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Mutual funds have grown to be among the most favored investment alternatives in India for an uncomplicated reason: they enable everyone to invest professionally. You do not have to do any of these activities: selecting individual stocks, monitoring dozens of companies, or managing a portfolio actively. You invest money, a professional fund manager makes investment decisions, and your money is invested in a diversified portfolio of assets.
Investing in mutual funds can be one of the most practical financial skills that one can learn, especially for beginners who want to build wealth but don’t know where to begin. The entry barriers are low – SIPs begin from Rs. 100 per month in many funds, and the variety of fund types means there’s a suitable one available for almost every financial goal and risk tolerance.
This guide explains everything you need to know to get started: What mutual funds are, what types of funds are available, the difference between direct and regular plans, how to open your fund account and place your first investment, how to select the right fund, and how to track your returns over time.
Quick Answer
To invest in mutual funds in India, do the KYC process with PAN and Aadhaar, select the type of fund (equity, debt, hybrid), pick between direct or regular plan, and either invest one-time (lump sum) or set up a monthly SIP via the AMC website or through a SEBI-registered platform. Mutual fund investments are subject to market risk.
What Is a Mutual Fund?
A mutual fund is an investment fund wherein investors pool their funds and invest in a mix of assets, run by a professional fund manager who represents all of those investors.
When you invest in a mutual fund, you’re not buying individual stocks or bonds directly. You are purchasing shares of a fund that comprises a variety of assets, such as stocks, bonds, or any combination of them, depending on the fund’s mandate. Each unit has a net asset value (NAV) that fluctuates daily under the market value of the portfolio.
The appeal for beginners lies within the professional management and the built-in diversification. A first-time investor having Rs. 5,000 per month can gain access to a portfolio spread across fifty or even more companies, which would certainly call for a lot more capital and experience to develop on their own.
The fund manager’s job is to make investment decisions in the fund’s stated mandate, and the investor’s job is to select the right fund for their objectives and remain invested with discipline.
Types of Mutual Funds
Mutual funds in India come in a wide variety of types, each with a unique risk profile and catering to various investment objectives and time horizons.
| Fund Type | Risk Level | Typical Investment Goal | Suggested Time Horizon |
| Equity funds | High | Long-term wealth creation | 5 years or more |
| Debt funds | Low to moderate | Stable returns, capital preservation | 1-3 years |
| Hybrid funds | Moderate | Balanced growth with some stability | 3-5 years |
| Liquid funds | Very low | Parking short-term surplus | Days to 3 months |
| ELSS (tax-saving) | High | Wealth creation with tax benefit | 3 years minimum (lock-in) |
Equity Funds
Equity funds focus mainly on stocks and are designed to create long-term capital gains. Equity funds are generally recommended for investors with a long-term time frame of at least five years because the stock markets tend to be volatile in the short term. These funds have sub-categories, such as those that invest in the largest companies in India (large-cap funds), medium-sized companies (mid-cap funds), and small-sized companies with high growth potential and high risk (small-cap funds).
Debt Funds
Debt funds invest in fixed-income instruments, such as government securities, corporate bonds, treasury bills, and money market instruments. They typically do not experience as much volatility as equities and are better for investors who have a shorter time horizon or lower risk tolerance. Comparing debt funds vs fixed deposits is a natural starting point for investors deciding between the two.
Hybrid Funds
Hybrid funds have a combination of equity and debt funds, while offering a balance of growth potential and stability. They’re ideal for investors who don’t want to take on the total risk of an equity fund, but want the benefits of equity investing. The proportion of equity vs debt varies by fund type: aggressive hybrid funds have more equity in the portfolio, conservative hybrid funds have more debt in the portfolio.
Liquid Funds
Liquid funds invest in short-term debt instruments, which have a maximum tenure of 91 days. They are intended for the storage of extra funds that may be required in a short period, such as emergency funds or funds awaiting deployment in other investments. They provide a slightly higher rate of return than a savings account, with a redemption period of 1 – 2 business days in most cases. Learning how to invest in liquid funds gives you an edge by transforming idle, low-yield savings into a strategic asset.
ELSS (Equity Linked Savings Scheme)
ELSS funds are equity funds that are subject to a three-year lock-in period and get tax deduction under Section 80C of the Income Tax Act. They are the only type of mutual fund that has this tax advantage, so they are sought out by investors who would like to have long-term equity exposure, along with some tax minimization.
Direct vs Regular Mutual Fund: Which Should You Choose?
In India, there are two types of mutual funds—direct plan and regular plan—and the gap between the two influences your returns on investment in the long run more than you think.
| Feature | Direct Plan | Regular Plan |
| Commission | No distributor commission | Commission paid to the distributor |
| Expense ratio | Lower | Higher (by 0.5% to 1.5% typically) |
| Return impact | Higher net returns over time | Slightly lower net returns |
| Who it suits | Self-directed investors comfortable with research | Investors who prefer guided advice |
| How to access | AMC website, SEBI-registered direct platforms | Brokers, banks, and financial advisors |
Why the Expense Ratio Difference Matters
That difference in expense ratio may seem insignificant, typically 0.5% to 1% annually, but when you consider a 10- or 20-year investment horizon, it can make a significant gap in total investment returns. In a direct plan, any commission paid to a distributor is not deducted from the funds invested, but rather remains invested.
