Mutual Fund Basics for Beginners: Everything You Need to Know Before Investing

• Sushil Bajaj |
• 22 September 2025 |

For first-time investors, Mutual Fund Basics for Beginners show that mutual funds can be one of the easiest and most effective ways to get started. They can provide indirect access to the stock market and other asset classes without needing to master complex trading techniques or financial analysis skills. Let’s take a look at the important elements step by step.

What is a Mutual Fund?

A mutual fund is a pooled investment vehicle from a group of individuals which is managed by a neutral fund manager who allocates the pool of money into different types of assets (equity/stocks, debt/bonds, or hybrids).

1. You do not need to purchase individual shares of lots of individual companies, if you wish.
2. Your investment is held and tracked for you by a professional manager.
3. Your investment is diversified by the fund and is arguably safer than owning one or two stocks yourself.

💡 You can think of a mutual fund like a cricket team: you are a part of the team (investor), but you are not the captain (i.e., fund manager) who makes the game plan and the other players (the assets) for how to win (return).

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NAV (Net Asset Value)

The NAV is the price of one unit of a mutual fund.

• Formula: (Total Value of Fund’s Assets – Liabilities) ÷ Total Units Outstanding
• It is calculated daily after the market closes.
• When you invest, you get units of the fund at the prevailing NAV.

Example:
If a fund’s NAV is ₹20 and you invest ₹10,000, you get 500 units.

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Risk–Return Balance

Every investment carries some risk. With mutual funds:

• Equity Funds → Higher potential returns, higher risk (good for long-term).
• Debt Funds → Lower risk, stable returns (good for short-term/parking money).
• Hybrid Funds → Middle path; mix of equity + debt.

👉 Rule of thumb: Higher returns come with higher risks. Choose funds based on your risk appetite, time horizon, and goals.

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Mutual Fund Categories

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1. Equity Funds

Invest primarily in stocks, making them suitable for long-term wealth creation (5–10 years+).

• Large-Cap Funds → Invest in top 100 companies by market capitalization; stable and relatively less volatile.
• Mid-Cap Funds → Invest in companies ranked 101–250; offer higher growth potential with moderate risk.
• Small-Cap Funds → Invest beyond top 250 companies; very high growth potential but highly volatile.
• Multi-Cap Funds → Diversify across large, mid, and small caps; balanced exposure to growth and stability.

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2. Debt Funds

Invest in bonds and fixed income; suited for stable, low-risk returns.

• Liquid Funds → Park money for short term.
• Corporate Bond Funds → Invest in company bonds.
• Short Duration Funds → Safer option for 1–3 years.

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3. Hybrid Funds

Blend of equity + debt for balanced growth and safety.

• Aggressive Hybrid → More equity, higher returns.
• Conservative Hybrid → More debt, safer option.

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4. Index Funds & ETFs

Track stock market indices like Nifty/Sensex.

• Index Funds → Passive, low-cost, simple.
• ETFs → Trade like shares on stock exchanges.

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5. Sectoral/Thematic Funds

Focused on specific industries or themes.

• IT/Pharma Funds → Growth in specific sectors.
• Thematic Funds → Based on broader themes (e.g., ESG, Infrastructure).

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How to Invest in Mutual Funds

1. Lumpsum

• One-time investment of a large amount.
• Best when you have surplus cash and confidence in market timing.

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2. SIP (Systematic Investment Plan)

• Small, regular investments (monthly/quarterly).
• Helps in rupee cost averaging (buy more units when NAV is low, fewer when NAV is high).
• Ideal for beginners and disciplined wealth creation.

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3. Platforms of Investment

Apps & Online Platforms (convenient, paperless investing).

AMC Websites (direct plans, lower expense ratio).

Distributors/Advisors (guided, but higher charges).

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Key Features of MF Investing

SWP (Systematic Withdrawal Plan)

• Regular fixed withdrawals from your investment.
• Useful for retirement income or fixed monthly needs.

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STP (Systematic Transfer Plan)

• Transfer money gradually from one fund to another.
• Example: From a debt fund to an equity fund over time.
• Helps manage risk while entering volatile markets.

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Flex STP

• Transfer amount depends on market conditions.
• You invest more in equities when the market is down and less when it is up.

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Capital Appreciation Transfer

• Only profits are transferred to another scheme.
• Ensures your capital remains safe, while gains work harder.

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New Fund Offers (NFOs)

• Newly launched schemes offered at face value (₹10 per unit).
• Investors are often attracted by the low entry price.
• Caution: Don’t invest just because it’s “new.” Always check:
  • Investment theme
  • Risk profile
  • Fund manager’s credibility

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Taxation of Mutual Funds

1. Equity Funds

• Short-Term (<1 yr): 15% tax on gains.
• Long-Term (>1 yr): 10% tax on gains above ₹1 lakh/year.

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2. Debt Funds

• Gains are taxed as per your income tax slab (no long-term benefit).

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3. Dividends

• Taxed as per your income slab (added to your income).

Always check post-tax returns while comparing investments.

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How to Start Investing in Mutual Funds

Experienced investors: Use lumpsum during market corrections.

Complete KYC

1. Submit PAN, Aadhaar, Bank Details.
2. A one-time process, mandatory for all investors.

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Set Your Investment Goal

1. Wealth creation (equity funds)
2. Tax saving (ELSS funds under 80C)
3. Regular income (SWP, debt funds)

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Choose the Right Fund

1. Match fund category with goal + time horizon + risk profile.

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Start with SIP or Lumpsum

1. Beginners: Prefer SIPs for disciplined long-term compounding.

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🔗 How to Invest Online?

You can easily invest through our online investment platform.

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Mutual funds are a simple, flexible, and beginner-friendly investment option. By understanding the basics—categories, risk-return trade-off, taxation, and investment modes—you can confidently start your journey.

The key is to:

• Start early
• Stay consistent
• Match funds with goals
• Avoid chasing short-term market movements

📌 Remember: Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully before investing.