal finance. One aspect of personal finance is investment, and mutual funds are a popular investment option for many people. In this blog post, we will provide an overview of what they are, how they work, and the benefits and risks of investing in them. Let us being by understanding mutual funds and what are they.

What is a Mutual Fund?

A mutual fund is a popular investment vehicle for individuals who want to diversify their portfolios and grow their wealth over time. They are a type of investment fund that pools money from different investors. Uses to purchase a portfolio of assets, such as stocks, bonds, and other securities. These are managed by professional fund managers who make investment decisions on behalf of the investors. There are different types of mutual funds, including equity funds, debt funds, balanced funds, index funds, and sectoral funds. Now that we’ve explored the mutual fund definition, let’s look at an educational list of MFs. 

List of Best Mutual Funds in India 2024

Here is a list of the top 10 mutual funds in India that you can consider investing in 2024

Fund Name3-Year-Return (%)5-Year-Return (%)
Quant Small Cap Fund Direct Plan45.83%33.47%
Bank of India Small Cap Fund35.34%32.53%
Quant Infrustructure Fund41.00%31.61%
Quant ELSS Tax Saver Fund33.82%30.45%
Nippon India Small Cap Fund41.41%29.45%
Quant Mid Cap Fund35.25%28.69%
Axis Small Cap Fund31.22%28.10%
Aditya Birla Sun Life Digital India Fund23.71%27.96%
Kotak Small Cap Fund32.34%27.87%
Tata Small Cap Fund37.80%27.85%
Disclaimer: Please note that the above list is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing.

Note: The data on the top mutual fund in India in the list is from 26th January, 2024.  However, for real-time updates on stock prices and market trends, visit the smallcase stocks collection today!

Top 10 Mutual Fund Investments Overview

Let’s discuss the best mutual funds to invest in India and learn about mutual funds listed above. 

Quant Small Cap Fund Direct Plan

Aimed at capitalizing on the growth potential of small-cap companies, this fund, offered in a direct plan, is managed by Quant Mutual Fund. It seeks to generate long-term capital appreciation by investing in small-cap stocks.

Bank of India Small Cap Fund

Managed by Bank of India Mutual Fund. This small-cap fund aims to achieve capital appreciation by primarily investing in stocks of small-cap companies. It is designed for investors seeking growth opportunities in the small-cap segment.

Quant Infrastructure Fund

This fund, managed by Quant Mutual Fund, focuses on the infrastructure sector. It aims to provide long-term capital growth by investing in stocks of mutual fund company engaged in infrastructure-related activities. This includes construction and development.

Quant ELSS Tax Saver Fund

Offered by Quant Mutual Fund, this Equity Linked Savings Scheme (ELSS) is designed for tax-saving purposes. Investors can avail tax benefits under Section 80C of the Income Tax Act while seeking capital appreciation through equity investments.

Nippon India Small Cap Fund

Managed by Nippon India Mutual Fund, this small-cap fund targets long-term capital appreciation by investing predominantly in small-cap stocks. It offers investors exposure to the potential high-growth opportunities in smaller companies.

Quant Mid-Cap Fund

This fund from Quant Mutual Fund focuses on the mid-cap segment of the market. It aims to generate capital appreciation by investing in mid-cap stocks. It can cater to investors looking for growth potential beyond large-cap companies.

Axis Small Cap Fund

Managed by Axis Mutual Fund. This small-cap fund seeks to provide long-term capital appreciation by investing primarily in small-cap stocks. It is suitable for investors with a higher risk appetite looking for potential high returns.

Aditya Birla Sun Life Digital India Fund

This thematic fund is managed by Aditya Birla Sun Life Mutual Fund. Primarily focuses on the digital and technology sectors. It aims to capitalize on the growth potential in the digital space, offering investors exposure to technology-driven companies.

Kotak Small Cap Fund

Managed by Kotak Mahindra Mutual Fund. This small-cap fund aims to generate capital appreciation by primarily investing in small-cap stocks. It may cater to investors seeking growth opportunities in smaller companies.

