Mutual funds in India pool money from many investors, and a professional fund manager invests that pool in shares, bonds or both, following a stated objective. You buy units at the fund's daily price (its NAV), you own units in your own name, and SEBI regulates how every fund is run and disclosed. You can start a mutual fund SIP with as little as ₹500 a month. Mutual funds can fall in value, and no fund can promise a return.
Last updated 23 October 2026. Reviewed by the Krishna Vriddhi Capital team. Krishna Vriddhi Capital is an AMFI-registered Mutual Fund Distributor (ARN-332460) that helps investors across India by phone and video.
Key takeaways
- Mutual funds come in five broad groups under SEBI's rules: equity, debt, hybrid, solution-oriented and other. The group tells you what the fund holds and how bumpy the ride can be.
- The date you need the money decides the type of fund. Money needed within three years does not belong in equity funds. Money you will not touch for five years or more can.
- Cost and tax are knowable in advance: the expense ratio, whether you hold a direct or a regular plan, and the capital gains rules for the financial year in which you sell.
- Mutual funds are not guaranteed. The riskometer on every scheme shows its level of risk, from low to very high.
- You do not need a demat account, a large sum or market knowledge to begin. A one-time KYC and a bank account are enough.
What are mutual funds, in plain words?
Think of a mutual fund as a shared basket. Thousands of investors put money into it, and one fund manager, working for a company called an asset management company (AMC), decides what the basket holds. The basket might hold shares, government and company bonds, or a mix. Every investor owns a slice in proportion to what they put in. The slices are called units.
The price of one unit is the net asset value, or NAV. It is worked out at the end of each trading day: the value of everything the fund holds, minus its costs, divided by the number of units. If a fund's NAV is ₹50 and you invest ₹10,000, you receive 200 units. If the NAV later rises to ₹55, your 200 units are worth ₹11,000. If it falls to ₹45, they are worth ₹9,000. The numbers here show how NAV works. They are not a return to expect.
Why do people use them? A small amount buys a slice of a diversified portfolio that would be costly to build yourself, a professional manages it, and SEBI sets rules on how the money is held, valued and reported. What is a mutual fund goes through the same ideas step by step.
How do mutual funds work?
- You invest. You put in a lump sum, or set up a monthly SIP (systematic investment plan), which is only a way of investing a fixed amount on a fixed date. A SIP is not a type of fund.
- You receive units. The units are issued at that day's NAV and recorded in your name with the fund house's registrar.
- The fund manager invests the pool. The scheme follows its stated objective. An index fund copies an index. An actively managed fund picks securities to try to do better than its benchmark, and it may not succeed.
- The NAV is published daily. Your holding is worth units multiplied by NAV. It moves with the market value of what the fund holds.
- You redeem when you choose. Most open-ended funds let you sell on any working day at the NAV of that day, after any exit load. Money usually reaches your bank account within one to three working days, depending on the fund category.
The fund's assets are held by a custodian, kept separate from the AMC's own money, and overseen by trustees. That structure is part of why a mutual fund is regulated very differently from a deposit scheme run by a private company.
Types of mutual funds in India
SEBI groups funds into five broad groups so that a fund with a given name holds what the name suggests. Each group holds different things, so each carries a different risk and suits a different horizon. The table is a map. The pages linked in it explain each type in turn.
| Group | What it holds | Usually considered for money needed in | Main risk | Read more |
|---|---|---|---|---|
| Equity funds | Shares of listed companies | 5 years or more | Sharp falls, sometimes for years | Equity funds, large cap, mid cap, small cap, flexi cap, ELSS |
| Debt funds | Government and company bonds, money market instruments | A few months to about 3 years | Interest rate moves and borrower defaults | Debt funds, liquid funds, short duration, corporate bond |
| Hybrid funds | A mix of shares and bonds, sometimes gold | 3 to 5 years | Falls in the equity part; mix may shift | Hybrid funds, balanced advantage, arbitrage, multi asset |
| Solution-oriented funds | Retirement and children's goals, with a lock-in | Until the goal | Lock-in and the risk of the underlying mix | All types of mutual funds |
| Other funds | Index funds, ETFs, funds of funds | Depends on the index or fund | The risk of what they track | Index funds, ETFs, gold funds, international funds |
Equity mutual funds
Equity funds invest mostly in shares. SEBI defines the company-size categories: large cap funds invest in the 100 largest listed companies by market value, mid cap funds in companies ranked 101 to 250, and small cap funds in those ranked 251 and below. Flexi cap funds can hold companies of any size. ELSS funds are equity funds with a three-year lock-in that qualify for a deduction under the old tax regime. Equity funds can rise a lot and fall a lot, which is why they suit long horizons.
