How mutual funds work

To many people, mutual funds can seem complicated or intimidating. Essentially, a mutual fund is created when a large number of people (or investors) pool their money together. This collective pool of funds is then managed by a professional fund manager.
EXPLORE FUNDS
How mutual funds work
EXPLORE FUNDS
4 mins
25-July-2024

Mutual funds have risen as a highly favoured investment choice in India, providing individuals with a chance to engage in financial markets even without extensive expertise. Through a broad spectrum of choices and investment approaches, mutual funds have transformed the landscape of investing, ensuring it's open to a broader set of people. Now, let's delve into the inner workings of mutual funds in India, investigating their diverse classifications, operations, approaches to investment, and the returns they offer.

How do mutual funds work?

The operation of mutual funds involves several key steps:

  1. Fund Creation: A mutual fund is created when an asset management company (AMC) designs a fund with a specific investment objective, strategy, and risk profile.
  2. Pooling Funds: Investors who want to invest in the fund purchase units at the current Net Asset Value (NAV). The NAV is the per-unit value of the fund's net assets (Assets minus liabilities).
  3. Portfolio Management: Skilled fund managers oversee the investment process. They research and select securities to build a diversified portfolio aligned with the fund's objectives. A fee is charged by the fund houses for management of the funds called management fees.
  4. Regular Reporting: Fund managers takes care that regular updates are provided to investors about the fund's performance, holdings, and any changes in strategy by the AMC.
  5. Redemption and Exit: Investors can sell their units back to the fund at the prevailing NAV. The redemption process provides liquidity to investors. Certain mutual funds may charge an Exit Load, serving as a charge or fee if investors withdraw prematurely (prior to a defined duration) from the fund.

Top performing funds

Equity

Debt

Hybrid

Tax saver

View All
View all
cross

Search Mutual Funds & Add to Compare

search

Frequently asked questions

Is it good to invest in equity funds?

Investing in equity funds may be a good option for those who are willing to take on some level of risk in order to achieve potentially higher returns. Equity mutual funds pool together money from various investors to buy ownership in companies that are publicly traded.

Are equity funds high risk?

Equity funds do carry higher risk, as they invest in the stock market, which can be volatile and unpredictable. However, this higher risk also comes with the potential for higher returns over the long term. It is important to understand that equity funds are a long-term investment option and investors should have a clear understanding of their risk tolerance and investment goals before investing in these funds.

What are equity funds with examples?

Equity funds are a type of mutual fund that invests primarily in stocks or equity securities of various companies. Examples of equity funds include large-cap funds, mid-cap funds, small-cap funds, sectoral funds, and index funds. Large-cap funds invest in large and well-established companies, mid-cap funds invest in medium-sized companies, while small-cap funds invest in small and growing companies. Sectoral funds, on the other hand, invest in a specific sector, such as technology, healthcare, or energy. Finally, index funds invest in the same securities that make up a particular market index, such as the Nifty 50 or the BSE Sensex.

How do I buy mutual funds?

To buy mutual funds, choose a fund, open an account with a fund house or a trusted platform like Bajaj Finserv, complete necessary documentation, and invest the desired amount. You can also buy funds directly through the asset management companies.

How Do You Purchase a Mutual Fund?

Purchasing a mutual fund involves selecting a specific fund, completing the required paperwork, and investing money. You can buy directly from the fund house or use financial advisors or trusted online platforms like the Bajaj Finserv Platform to facilitate the process.

What Should You Keep in Mind When Buying a Mutual Fund Online?

When buying a mutual fund online, consider factors like the fund's past performance, expense ratio, investment objective, and risk profile. Ensure the online platform is secure, and understand the terms and conditions, fees, and any additional features before making the purchase.

What happens if I invest 1 lakh in mutual fund for 10 years?

The growth of your investment over 10 years would depend on the performance of the mutual fund. Typically, mutual funds aim to generate returns higher than traditional savings options, potentially resulting in significant growth over the long term.

What if I invest 30,000 a month in SIP for 5 years?

By investing 30,000 a month through a Systematic Investment Plan (SIP) over 5 years, you would accumulate wealth through regular contributions. The final value of your investment would depend on factors such as the rate of return and market performance during the investment period. Assuming you get a return of 12% per annum, than the value of your investment after 5 years will be Rs. 24,74,591.

What are the categories of mutual funds?

Mutual funds are categorised based on their investment objectives and asset allocation strategies. Common categories include equity funds, debt funds, hybrid funds, and thematic/specialty funds, each catering to different investor preferences and risk profiles.

How many ways can we invest in mutual funds?

Investors can invest in mutual funds through various channels, including regular plans offered by brokers and online platforms. Each channel offers different levels of convenience and assistance in managing investments.

How does your money grow in a mutual fund?

In a mutual fund, your money grows through capital appreciation and/or income generated by the underlying investments held within the fund's portfolio. This growth is influenced by factors such as the performance of the securities held, changes in market conditions, and the fund manager's investment decisions.

Show More Show Less

Related Videos

Bajaj Finserv app for all your financial needs and goals

Trusted by 50 million+ customers in India, Bajaj Finserv App is a one-stop solution for all your financial needs and goals.

You can use the Bajaj Finserv App to:

  • Apply for loans online, such as Instant Personal Loan, Home Loan, Business Loan, Gold Loan, and more.
  • Explore and apply for co-branded credit cards online.
  • Invest in fixed deposits and mutual funds on the app.
  • Choose from multiple insurance for your health, motor and even pocket insurance, from various insurance providers.
  • Pay and manage your bills and recharges using the BBPS platform. Use Bajaj Pay and Bajaj Wallet for quick and simple money transfers and transactions.
  • Apply for Insta EMI Card and get a pre-approved limit on the app. Explore over 1 million products on the app that can be purchased from a partner store on Easy EMIs.
  • Shop from over 100+ brand partners that offer a diverse range of products and services.
  • Use specialised tools like EMI calculators, SIP Calculators
  • Check your credit score, download loan statements, and even get quick customer support—all on the app.

Download the Bajaj Finserv App today and experience the convenience of managing your finances on one app.

Do more with the Bajaj Finserv App!

UPI, Wallet, Loans, Investments, Cards, Shopping and more

GET THE APP

Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.

Disclaimer:

Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319

BFL does NOT:

(i) provide investment advisory services in any manner or form:

(ii) carry customized/personalized suitability assessment:

(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.

In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

Disclaimer on Risk-O-Meter:

Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.