Tata Small Cap Fund

This small-cap fund is managed by Tata Mutual Fund. It seeks to provide long-term capital appreciation by investing predominantly in small-cap stocks. It is designed for investors looking for growth potential in smaller companies.

How Mutual Funds Work?

As mentioned earlier, MFs pool money from different investors and use the funds to purchase a portfolio of assets. When investors buy mutual fund units, they become shareholders in the mutual fund, and the fund manager uses the pooled money to buy the portfolio of assets.

The fund manager manages the investments, buying and selling assets to generate highest return mutual fund for investors. Thus, the performance of a mutual fund is reflected in its net asset value (NAV), which represents the value of the assets held by the fund minus any liabilities.

Features of Mutual Fund Investment

Mutual fund investment boasts a unique set of features that make it attractive to a wide range of investors. Here are some key features you should consider:

  • Professional Management: You don’t need to be a market expert. Experienced fund managers research, select, and manage a diversified portfolio of investments on your behalf, saving you time and effort.
  • Diversification: MFs pool money from multiple investors, allowing you to own a basket of various assets within a single investment. This spreads your risk across different sectors and reduces the impact of individual security fluctuations.
  • Affordability: Many actively managed mutual funds have low minimum investment requirements, making them accessible even to small investors. You can start investing with as little as ₹500 through Systematic Investment Plans (SIPs), making it easier to gradually build your wealth.
  • Liquidity: Most open-ended mutual funds offer daily redemption, allowing you to easily access your invested capital if needed. This can provide a degree of flexibility compared to some other investment options.
  • Convenience: Investing in MFs is simple and convenient. You can easily purchase and redeem units online or through various financial institutions, eliminating the need for complex transaction processes.
  • Transparency: Fund houses provide regular updates on fund performance, portfolio holdings, and fees, allowing you to stay informed about your investment. Let us now look at types of funds.

What are the Types of Mutual Funds in India?

There are various types of mutual funds, including:

  • Equity Funds: These funds invest primarily in stocks or equity-related instruments of companies. 
  • Debt Funds: These funds invest primarily in fixed income instruments like bonds, debentures, and government securities.
  • Balanced Funds: These funds invest in a mix of equity and debt instruments, maintaining a balanced portfolio.
  • Index Funds: These funds invest in securities that replicate a particular market index like NIFTY or BSE.
  • Sector Funds: These funds invest in specific sectors like infrastructure, pharmaceuticals, or technology.

Who Should Invest in Mutual Funds?

Mutual fund investing can be suitable for a wide range of investors with varying financial goals and risk appetites. Individuals who may not have the expertise or time to manage their investments can benefit from MFs, as they pool their money with other investors and rely on professional fund managers to make investment decisions. Additionally, investors who might be in the early stages of their careers may find mutual funds a convenient way to start investing with relatively lower amounts. Additionally, those with a moderate risk tolerance looking for a diversified investment approach may also consider MFs. 

As always, investors must do their own research and/or consult their financial advisor before investing.

Factors to Consider Before Investing in Mutual Fund Investments

Let’s learn about the important aspects of mutual funds investing. 

  • Investment Goals and Risk Tolerance: Clearly define your investment objectives and assess your risk tolerance before venturing into MFs.
  • Expense Ratios and Fees: Examine the expense ratios and associated fees of mutual funds. These costs can significantly impact your returns over time. Opt for funds with competitive expense ratios. Be aware of any front-end or back-end loads, as these can affect the overall profitability of your investment.
  • Expense Ratios and Fees: Examine the expense ratios and associated fees of mutual funds. These costs can significantly impact your returns over time. Opt for managed funds with competitive expense ratios. Be aware of any front-end or back-end loads, as these can affect the overall profitability of your investment.
  • Diversification and Portfolio Composition: Consider the fund’s asset allocation and portfolio composition. Diversification helps spread risk, reducing the impact of poor performance in any single investment. Assess whether the fund aligns with your desired level of diversification and if it complements your existing investment portfolio.
  • Managerial Expertise and Stability: Investigate the fund manager’s experience, track record, and investment philosophy. A seasoned and stable management team can play a crucial role in the fund’s success.

