Mutual funds have traditionally been distributed through MF distributors in India. MF distributors mandatorily need to have certification from AMFI (the nodal body of mutual funds in India) to ensure that they have sufficient knowledge to give investment advice to investors. Apart from investment advice, MF distributors also help investors with fulfilment of their purchase or redemption transactions (fulfilling KYC requirements, filling application forms and submission to AMCs or mutual fund registrars), as well as ongoing customer service. For their services, MF distributors get commissions from the AMC. If you make your mutual fund investment through a MF distributors, you will invest in, what is known as, regular plan of the scheme. Some years back, investors were also provided with the option of investing directly with the AMC, without going through a MF distributors. If you submit your mutual fund investment application directly to the AMC (online or offline), you will invest in, what is known as, direct plan of the scheme. The most obvious difference between regular and direct plan is that, unlike in a regular plan, you need to have capability to decide which scheme to invest in and how to manage your investment on an ongoing basis. You will also have to devote time and effort to fulfil the transaction by yourself by providing necessary documents for KYC, filling forms and visiting the AMC (online or offline). The advantage of direct plan versus regular plan is in the expense ratio. Since in direct plans, AMCs do not have to pay commissions to the MF distributors, the expense ratio is lower. Hence, the returns are higher.

AMCs may charge a fee if you redeem (sell) your units within a specified period from the date of investment. This fee is known as exit load. Let us understand exit load with the help of an example. Suppose, you invested Rs 1 lakh in a scheme whose NAV was Rs 20; in other words, you bought 5,000 units of the scheme. Let us assume that, the exit load is 1% for redemptions within 12 months from the date of purchase. Suppose after 8 months, the NAV of the scheme is Rs 23. The value of the 5,000 units will be Rs 1.15 lakhs. However, if you redeem (sell) all your units after 8 months, you will not get a credit of Rs 1.15 lakhs to the bank because exit load will apply. Exit load per unit will be 23 paise (1% X 23) and total exit load will be Rs 1,150. This amount will be deducted from your redemption proceeds and only Rs 1,13,850 will be credited to your bank account. Investors should note that, exit load does not just apply for redemptions; they are also applicable for switches, Systematic Transfer Plans (STP) and Systematic Withdrawal Plans (SWP), as long as those transactions take place, within the exit load period.

Growth and Dividend are essentially options of how investors want cash-flows. During the course of a year, a mutual fund scheme may make profits through dividends from shares ownership or interests from bonds owned by the scheme and also through portfolio churn (profit booking by buying and selling shares and bonds). In a growth option the profit is re-invested to generate more returns whereas in dividend option the profits are distributed to the investors on a regular basis (annual, semi-annual, quarterly, monthly etc). Dividends are declared on a per unit basis. Capital appreciation is much higher in growth option because investors benefit from compounding over a long investment horizon; NAV in growth options grows much more than dividend options where the NAVs get re-adjusted whenever the scheme declares dividends. However, some investors may need income during the tenure of the investment and dividend option is suitable for such investors. Dividend re-investment is another option available to investors. In this option the dividends instead of being distributed to investors, get re-invested to buy units of the scheme. A dividend re-investment option works very much like growth option. The major difference between growth and dividend re-investment option is that, in growth option investor gets capital appreciation through growth in NAV, whereas in dividend re-investment the investor gets capital appreciation through incremental units (the NAVs of dividend and dividend re-investment options are the same). Tax consequences of growth and dividend re-investment option are different (we will discuss in more details in a separate post).

Mutual funds are bought or sold on the basis of Net Asset Value (NAV). NAV is essentially the price of a unit. NAV is calculated by dividing the net assets (market value of the securities and cash held by the fund minus the liabilities) of the fund by the total number of units outstanding. Unlike share prices which changes constantly during the day depending on the activity in the share market, the NAV is determined on a daily basis, computed at the end of the day based on closing price of all the securities that the mutual fund owns after making appropriate adjustments. Contrary to popular misconception, schemes with high NAVs are not overpriced and funds with low NAVs are not attractively priced. Older the fund higher will be the NAV over a period of time. Low or high, the NAV by itself does not impact the return on investment from the mutual fund. The percentage change in a fund's NAV over a period of time denotes the percentage returns on investment of all the unit holders of the fund over the same period.

Mutual fund is a financial instrument which pools the money of different people and invests them in different financial securities like stocks, bonds etc. The Asset Management Company (AMC), i.e. the company which manages the mutual fund raises money from the public. The AMC then deploys the money by investing in different financial securities like stocks, bonds etc. The securities are selected keeping in mind the investment objective of the fund.

The Asset Management Company (AMC), i.e. the company which manages the mutual fund raises money from the public. The AMC then deploys the money by investing in different financial securities like stocks, bonds etc. The securities are selected keeping in mind the investment objective of the fund. For example, if the investment objective of the fund is capital appreciation, the fund will invest in shares of different companies. If the investment objective of the fund is to generate income, then the fund will invest in fixed income securities that pay interest. Each investor in a mutual fund owns units of the fund, which represents a portion of the holdings of the mutual fund. On an on-going basis, the fund managers will manage the fund to ensure that the investment objectives are met. For the services the AMCs provide to the investors, they incur expenses and charge a fee to the unit holders. These expenses are charged against proportionately against the assets of the fund and are adjusted in the price of the unit. Mutual funds are bought or sold on the basis of Net Asset Value (NAV). Unlike share prices which changes constantly depending on the activity in the share market, the NAV is determined on a daily basis, computed at the end of the day based on closing price of all the securities that the mutual fund holds in its portfolio.

