Mutual Funds in India – Where to start? – Part 1

This is a 3-part post carrying an introduction to mutual funds, the different categories, their characteristics, their portfolio type, what one should expect from investing in them and who each of the categories are appropriate for. We will deep dive into equity mutual funds and look to develop the intuition required to pick a fund best suited for our individual needs. Oh, we will also talk to the magic mirror.
Disclaimer – The funds or fund houses discussed on this post are NOT meant to be investment recommendations. Reader discretion is advised. Please do your own due diligence or discuss with your financial advisor before investing in any of the mutual funds discussed on this post.

This is part 1 of a three-part series on mutual funds in India. Part 1 is an introduction to mutual funds, Part 2 unravels the secrets to picking winning equity mutual funds and Part 3 is a practical implementation guide.

I kept thinking how I should begin this post.

Perhaps like this?

“If you are looking to invest in mutual funds, you can choose one from the 1792 different funds that are available in India.”

That would send people running away from this post faster than Usain Bolt.

Or may be like this?

“The SEBI in India classifies the different funds into 36 different categories. You can have your pick.”

Still sends your head spinning, doesn’t it?

Let’s try this –

“There are only 3 kinds of mutual funds in India. And every single mutual fund can be grouped into one of these three categories – Equity, Debt or Hybrid.”

Nice & simple, isn’t it?

This post will give you an introduction to their characteristics, what they invest in, what you should expect from them and who each of the categories are appropriate for. In Part 2 of this post I will use data to deep dive into equity mutual funds and give you the insights you need to be able to pick one that is best suited for you – All by yourself.

Before you jump in, have you read our post on the best fixed deposits and risk free investments?

WHAT IS A MUTUAL FUND?

Imagine a box of chocolates that you want to buy in the hope that its price will go up. There is just one problem with it. You cannot buy the whole box on your own because it is too expensive. So you pool in money with other people to buy the whole box hoping that you can then sell it when its price has gone up. In most cases, the chocolatier (the expert) decides which chocolates to buy based on his opinion of which ones will appreciate in price – rum & raisin, marzipans, eclairs, toffees etc. This is exactly the idea behind a mutual fund.

A mutual fund is an investment vehicle where large numbers of investors come together and pool their money to invest in the stock market. In most cases, the fund manager (chocolatier) decides which shares to buy depending upon his assessment of which ones will go up in price. At the end of each day, the fund calculates its total worth based on prices of stocks it owns and publishes what is known as Net Asset Value or NAV. This NAV is the price per unit of the mutual fund. In our example, the price of one share of that box of chocolate. AMFI, which is the association of mutual funds in India has a lot of very good introductory material to mutual funds.

THE THREE MAIN KINDS

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