How to Invest in Mutual Funds for Beginners in India?

Here’s a step-by-step guide on how to invest in mutual funds:

  • Identify your investment goals and risk appetite.
  • Determine your investment horizon.
  • Choose the best mutual fund type that suits your investment goals and risk tolerance.
  • Choose between a lump-sum investment or a systematic investment plan (SIP).
  • Select a mutual fund image scheme and complete the KYC formalities.
  • Invest in the mutual fund through an online platform or offline mode.

Now that we know the mutual funds definition, let’s see a few reasons to invest in them.

Why Invest in Mutual Funds in India?

In India, mutual funds offer a smart route to wealth creation for several reasons. For starters, you gain access to professional expertise, letting seasoned fund managers navigate the market on your behalf. This saves you time and research while offering diversification across a basket of assets, protecting you from putting all your eggs in one basket. Plus, with small investment amounts and flexible options like SIPs, even small savings can blossom into long-term wealth. And lastly, many mutual funds boast tax benefits,  adding an extra layer of sweetness to your financial goals. So, dive into the world of mutual funds in India and watch your money grow, stress-free and steadily.

How to Buy & Sell Mutual Funds?

Selling active mutual funds can be done in a few simple steps. The process of selling mutual funds depends on the type of fund and where the investment is held. Here are the general steps:

  • Contact the investment firm: The first step to selling mutual funds is to contact the investment firm that holds the fund. This can be done online, by phone, or by visiting a branch office.
  • Provide account information: To sell mutual funds, the investment firm may ask for account information. Such as the fund name, mutual fund account number, and the number of mutual fund shares to be sold.
  • Place the sell order: After providing the necessary information, the sell order can be placed with the investment firm. The price at which the shares are sold is based on the net asset value (NAV) of the fund at the time of the sale.
  • Confirm the sale: Once the sell order is placed, the investment firm will confirm the sale. The proceeds from the sale are then deposited into the investor’s account.

It is important to note that there may be mutual fund fees associated with selling mutual funds, such as transaction fees or redemption fees.

How to Choose a Mutual Fund? 

To find the best mutual funds to invest in, you should look at the following:

  • Define Your Investment Objectives and Risk Tolerance: Before investing in a mutual fund, you need to determine your investment goals and risk tolerance. If you are looking for long-term investment, you may want to invest in equity funds. Conversely, if you want to avoid volatility, bond funds or balanced investment funds might be a better option.
  • Look for Consistent Performance: While past performance does not guarantee future mutual fund returns. It is an excellent indicator of how a fund has performed historically. Look for a mutual fund that has consistently performed well over the years.
  • Check Fund Manager Track Record: The fund manager is responsible for managing the fund and making investment decisions. Look for a fund manager who has a track record of success.

How Mutual Fund Returns are Generated?

Mutual funds generate mutual fund type of returns for investors through dividends, interest income, and capital gains. When the mutual fund earns income from its investments, it distributes that income to its investors in the form of dividends. Interest income is earned when the mutual fund invests in fixed-income securities like bonds. Capital gains are realized when the mutual fund sells securities at a higher price than it paid for them.

Mutual Funds Fees and Charges 

  • Entry Load: An entry load is a one-time fee that is charged when you invest in a mutual fund. It is expressed as a percentage of the amount invested, and it can range from 0% to 2.5%. The entry load is deducted from the investment amount.
  • Expense Ratio: The cost of managing a mutual fund and expressed as a percentage of the fund’s assets under management (AUM). This fee covers the fund’s operational expenses, including the fund manager’s salary, administrative expenses, marketing costs, etc. Investors should look for MFs with a low expense ratio to maximize their returns. 
  • Exit Load: An exit load is a fee that is charged when you sell your different categories of  mutual fund units. It is expressed as a percentage of the amount redeemed, and it can range from 0% to 5%. The exit load is deducted from the redemption amount. It is important to note that the exit load varies depending on the duration of the investment. Learning more about mutual funds fees and charges would help investors understand how to learn mutual funds investing.