There are essentially two kinds of mutual funds. Open Ended Schemes: Investors can buy units of open ended schemes at any time. Investors can also sell units of open ended schemes at any time, though some schemes (e.g. equity linked savings schemes) may have a lock in period during which the investor cannot sell the units. The percentage ownership of investors in the assets of open ended schemes changes whenever investors purchase or sell units. Since you can sell units of open ended schemes at any time, high liquidity is ensured to the investors. However, costs may apply if you sell units of open ended scheme before a certain period of time from the date of investment. We will discuss this in more details later. Close Ended Schemes: Close ended schemes are open for subscription only for a limited period of time, during the offer period. These schemes have fixed tenure and the investors can sell or redeem only after the maturity of the scheme. Upon maturity, depending on the scheme, the units get automatically redeemed or in some cases, the investors can switch to a different scheme. Close ended schemes are open for subscription only for a limited period of time, during the new fund offer (NFO) period. These schemes have fixed tenure and the investors can sell or redeem only after the maturity of the scheme. Upon maturity, depending on the scheme, the units get automatically redeemed or in some cases, the AMC gives option to unit holders to switch to a different scheme. The percentage ownership of investors in the assets of close ended schemes is unchanged throughout the tenure of the scheme as new investors cannot buy units post closure of the NFO. Some close ended schemes are listed on stock exchanges and you can buy or sell them through your share trading / demat account in the stock exchange, but the liquidity of these schemes listed on the exchanges is still quite low.

There are 5 key advantages of investing in mutual funds:- Risk Diversification:Mutual funds help investors diversify their risks by investing in a portfolio of stocks and other securities across different sectors, companies and market capitalizations. A diversified portfolio reduces risks associated with individual stocks or other assets or specific sectors. If an equity investor were to create a well-diversified portfolio by directly investing in stocks it would require a large investment. On the other hand, mutual fund investors can buy units of equity mutual funds with an investment of as low as Rs 5,000/- only. Mutual funds are managed by professional fund managers who are experts in picking the right stocks to get the best risk adjusted returns. A common investor often lacks this expertise and thus should invest through the mutual fund route. Economies of scale in transaction costs: Since mutual funds buy and sell securities in large volumes, transaction costs on a per unit basis is much lower than buying or selling stocks directly by an individual investor. Tax efficiency: Mutual funds are more tax efficient than most of the other investment products. Long term capital gains (holding period of more than 1 year) for equity and equity oriented mutual funds are tax exempt up to the gain of Rs 100,000. For investments made in debt funds, prior to 1st April 2023, long term capital gain (holding period of more than 3 years) is taxed at 20% with indexation. Once indexation (due to inflation) is factored in, the long-term capital gains tax is reduced considerably, especially for investors in the higher tax bracket. However, following the Amendment to Finance Bill 2023, the indexation benefit on debt mutual funds has been withdrawn. Debt funds will now be taxed at investor's tax slab rate. These changes bring taxation of debt and debt oriented mutual funds at par with fixed deposits for investments made from 1st April 2023 onward. Investments in mutual fund Equity Linked Savings Schemes (ELSS) up to Rs 150,000 in a financial year qualify for deductions under Section 80C of The Income Tax Act 1961. High Liquidity: Open ended mutual funds are more liquid than many other investment products like shares, debentures and variety of deposit products (excluding bank fixed deposits). Investors can redeem their units fully or partially at any time in open ended funds. Moreover, the procedure of redemption is standardized across all mutual funds. Variety of products and modes of investment: Mutual funds offer investors a variety of products to suit their risk profiles and investment objectives. Apart from equity funds, there are income funds, tax plans (ELSS Funds), balanced funds, monthly income plans and liquid funds to suit different investment requirements. Mutual funds also offer investors flexibility in terms of modes of investment and withdrawal. Investors can opt for different investment modes like lump sum (or one time), systematic investment plans, systematic transfer plans (from other mutual fund scheme to the other in the same AMC) or switching from one scheme to another.

Units are the building blocks of a mutual fund scheme. A unit represents percentage ownership of the total pool of money managed by the Asset Management Company. Generally, Mutual fund units are priced at Rs 10 at the time of launch (known as New Fund Offer or NFO) of the scheme and its price fluctuates with change in value of the assets of the scheme Suppose you have invested Rs 100,000 in a mutual fund. If the price of a unit of the fund is Rs 10, then the mutual fund house will allot you 10,000 units. Let us assume the total money invested in the fund by all the investors is Rs 100 Crores. The mutual fund invests the money to buy equity or fixed income securities. Each unit will represent 0.000001% value of all the securities the mutual fund has in its holdings. If you have 10,000 units, then your portion of the mutual fund holdings will be 0.01%. As the value of portfolio of securities held by the mutual increases or decreases, so will the price of the units. If the value of assets increases from Rs 100 Crores to Rs 110 Crores, without the issue of new units, the price of the unit will be Rs 11 (0.000001% X 110 Crores). Please note that the percentage ownership represented by unit of the total assets of a scheme will change from time to time as new investors invest in the scheme or existing investors exit (redeem) from the scheme.