How to Invest in Mutual Funds in India: The Complete Guide for Beginners [2024]

Mutual Funds in India

Mutual funds have become one of the most popular investment options for retail investors in India. With over 67 million SIP accounts and 25+ asset management companies offering 5000+ schemes, the scope for mutual fund investments is tremendous.

However, the process can seem daunting for first-time investors. Where do you begin? How much should you invest? Which funds should you choose?

This extensive guide will walk you through everything you need to know as a beginner – from understanding what mutual funds are, their benefits, and types – to figuring out smart investment strategies.

Equipped with this knowledge, you can confidently start your mutual fund investment journey and pursue your financial goals through informed decisions. So let’s get started!

What are Mutual Funds and How Do They Work?

A mutual fund pools money from numerous investors and invests it collectively in stocks, bonds, and other securities. A professional fund manager handles investing and managing the pooled money to generate returns for investors based on the fund’s objectives.

When you invest in a mutual fund scheme, you purchase “units” of the fund based on the current Net Asset Value (NAV) per unit. The NAV increases when the investments in the fund’s portfolio appreciate and decreases when the value of its assets depreciates.

As an investor, you earn returns through the NAV appreciation and earn dividends or interest based on the fund’s investments. You can redeem your investment by selling the units back to the mutual fund when you want to exit.

Why Invest in Mutual Funds?

Here are the key advantages of investing in mutual funds for wealth creation:

  • Professional Management: Fund managers and their research team handle investing the pooled money using their expertise. This is especially beneficial for novice investors.
  • Diversification: Investing across asset classes and securities helps mitigate risks by avoiding concentration in a single investment.
  • Liquidity: Open-ended funds allow easy purchase and redemption of units, providing liquidity to investors.
  • Flexibility: Investors can start with a small amount and increase/decrease investments. SIPs allow periodic investments.
  • Transparency: Strict regulations by SEBI (Securities Exchange Board of India) ensure fair practices and transparency.
  • Potential for long term growth: Equity funds invest predominantly in stocks and hence have the potential for high returns over the long term.
  • SIP Advantage: Systematic Investment Plan is a disciplined approach allowing investment of small amounts periodically. SIPs mitigate market volatility and provide the benefit of rupee cost averaging and compounding to investors over the long term.
  • Reasonable Costs: pooling of a large corpus brings down the costs due to economies of scale.
  • Tax Benefits: ELSS and certain other funds provide tax benefit under section 80C.
  • Variety: Investors can choose from a wide variety of fund categories and schemes to suit their needs.

Things to Consider Before Investing in Mutual Funds

As a beginner, here are some things to keep in mind before you start investing:

  • Set Financial Goals: Be clear about what you wish to achieve from your mutual fund investments. Whether it is retirement planning, kid’s education, wealth creation or any other goal, defining this will help decide your investment strategy.
  • Risk Appetite: Assess your willingness and capacity to take risks. Choose funds that align with your risk tolerance. For example, equity funds are riskier but can give higher returns than debt funds over the long term.
  • Time Horizon: Invest based on the duration you plan to remain invested. Longer duration of 5 years or more suits equity funds to ride out market ups and downs. Short-term goals are better matched with debt funds.
  • Amount to Invest: Decide how much you can invest per month or year based on your income and expenses. Allocate only surplus savings to mutual funds after accounting for emergency funds and insurance needs.
  • Tax planning: Understand the taxation applicable for returns from your mutual funds. Some options like ELSS offer tax savings under Section 80C.
  • Read Documents: Go through the Scheme Information Document, Statement of Additional Information and Key Information Memorandum offered by the fund house to understand the fund’s investment strategy and risks involved.

How to Start Investing in Mutual Funds

Ready to take the plunge? Here is a step-by-step process to start your mutual fund investment journey:

Step 1: Identify Your Financial Goals

Be clear about what you wish to achieve from your mutual fund investment – retirement corpus, children’s education and marriage, dream home, starting a business, annual income, tax saving, etc. Defining this will help decide your investment strategy.

Step 2: Analyze Your Risk Appetite

Assess your willingness and capacity to take investment risks. Are you someone who can’t sleep at night if markets are volatile or would stay invested knowing markets bounce back in the long term? Choose funds aligned to your risk tolerance.

Step 3: Choose the Right Mutual Funds

With thousands of schemes available, picking the right funds can be tricky.

  • Match fund categories to your goals – Equity for long term, Debt for short term, Hybrid for balance.
  • Analyze historical performance across bull and bear markets.
  • Consider portfolio composition, fund management experience, expense ratio etc.
  • Choose a mix of funds for diversification – large cap, multi cap, mid cap, sectoral, thematic.

Step 4: Open an Online Investment Account

Many fund houses and online investment platforms offer paperless account opening today.

  • Provide your PAN and personal details for KYC verification.
  • Upload documents – PAN, Aadhar, Passport etc.
  • Fill bank details to register your account for investments and redemptions via online modes.

