In today’s fast-paced financial world, mutual funds have emerged as a popular investment option for millions of Indians. Whether you’re looking to grow your wealth over the long term or seeking regular income, mutual funds offer flexibility, diversification, and professional management.
But how exactly do mutual funds work in the Indian market? Let’s break it down.
What is a Mutual Fund?
A mutual fund is an investment vehicle that pools money from multiple investors and invests it in a diversified portfolio of securities like stocks (equity), bonds (debt), gold, or a mix of all.
This pool of money is managed by professional fund managers from Asset Management Companies (AMCs), who make investment decisions on your behalf.
How Do Mutual Funds Work?
Here’s how the mutual fund system operates in India:
- Investor Contribution: Individuals (like you) invest money in a specific mutual fund scheme.
- Fund Pooling: The invested money is pooled together to form a large corpus.
- Professional Management: A fund manager deploys this corpus into various securities based on the scheme’s objective — for example, large-cap stocks, government bonds, or hybrid assets.
- Returns & NAV: The investments generate returns in the form of capital gains, dividends, or interest. These returns are reflected in the Net Asset Value (NAV) of the fund — the price at which units of the mutual fund are bought or sold.
- Investor Profits: As NAV grows, so does the value of your investment. You can redeem (sell) your units at any time in open-ended funds and receive the amount at the prevailing NAV.
Types of Mutual Funds in India
| Equity Mutual Funds | Invest mainly in stocks. Suitable for long-term wealth creation. |
| Debt Mutual Funds | Invest in fixed-income instruments like government bonds, corporate bonds, etc. Preferred for stable and lower-risk returns. |
| Hybrid Funds | Combine equity and debt to balance risk and return. |
| Index Funds/ETFs | Track a specific market index like Nifty 50 or Sensex. |
| ELSS (Equity Linked Savings Scheme) | Offers tax benefits under Section 80C with a 3-year lock-in. |
Who Regulates Mutual Funds in India?
In India, mutual funds are regulated by SEBI (Securities and Exchange Board of India). SEBI ensures transparency, investor protection, and fair practices. AMFI (Association of Mutual Funds in India) also plays a key role in standardizing operations and promoting investor awareness.
Taxation of Mutual Funds in India
- Equity Funds:
- STCG (Short-Term Capital Gains): 15% tax if held for less than 1 year.
- LTCG (Long-Term Capital Gains): 10% on gains above ₹1 lakh/year (if held for over 1 year).
- Debt Funds (as of July 2023):
- Gains are added to income and taxed at slab rate (no indexation benefit after new rule changes).
ELSS funds allow tax deduction up to ₹1.5 lakh/year under Section 80C.