Benefits and Risks of Investing in Mutual Funds 

Before finding the best online mutual funds to invest in, it is important to understand the benefits and risks associated with this investment vehicle. Here are some benefits and risks of that one should consider before learning mutual fund investing:

Diversification of Portfolio:Investing in mutual funds allows for diversification of your portfolio, which can help to minimize risks.Market Risks: The value of the assets held by mutual funds is subject to market fluctuations, and hence, the mutual fund returns are also subject to market risks.
Professional Management: Mutual funds are managed by experienced fund managers who have the necessary expertise to make investment decisions on behalf of the investors.Managerial Risks: The performance of mutual funds is dependent on the skill and expertise of the fund manager. Poor investment decisions made by the fund manager can result in losses for investors.
Easy Accessibility and Affordability: Investing in mutual funds is easy, and anyone can invest in mutual funds with as little as Rs. 500.Credit Risks: Investing in debt mutual funds comes with the risk of credit defaults, which can result in the mutual fund losing value.
Higher Returns compared to Traditional Savings Options:Highest return in mutual fundscompared to traditional savings options such as fixed deposits, saving accounts, and recurring deposits.Liquidity Risks: Some mutual funds have a lock-in period, which means that investors cannot withdraw their funds before a specified period. This can be a disadvantage if the investor requires funds urgently.

Evaluating Mutual Fund Returns

Here are some of the factors that are crucial while evaluating mutual fund performance.

  • Use Performance Metrics: When evaluating a mutual fund’s performance, you need to use some performance metrics, such as absolute return, relative return, and risk-adjusted return. These metrics help you compare the performance of all the best performing mutual funds.
  • Compare Fund Performance Against its Benchmark: MFs have benchmarks against which their performance is measured. Compare a mutual fund’s performance against its benchmark to determine whether it is the best performing mutual fund or not.
  • Analyze the Portfolio: Mutual funds invest in different stock funds and bonds. Analyze the portfolio to determine whether it is aligned with your investment goals and risk tolerance.

Who Can Buy Mutual Funds?

MFs can be bought by any individual who is eligible to invest in securities as per the regulations of the Securities and Exchange Board of India (SEBI). This includes resident individuals, non-resident Indians (NRIs), Hindu Undivided Families (HUFs), trusts, and corporate entities. However, the eligibility criteria and investment limits may vary for different types of mutual fund schemes. 

For instance, some schemes may be available only to resident individuals, while others may have higher investment limits for institutional investors. It is important to understand the eligibility criteria and investment objectives of different mutual fund schemes before making an investment decision. It is also advisable to consult a financial advisor to assess the suitability of mutual fund investments based on one’s financial goals, risk appetite, and investment horizon.

Also, you may like to read: Difference between Mutual funds and ETFs

Impact of Investing in Mutual Funds on Your Financial Portfolio

Investing in mutual funds can have a significant impact on your financial portfolio. Mutual Funds offer the benefit of diversification. This means that your money is invested in a wide range of assets, reducing the risk of losing all your money if one asset underperforms.

Investing in mutual funds also allows you to access a wide range of asset classes. Such as equities, debt, gold, and international assets. This enables you to create a diversified portfolio and balance out risk and returns.

The returns on mutual funds are dependent on the performance of the underlying assets. Historically, equities have provided higher returns over the long term compared to other asset classes. Therefore, investing in equity-based MFs may provide higher returns but also carries a higher risk.

In addition to diversification and access to a range of asset classes, mutual funds also provide liquidity. You can easily buy and sell units of mutual funds on the stock exchange or through an online platform, making it easy to access your money when you need it.

Overall, it can help you achieve your financial goals. However, it is important to choose the right mutual fund investor based on your financial goals, risk tolerance, and investment horizon. It is also recommended to regularly review and rebalance your portfolio to ensure it remains aligned with your financial goals.

Understanding Mutual Fund Ratings

Let’s have a look at the mutual fund ratings.

  • Morningstar Ratings: Morningstar Ratings are a widely used rating system that rates mutual funds based on historical risk-adjusted performance.
  • Lipper Ratings: Lipper Ratings are another rating system that rates mutual funds based on risk-adjusted performance.
  • CRISIL Ratings: CRISIL Ratings are India’s leading mutual fund options rating system, providing an independent assessment of a mutual fund’s quality.