It hardly takes 15-20 minutes to complete online.

Step 5: Start SIP Investments

Systematic Investment Plan or SIP is the most disciplined and hassle-free way to invest in mutual funds.

  • Decide the monthly or quarterly amount you wish to invest.
  • Pick suitable funds and set up SIPs to automatically invest periodic instalments.
  • Use online bill pay, autopay or NACH to conveniently manage SIPs.
  • Top up your investments or rebalance periodically based on fund performance.

Regular investing helps you benefit from rupee cost averaging and compounding. Over time, small periodic investments can grow into a sizable corpus.

Benefits of Investing in Mutual Funds

Here’s a summary of the key advantages mutual funds offer as an investment option:

  • Professional management by experienced fund managers
  • Risk diversification across asset classes and securities
  • Liquidity allowing easy purchase and redemption
  • Flexibility to invest lump sum amounts or periodic SIPs
  • Low cost compared to directly investing in securities
  • Potential to earn inflation-beating returns over long term
  • SIP mode mitigates market volatility, provides rupee cost averaging
  • Variety with myriad schemes to suit investor needs & profiles
  • Transparency due to strict SEBI oversight and regulations
  • Reasonable taxation compared to other instruments
  • ELSS and certain funds provide tax saving under Section 80C
  • Online process convenient; can start with just Rs. 500

Types of Mutual Fund Schemes

SEBI categorizes mutual fund schemes based on asset class and investment strategy. Let’s look at the common types:

1. Equity Funds

Invest predominantly in stocks offering high growth potential over long term. Different types are:

  • Large Cap – Invest in large established companies
  • Mid/Small Cap – Invest in mid/small size growth companies
  • Dividend Yield Funds – Invest in stocks giving higher dividends
  • Value Funds – Invest in undervalued stocks with growth potential
  • Sector/Thematic – Invest in specific sectors or themes

2. Debt Funds

Invest in fixed income instruments like bonds, government securities etc. Provide regular income and stable but moderate growth. Types include:

  • Liquid Funds – Invest in cash, cash equivalents and money market instruments
  • Ultra Short Duration Funds – Invest in debt and money market instruments of shorter maturities
  • Short Duration Funds – Hold debt and money market instruments up to 3 years maturity
  • Medium Duration Funds – Invest across medium term debt and money market instruments
  • Long Duration Funds – Hold securities with long maturities above 7 years
  • Dynamic Bond Funds – Actively manage portfolio across duration
  • Corporate Bond Funds – Invest predominantly in corporate bonds
  • Credit Risk Funds – Invest in corporate bonds with credit ratings below AAA
  • Banking and PSU Funds – Invest in debt instruments of banks, PSUs, etc.

3. Hybrid Funds

Invest in a mix of equity and debt/money market instruments. Moderate risk and returns between equity and debt funds. Main types are:

  • Conservative Hybrid Funds – Invest 10-25% in equity, rest in debt
  • Balanced Hybrid Funds – Invest balance of equity & debt
  • Dynamic Asset Allocation Funds – Vary equity/debt allocation based on market outlook
  • Multi Asset Allocation Funds – Invest across equity, debt and gold/commodities
  • Arbitrage Funds – Leverage price differential between cash and derivatives market
  • Equity Savings Funds – Hedge equity exposure using derivatives

4. Solution-Oriented Schemes

Special funds targeted for specific financial goals or types of investors. Examples are:

  • ELSS (Equity Linked Savings Scheme) – For tax saving under Section 80C
  • Children’s Funds – For children’s future needs like education, marriage
  • Retirement Funds – To build a retirement corpus
  • Gold Funds – To invest in gold securities, ETFs
  • Index Funds – Mirror performance of a market index; low cost
  • International Funds – Invest in overseas stocks, funds
  • Exchange Traded Funds (ETFs) – Trade on exchange like stocks; track index

Mutual Fund Taxation

Taxation on mutual fund returns depends on:

  • Type of scheme – Equity, Debt or Hybrid
  • Period of holding
  • Nature of returns – Dividend or capital gains

Equity Funds:

  • LTCG on units held >1 year – 10% tax without indexation
  • STCG on units held <1 year – 15% tax
  • Dividend income from equity funds above Rs. 10L – 10% tax

Debt Funds:

  • LTCG on debt funds held >3 years – 20% after indexation
  • STCG on units held <3 years – Normal slab rates
  • Dividend and interest – Normal slab rates

Hybrid Funds:

Taxation based on equity/debt share –

  • >65% Equity – Treated as equity funds
  • <65% Equity – Treated as debt funds

How to Select the Best Mutual Funds

With thousands of funds to choose from, selecting the right ones may seem complicated initially. Here is a step-by-step process:

1. Decide Asset Class

Based on your goals and risk appetite, decide the asset class – Equity, Debt or Hybrid. Equity for long term goals, Debt for short term, Hybrid for balance of both.