Debt mutual funds
Debt funds lend to governments and companies by buying bonds and money market instruments. They aim for steadier outcomes than equity funds, but they carry risk too. Prices of bonds fall when interest rates rise, and a company that cannot repay can cause a loss. Liquid funds, which hold very short-term instruments, are often used for a cash buffer.
Hybrid mutual funds
Hybrid funds combine equity and debt in one scheme. Some keep a fixed mix. Balanced advantage funds shift the mix with market valuations. Arbitrage funds use equity market price gaps and are taxed like equity funds. A hybrid fund can suit someone who wants one fund that manages the mix.
Index funds and ETFs
An index fund holds the same shares as an index such as the Nifty 50, in the same weights, so it costs less to run than an actively managed fund. An ETF does the same but trades on the stock exchange, which needs a demat account. Both follow the index up and down. Index funds versus active funds compares the two.
Are mutual funds safe?
They are regulated, but they are not guaranteed. Those are two different things, and the difference matters.
- What regulation does. SEBI requires a fund to keep investor assets with a custodian, to value them every day, to publish its portfolio, and to follow its stated objective. A fund house cannot dip into your units.
- What regulation does not do. It does not protect you from market losses. Equity funds can fall by a third or more from a peak in a bad market, and debt funds can lose value when rates rise or a borrower defaults.
- The riskometer. Every scheme carries a riskometer with six levels: low, low to moderate, moderate, moderately high, high and very high. Read it before you invest. It is based on what the fund holds.
- Time horizon. A longer holding period reduces the chance of a loss on a diversified equity fund. It does not remove it.
Our guide are mutual funds safe explains the risks one by one. If you want to compare them with a bank deposit, see mutual funds vs fixed deposits.
Mutual funds for beginners: how to start
If you have never invested, do the dull steps first. They decide whether the interesting step works.
- Keep a safety net. Three to six months of expenses in a savings account or a liquid fund, so an emergency does not force you to sell.
- Complete KYC. One time, online, with your PAN, Aadhaar and bank account. You do not need a demat account to buy mutual funds.
- Name the goal and the date. The date decides the type of fund, as the table above shows.
- Choose the plan. Direct and regular plans hold the same portfolio. They differ in cost and in who helps you.
- Start a SIP. Pick a date shortly after your salary arrives. ₹500 a month is enough to begin, and a SIP you can afford is one you will keep.
- Review once or twice a year. Raise the SIP each year, and leave the rest alone.
Illustrative only: ₹5,000 a month for 20 years means you invest ₹12 lakh. At an assumed return of 8%, 10% or 12% a year, that grows to about ₹29.5 lakh, ₹38.0 lakh or ₹49.5 lakh. These are assumed returns, not a forecast. Real mutual fund returns vary from year to year and can be negative. Try your own numbers below.
Move the sliders or type your own numbers.
Value after 20 years
₹75.9 lakh
- You invest
- ₹24.0 lakh
- Growth
- ₹51.9 lakh
- In today's money
- ₹23.7 lakh
Starting 5 years later: about ₹34.5 lakh less.
Want this checked against your own goals?
Illustrative only: uses the assumed return you choose, is not a forecast or a promise, and ignores costs and taxes. SIP and step-up compound monthly, lumpsum yearly; today’s money assumes 6% inflation a year. How we are paid.
Step-by-step pages: how to invest in mutual funds, how to start a SIP, SIP for beginners and how to start with ₹500. For the full plan by stage, read how to start investing in India.
What do mutual funds cost?
You pay for them in three ways, and all of them can be checked before you invest.
- Expense ratio. A yearly percentage taken from the fund's assets to pay for management, administration and distribution. It is built into the NAV, so you never see a bill. SEBI's rules for how it is split and capped changed in 2026; our research note your fund's expense ratio was rewritten in 2026 explains the new four-line split.