Taxability on Mutual Fund Investments

The taxation of capital gains in mutual funds is contingent on the type of scheme and the duration of holding the units. Let’s delve into these aspects in detail.

To begin, let’s elucidate the concepts of long-term capital gains (LTCG) and short-term capital gains (STCG). LTCG arises from holding an asset for an extended period, whereas STCG stems from the sale of assets held for a relatively brief duration.

The definitions of long and short durations vary for equity and debt schemes concerning tax implications. For example, to qualify as a long-term capital gain in equity-oriented schemes, the holding period must be a minimum of 12 months. While for debt-oriented schemes, it extends to 36 months. The table below provides a concise summary of the requisite holding periods for capital gains to be categorized as long-term and short-term

Type of Mutual FundHolding Period on STCGHolding Period on LTCG
Equity FundsLess than 12 monthsMore than 12 months
Debt FundsLess than 36 monthsMore than 36 months
Hybrid Fund-Equity FundedLess than 12 monthsMore than 12 months
Hybrid Fund-Debt FundedLess than 36 monthsMore than 36 months

What is the Difference Between smallcase and Mutual Fund?

smallcase vs mutual fund are two distinct types of investment vehicles. Let’s look and learn mutual fund investments and how it is different from smallcase. However, smallcase is a  basket of stocks or exchange-traded funds (ETFs) centered around a theme or strategy. Mutual Funds pools money from various investors to invest in a diversified portfolio of stocks, bonds, or other securities. Investors own units or shares of the mutual fund.

FeaturesmallcaseMutual Fund
StructurePortfolio of pre-selected stocks curated by the platformPool of money from multiple investors managed by a fund manager
Investment ChoiceYou choose from curated portfoliosLimited control over individual holdings
ManagementNo active management (you invest & exit as you please)Actively managed by professional fund managers
DiversificationLimited within the chosen smallcaseTypically more diversified across various sectors and asset classes
Minimum InvestmentLower; often ₹100 or lessVaries depending on the fund; could be ₹500 or more
TransparencyFull transparency of underlying holdings and their weightagesLess transparent; detailed portfolio composition might not be readily available
CostsLower expense ratios (0.5-1.5%)Higher expense ratios (1-2.5%)
FlexibilityHigh; easily invest, modify, or withdraw from smallcasesLower; lock-in periods might apply, exit loads common
ControlMore control over your holdings and investment timingLess control; relies on fund manager’s decisions
SuitabilityGood for beginners, DIY investors, and those seeking specific themes/strategiesGood for passive investors, long-term goals, and seeking professional management

To Wrap It Up…

In summary, best mutual funds offer investors a diversified investment option that is managed by professional fund managers. The minimum investment amount varies from fund to fund, and investors should focus on their investment goals rather than meeting the minimum investment requirement. Compared to other investment options, mutual funds offer higher returns in the long run.
smallcase too, can be an attractive investment opportunity for those who want to diversify their portfolios & yield significant returns. smallcase offers an excellent opportunity for portfolio investing!


1. How much money do I need to invest in mutual funds?

The minimum amount required to invest in mutual funds varies from fund to fund. Some mutual funds minimum investment amount starts as low as Rs. 100, while others may require a minimum investment of Rs. 500 or more.

2. What is mutual funds categorisation?

The category of mutual funds can be divided into three: Equity (tax benefits upto 80C of the Income Tax Act), Debt, and Hybrid.

3. How do mutual funds compare to other investment options?

Compared to other investment options like fixed deposits (FDs), the highest returns are in mutual funds. While FDs offer guaranteed returns, the returns from mutual funds are dependent on market performance. However, mutual fund returns are higher than FDs in the long run.

4. How often should I review my mutual fund investments?

For short-term investments, it is recommended to review your mutual fund investments every three to six months. For long-term investments, it is recommended to review your investments annually. However, if there are any major changes in your investment goals or market conditions, you may need to review your investments more frequently.

 Mutual Funds Investments Guides on smallcase – 

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