2. Identify Category & Style

For equities, identify market cap preference – large cap, mid cap, multi cap, etc. For debt, identify duration – short, medium, long term.

3. Shortlist Top Performing Funds

Shortlist funds with consistently good performance over 3, 5 & 10 year time periods. Consider returns across bull and bear markets.

4. Analyze Portfolio

Evaluate portfolio composition, size, diversification etc. Ensure the portfolio matches the fund’s stated mandate.

5. Check Fund House Reputation & Stability

Consider investing in funds from reputed AMCs with a long track record. Check AUM size.

6. Evaluate Costs

Check expense ratio. Lower is better. 1-1.5% for equity, 0.5-1% for debt funds.

7. Consider Risk Factors

Review portfolio turnover, concentration, volatility etc. based on risk metrics.

8. Research Fund Management

Experience and performance record of the fund manager managing the scheme.

Common Mistakes to Avoid While Investing

Here are some common mutual fund investing mistakes to avoid:

  • Not having clear financial goals
  • Choosing funds blindly without research
  • Focusing only on past returns
  • Not diversifying across schemes & asset classes
  • Investing without considering risk profile & time horizon
  • Trying to time the market
  • Stopping SIPs during market downturns
  • Chasing hot sectors or fad funds
  • Paying commissions to agents by investing in regular plans instead of low-cost direct plans
  • Not reviewing investments periodically or rebalancing
  • Redeeming investments to meet short-term needs instead of giving time to grow

Mutual Fund Investment Strategy

Here is a smart mutual fund investment strategy to maximize wealth creation:

  • Define your investment goals and time horizon first
  • Build a diversified portfolio across equity, debts and hybrid funds
  • Invest for the long term – at least 5 years for equity
  • Use SIPs to invest regularly, benefit from rupee cost averaging
  • Invest more in early years to leverage power of compounding
  • Stagger investments across schemes with different market caps or styles
  • Rebalance occasionally to maintain target allocation
  • Use STP, SWP to enter, exit large amounts in a phased manner
  • Don’t panic by market volatility; continue SIPs during downturns
  • Monitor performance quarterly; review winners & laggards
  • Redeem only when required; avoid frequent purchase/redemption
  • Consider tax impact on returns in deciding investment tenure or type of funds

Safety Tips for Investing Online

While investing online in mutual funds is very convenient, here are some tips to invest safely:

  • Verify online portals are registered platforms before investing
  • Complete video based KYC with valid PAN and Aadhar card
  • Check platform uses bank-level security with data encryption
  • Use strong and unique passwords and 2-factor authentication
  • Register your phone number and email ID properly for alerts
  • Do not share OTPs or passwords; inform fund house of misuse
  • Check account statements match your transactions
  • Use online bill pay, ECS, NACH for SIP investments
  • Avoid using public networks for transactions

FAQs on Mutual Funds Investment

Q1. Which is better – direct plan or regular plan?

A1. Direct plans have lower expense ratios since no commission is paid to intermediaries. Returns are higher by at least 1%. Always opt for direct.

Q2. How to invest Rs 10,000 per month in mutual funds?

A2. Decide allocation to equity and debt funds based on your profile. Split Rs. 10K across 4-5 funds via SIP. For example, Rs. 4000 in an index fund, Rs. 3000 in a multi cap fund, Rs. 2000 in a corporate bond fund and Rs. 1000 in a liquid fund.

Q3. Can I start a SIP with Rs. 500?

A3. Yes, many funds allow SIP investment with a minimum amount of Rs. 500 per month or Rs. 1500 per quarter. So you can start SIPs with as little as Rs. 500.

Q4. Is 1 lakh enough to invest in mutual funds?

A4. Yes, you can begin investing in mutual funds even with a small amount like Rs. 1 lakh. Decide allocation between equity and debt funds based on your risk appetite and start SIPs to invest regularly.

Q5. How to choose the best ELSS funds?

A5. Look for ELSS funds with a consistent track record of beating broader market returns over 5-10 years. Choose funds managed by experienced fund managers with expertise in equity investment. Analyze portfolio composition and diversification. Opt for funds with lower expense ratios.


Investing in mutual funds is a smart way for individual investors to grow wealth and achieve financial goals like retirement planning or children’s future needs. But don’t let the wide gamut of options overwhelm you. Follow the guidance provided in this article to make informed fund choices that align with your investor profile and needs.

The key is to start early, stay invested for the long term, and use SIPs to your benefit. With robust growth of the Indian mutual fund industry, employing a well planned investment strategy can create long-term riches through the power of compounding. Happy Investing!

Disclaimer: Mutual Funds investments are subject to market risks. Please read scheme related documents carefully before investing. This article is for informational purposes only, not intended as legal or financial advice. Please consult a financial expert for personalised advice.

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