- Exit load. A fee some funds charge if you sell within a set period, often a year or less. Check it before you buy.
- Direct or regular plan. A direct plan has no distributor commission, so its expense ratio is lower. A regular plan includes the distributor's commission and the distributor's help. We measured the gap on real NAV history in direct vs regular mutual fund returns: about 12 basis points a year for an index fund pair and 82 for a flexi cap pair over roughly 13 years. Historical, not a forecast.
A cost that looks small compounds. Illustratively, a 1% yearly cost gap on ₹10,000 a month for 20 years, at an assumed 12% return before costs, is about ₹12.4 lakh. We say this so you can weigh it. Here is how Krishna Vriddhi Capital is paid, and our direct vs regular guide lays out both sides.
How are mutual funds taxed?
Tax depends on the kind of fund, how long you hold it and the financial year you sell in. For FY 2026-27 the reported position is below. Rates change, so check with your CA before you act. This is general information, not tax advice.
| Fund type | Held | Tax on gains |
|---|---|---|
| Equity-oriented fund | Less than 12 months | 20% |
| Equity-oriented fund | More than 12 months | 12.5% on gains above ₹1.25 lakh a year |
| Debt fund bought after 1 April 2023 | Any period | Added to your income and taxed at your slab rate |
An equity-oriented fund is one that holds at least 65% in equity shares. Dividends (IDCW) are taxed at your slab rate. The capital gains tax calculator works out the figures for your own sale, and the Income Tax Department's website has the current rules.
How do you choose mutual funds without a ranked list?
We do not publish a ranked list of funds, and we would be wary of any list that claims to name the "best funds". A fund tops a list because of the past, and a list does not know your goal. A better process takes six questions.
- What is the money for, and by when? This picks the group of fund.
- What can you bear? Look at the riskometer and ask whether you would hold on through a fall of 30%.
- What does it cost? Compare the expense ratio of funds in the same category, and note direct or regular.
- How has it behaved across more than one market cycle? One strong year says little.
- What does it overlap with? Funds that hold the same shares add cost without adding diversity. Our note how many mutual funds should I have shows overlap in real large cap and flexi cap funds.
- What are the exit load and the tax? Both are knowable before you buy.
How to choose a mutual fund goes deeper, and the NFO tracker shows new fund offers with the facts in one place. A new fund offer is not automatically a better fund; it is a new fund.
Mutual funds compared with a fixed deposit, stocks or PPF
| Topic | Fixed deposit | Mutual funds | Direct stocks |
|---|---|---|---|
| Value moves with | Nothing: the amount is fixed | The market value of the fund's holdings | One company's share price |
| Can it lose money? | Not in the usual sense; inflation can still outrun it | Yes | Yes, and by more if concentrated |
| Effort needed | Almost none | A review once or twice a year | Ongoing research |
| Usually considered for | Money needed within about 3 years | Goals 3 to 5 years or more away | Long horizons and time to research |
The answer is rarely one or the other. For a measured look at deposits, our note FD rate of return follows ₹1 lakh through fourteen years of one-year deposits, after tax and inflation. Illustratively, it grew to ₹1.98 lakh after 30% tax but bought less than in 2011. This is historical and not a forecast. Mutual funds vs stocks compares the other column.
Who regulates mutual funds in India?
The Securities and Exchange Board of India (SEBI) regulates the industry under the SEBI (Mutual Funds) Regulations, 1996. The Association of Mutual Funds in India (AMFI) is the industry body, publishes NAVs, and registers mutual fund distributors, giving each an ARN. Before you deal with any distributor, search their ARN on the AMFI website, and read how to verify an ARN or SEBI registration. If something goes wrong, you can complain to the fund house first and then through SEBI SCORES. AMFI's investor awareness site, Mutual Funds Sahi Hai, has more plain-language explanations.
Mutual funds with Krishna Vriddhi Capital
Krishna Vriddhi Capital is an AMFI-registered Mutual Fund Distributor (ARN-332460). We distribute mutual funds and do not give investment advice. Here is how that works:
- You pay no separate fee. Fund houses pay us a commission on regular plans. Direct plans carry none and are open to you.
- Your units stay in your name. Folios are opened with the fund house directly. We never hold your money.
