Mutual Funds

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Mutual Funds

A mutual fund is formed when capital collected from different investors is invested in company shares, stocks or bonds. Shared by thousands of investors (including you), a mutual fund is managed collectively to earn the highest possible returns. The person driving this investment vehicle is a professional fund manager.

Investing in mutual funds is the easiest means to grow your wealth. This is why the fund manager’s expertise (thereby the fund house’s reputation) is an important factor to consider. All mutual funds are registered with SEBI (Securities Exchange Board of India) and therefore, quite safe.

Benefits of Mutual Funds

  • Expert Money Management
  • Lock-in Period
  • Low Cost
  • SIP(Systematic Investment Plans) option
  • Flexibility to switch funds
  • Investments based on goals & focus sector
  • Diversification
  • Flexibility in terms of tenure
  • Painless trading & transaction
  • Spoilt for choice
  • Tax-Efficiency

  • How to Invest

    Direct Investment

    Investors can directly contact fund houses to apply for a scheme and save on brokerage. Get the form from the nearest branch of the fund house or download it online. Do take care to go through the fine print and clear all your queries before deciding.


    These are sales professionals who reach out to potential customers and inform them on the different fund options. You can choose based on your income, investment goal and risk profile. The agent can help you with applications, redemption, transactions and cancellation among others. They charge commissions for their services.

    Online (Distributors/Fund Houses)

    Buying/selling a mutual fund unit online is almost the norm today. This not only saves time and effort but also makes it easy to compare funds and make informed decisions. ClearTax is one such portal that handpicks the best mutual funds from country’s top fund houses for you at zero costs. Just enter your details and make the online payment in less than 5 minutes.

    Types of Funds

    Equity Funds

    Equity funds invest money collected from individual investors into shares of different companies. When the price of the share rises, the investors make a profit and vice versa.Equity funds are suitable for those who stay invested for a long time and who have a higher risk appetite. Equity funds aim to generate high returns by investing in the shares of companies of different market capitalization. They generate higher returns than debt funds or fixed deposits. How the company performance results in profit or loss decides how much an investor can make based on his shareholdings.

    An equity fund invests 60% or more of its assets in equity shares of companies in varying proportions. This should be in line with the investment mandate. It might be a purely large-cap, mid-cap or small-cap fund or a mixture of market capitalization. Moreover, the investing style may be value-oriented or growth-oriented. After allocating a major portion of equity shares, the remaining amount will go to debt and money market instruments. This is to take care of sudden redemption requests as well as bring down the risk level to some extent. The fund manager makes buying or selling decisions to take advantage of the changing market movements and reap maximum returns.

    Who should Invest in Equity Funds?

    Your decision to invest in equity funds must align to your risk tolerance, investment horizon and goals. Generally, if you have a long-term goal (say, 5 years or more), it is better to go for equity funds. It will also give the fund ample time to ride out the market fluctuations.

    For budding investors

    If you are a budding investor who wants to have exposure to the stock market, then large-cap equity funds may be the right choice. These funds invest in equity shares of the top 100 companies of the stock market. These well-established companies have been historically delivering stable returns over the long-term.

    For market savvy investors

    In case you are well-versed with the market pulse but want to take calculated risks, you may think of investing in diversified equity funds. These invest in shares of companies across market capitalisation. These give optimum combination of high return and lesser risk as compared to equity funds that only invest in small-cap/mid-caps.

    Benefits of Investing in Equity Funds The benefits of investing in mutual funds are many:

  • Expert money management
  • Low Cost
  • Convenience
  • Diversification
  • Systematic investments
  • Flexibility
  • Liquidity
  • The major benefit of investing in equity funds is that you don't need to worry about choosing stocks and sectors to invest in. Successful equity investing requires a lot of research and knowledge. You need to dig deep into the financials of a company before you invest in it. You also need to have an understanding of how a particular sector is expected to perform in the future. Of course, all of this requires a lot of time and effort, which most common investors don't have. Hence, the solution is to leave the stock picking to an expert fund manager by investing in an equity fund.

    Debt Fund

    Buying a debt instrument is similar to giving a loan to the issuing entity. A debt fund invests in fixed-interest generating securities like corporate bonds, government securities, treasury bills, commercial paper and other money market instruments. The basic reason behind investing in debt fund is to earn interest income and capital appreciation. The issuer pre-decides the interest rate you will earn as well as maturity period. That’s why they are called ‘fixed-income’ securities because you know what you’re going to get out of them.

    How do Debt Funds work?

    Debt funds invest in different securities, based on their credit ratings. A security’s credit rating signifies whether the issuer will default in disbursing the returns they promised. The fund manager of a debt fund ensures that he invests in high credit quality instruments. A higher credit rating means that the entity is more likely to pay interest on the debt security regularly as well as pay back the principal amount upon maturity. This is why debt fund which invest in higher-rated securities will be less volatile, compared to low-rated securities. Additionally, the maturity also depends on the investment strategy of the fund manager and the overall interest rate regime in the economy. A falling interest rate regime encourages the manager to invest in long-term securities. Conversely, a rising interest rate regime encourages him to invest in short-term securities.

    This is why debt fund which invest in higher-rated securities will be less volatile, compared to low-rated securities. Additionally, the maturity also depends on the investment strategy of the fund manager and the overall interest rate regime in the economy. A falling interest rate regime encourages the manager to invest in long-term securities. Conversely, a rising interest rate regime encourages him to invest in short-term securities.

    Who should Invest in Debt Funds?

    Debt funds try to optimize returns by diversifying across different types of securities. This allows debt funds to earn decent returns, but there is no guarantee of returns. However, debt fund returns often falls in a predictable range. This makes them safer avenues for conservative investors. They are also suitable for people with both short-term and medium-term investment horizons. Short-term ranges from 3 months to 1 years, while medium term ranges from 3 years to 5 years.

    Types of Debt Funds

    Dynamic Bond Funds

    As the name suggests, these are ‘dynamic’ funds, which means that the fund manager keeps changing portfolio composition according to changing interest rate regime. Dynamic bond funds have a fluctuating average maturity period because these funds take interest rate calls and invest in instruments of longer as well as shorter maturities.

    Income Funds

    Income Funds can also take a call on interest rates and invest in debt securities with different maturities, but most often, income funds invest in securities that have long maturities. This makes them more stable than dynamic bond funds. The average maturity of income funds is around 5-6 years.

    Hybrid Fund

    Hybrid funds invest in both debt instruments and equities to achieve maximum diversification and assured returns. A perfect blend! The choice of hybrid fund depends on your risk preferences and investment objective.

    How do Hybrid Funds work?

    Hybrid funds aim to achieve wealth appreciation in the long-run and generate income in the short-run via a balanced portfolio. The fund manager allocates your money in varying proportions in equity and debt based on investment objective of the fund. The fund manager may buy/sell securities to take advantage of market movements.

    Who should invest in Hybrid Funds?

    Hybrid funds are regarded as safer bets than pure equity funds. These provide higher returns than pure debt funds and are a favourite among conservative investors. Budding investors who are eager to take exposure in equity markets can think of hybrid funds as the first step. As these are an ideal blend of equity and debt, the equity component helps to ride the equity wave. At the same time, the debt component of the fund provides a cushion against extreme market turbulence. In that way, you receive stable returns instead of a total burnout that might be possible in case of pure equity funds. For the less conservative category of investors, the dynamic asset allocation feature of some hybrid funds becomes a great way to milk the maximum out of market fluctuations.