A mutual fund collects money from many investors and invests it according to a published objective. You own units; the value of a unit is the Net Asset Value (NAV), which is the fund’s holdings less its liabilities, divided by the units outstanding.
The main categories
- Equity funds invest predominantly in shares. Higher variability, longer suitable horizon.
- Debt funds invest in fixed-income instruments. Generally lower variability, but not risk-free - they carry interest-rate and credit risk.
- Hybrid funds hold a mix of both in a stated proportion.
- Index funds and ETFs track a benchmark rather than selecting securities.
Costs that reduce your return
- Expense ratio - the annual cost of running the fund, deducted from the NAV. It applies whether the fund gains or loses.
- Exit load - a charge for redeeming within a stated period.
- Taxes on capital gains, which depend on the category and holding period.
Direct and regular plans
The same scheme is usually offered in a direct plan and a regular plan. The regular plan includes distributor commission in its expense ratio; the direct plan does not. Both hold the same portfolio.
Reading a factsheet
Look at the stated objective, the benchmark, the portfolio composition, the expense ratio, the fund manager’s tenure and the riskometer. Returns shown are historical and describe what happened, not what will happen.
Educational content. This article explains general concepts. It is not investment advice, does not recommend any security or scheme, and takes no account of your personal circumstances. Investments in securities are subject to market risks.