- You get a plan before a product. Goals with dates and rupee amounts, an allocation range for each, and a cost table that shows direct and regular side by side.
- We say when a direct plan suits you better.
Book a free consultation. It is 30 minutes by phone or video, in any time zone. Already invested? Send your account statement for a written portfolio review.
Also useful: the SIP calculator, all calculators, our research library of notes with real numbers, and the learning centre.
Questions people ask
What is a mutual fund?
A mutual fund pools money from many investors and invests it in shares, bonds or both, through a professional fund manager. You hold units, priced at the fund's NAV each day. The fund follows a stated objective and is regulated by SEBI. Returns are not guaranteed and the value of your units can fall.
How do mutual funds work?
You invest a lump sum or a monthly SIP and receive units at the day's NAV. The fund manager invests the pool in line with the scheme's objective. The NAV changes with the market value of the holdings, and you can usually sell units on any working day at that day's NAV, after any exit load.
Are mutual funds safe?
They are regulated, but returns are not guaranteed. SEBI rules keep your assets with a custodian and require daily valuation and disclosure. They do not protect you from market losses: equity funds can fall sharply and debt funds can lose value when interest rates rise or a borrower defaults. Check the riskometer on each scheme.
Are mutual funds good for beginners?
Many beginners choose them because a small SIP buys a diversified portfolio that a professional manages. Whether they suit you depends on your goal and time horizon: money needed within about three years should stay out of equity funds. Start with a cash buffer, complete your KYC and begin with an amount you can keep paying.
How much money do I need to start investing in mutual funds?
Many schemes accept a SIP from ₹500 a month, and lump sums from ₹1,000 in many schemes. The amount matters less at the start than starting and continuing. Keep three to six months of expenses aside first, so that an emergency does not force you to sell.
What are the types of mutual funds?
SEBI groups them into equity, debt, hybrid, solution-oriented and other funds. Equity funds hold shares, debt funds hold bonds, hybrid funds mix both, solution-oriented funds serve goals such as retirement, and the other group includes index funds, ETFs and funds of funds. Each carries a different risk and suits a different horizon.
How do I choose a mutual fund?
Start with the goal and the date, which decide the group of fund. Then compare cost, check the riskometer and the overlap with funds you already hold, and read the exit load and tax rules. Be careful with rankings: a list shows past results and does not know your goal.
Are mutual funds taxable?
Yes. For FY 2026-27 the reported position is 20% on equity fund gains held under 12 months and 12.5% on equity fund gains above ₹1.25 lakh a year held longer. Debt funds bought after 1 April 2023 are taxed at your slab rate. Rates change, so confirm with a tax professional.
Can I withdraw my mutual funds at any time?
Most open-ended funds let you redeem on any working day at that day's NAV, and the money usually reaches your bank account within one to three working days. Exceptions include ELSS funds, which have a three-year lock-in, and solution-oriented funds. Some funds charge an exit load if you sell early.
Do I need a demat account for mutual funds?
No. You can buy them with a completed KYC and a bank account, through the fund house or a distributor. A demat account is needed for stocks and ETFs, not for ordinary mutual fund units.
What is the difference between a mutual fund and a SIP?
A mutual fund is the investment. A SIP, or systematic investment plan, is a way of investing in it by paying a fixed amount at regular intervals. You can also invest a lump sum in the same fund.
Are mutual funds better than fixed deposits?
Neither is better for everyone. A fixed deposit gives a known amount at a known date, and inflation and tax can still reduce what it buys. They can grow more but can also fall, and suit longer goals. Many people hold both for different goals.
Do mutual funds promise a return?
No. Returns are not guaranteed, past performance does not predict future results, and equity funds can fall for years at a time. Be wary of anyone who promises a return.
Sources
Securities and Exchange Board of India, SEBI (Mutual Funds) Regulations, 1996 and circulars on scheme categorisation. Association of Mutual Funds in India, AMFI, for NAVs and the register of distributors. Mutual Funds Sahi Hai for investor education. Income Tax Department, incometax.gov.in, for capital gains rules. MF Central for consolidated account statements. Tax figures are general information for FY 2026-27 and are reviewed every April.
Investor education only. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Krishna Vriddhi Capital is an AMFI-registered Mutual Fund Distributor and does not provide investment advice. Past performance may or may not be sustained in future.