Who Should Choose What
Direct plans are appropriate for investors who are confident to do independent research, choose their funds based on their objectives and tolerance to risk, and review their portfolio from time to time without the help of a guide. Regular plans may be a better choice for investors who appreciate professional advice and are prepared to pay for it by paying a slightly higher expense ratio; the advice may be worth more than the cost difference for investors who would otherwise make poor fund selection decisions.
If you want to know everything about the differences between them, you can check out the direct vs regular mutual fund guide. However, if you have decided to go direct, read more on how to invest in direct mutual funds to understand the step-by-step process of investing in a direct plan.
How to Start Investing in Mutual Funds Step by Step
Investing in mutual funds in India has a simple process; if you get all the steps right, the rest will go a lot smoother.
| Step | Action | What to Check or Prepare |
| 1 | Complete KYC | PAN card, Aadhaar, bank account details, photograph |
| 2 | Choose a fund type | Align with your goal, risk tolerance, and time horizon |
| 3 | Select a specific fund | Check the NAV, expense ratio, and consistent past performance |
| 4 | Choose a direct or regular plan | Direct if self-directed; regular if using an advisor |
| 5 | Invest via SIP or lump sum | Use the AMC website or the SEBI-registered platform |
Step 1: Complete KYC
In India, all investments in mutual funds require KYC (Know Your Customer) verification. You will need your PAN card, Aadhaar card, a linked bank account, and a passport-sized photo. The KYC process is quick and can be done online through SEBI-registered platforms with video verification (eKYC).
Step 2: Choose a Fund Type Based on Your Goal
Before selecting a fund, clarify your fund’s purpose. Equity funds are the way to go for long-term wealth creation (10 years or more). Hybrid or debt funds are a target for those with a moderate risk tolerance and 3 years away. Emergency fund parking points towards liquid funds. For long-term tax savings, it may be advisable to pick ELSS. The fund is determined by the goal, not by the category of the fund.
Step 3: Select a Specific Fund
Within your chosen category, compare funds on expense ratio, consistency of performance over three to five years relative to the category benchmark, fund size (AUM), and fund manager track record. Past performance doesn’t guarantee future returns, but consistent outperformance of the category benchmark over multiple market cycles is a meaningful signal of fund quality.
Step 4: Choose Direct or Regular Plan
A direct plan is the more cost-effective option if you are at ease with the research needed and have already gone through the selection of categories. If you have a financial adviser who is obtaining a true value from your investment strategies, a regular plan with them might be ideal.
Step 5: Start Your Investment
When it comes to investing, most of those who are just getting started find SIP (Systematic Investment Plan) the most suitable option. Each month, a fixed amount is deducted from your bank account by the SIP and invested in the fund at the current NAV. This way, all you need to do is invest, create an investing discipline, and average your buying price over time. Lump sums are suitable where you have an oversupply of a sum to use right away.
Real-world example: A 28-year-old salaried professional in Bengaluru decides to start investing with Rs. 5,000 per month. They set a goal of building a retirement corpus over 25 years. After completing eKYC, they opt for a SIP in a large-cap equity fund in the direct plan and begin the SIP on the AMC’s website, assuming that the expense ratio is below 1%. The whole process should only take about 30 minutes. Three months later, they have already become accustomed to reviewing their folio quarterly, and that’s the proper time frame for a long-term equity SIP.
How to Choose the Right Mutual Fund
There are three stages to selecting a mutual fund: Set a goal, then match it with a type of mutual fund, and then compare the mutual funds that fall under each of these categories on key factors.
The biggest error that beginners make is beginning with the question, “Which fund had the highest returns last year?”, rather than, “What do I want to accomplish and over what time frame?” By focusing on the leader of the previous year, they are missing the point that leadership of categories changes over time; the leader of the best equity funds in one year may not be in the next.
Define Your Goal First
Each goal is associated with a different time horizon and risk implication: retirement corpus, house down payment in 5 years, child’s education in 10 years, and tax savings till March. The fund category is dependent on the time horizon. You should only begin to consider specific funds after determining the category.
What to Check When Comparing Funds
Within your chosen category, compare expense ratios (lower is better, all else equal), exit loads (fees charged for early redemption), rolling returns over three and five years against the category average, and the fund manager’s tenure and track record. Comparing funds within the same category against each other, rather than comparing a large-cap fund to a mid-cap fund, gives a more meaningful picture.
Our guide on how to choose mutual funds covers the full selection framework in detail, including how to read fund fact sheets and interpret performance data.
The Association of Mutual Funds in India (AMFI) has recently reported that SIP accounts in India have reached an unprecedented scale of 10 crores in the recent past, indicating the increased popularization of the SIP approach among retail investors in India, who already invest in mutual funds with a goal-oriented strategy.
Note: Past performance does not guarantee future returns. This is not investment advice. Investors should consider their own financial situation and goals before investing.
How to Buy and Sell Mutual Funds
Mutual fund investments in India can be made either through direct plans or regular plans and through various channels, depending on the support and investment amount.
Buying Mutual Funds
Direct plans can be done through the AMC’s website or app, or through SEBI-registered websites, with which transactions can be done in various fund houses. The purchase of regular plans is made via banks, brokers, or financial advisors.
If the transactions are made before the cut-off time (usually 3 PM on the day of closing), then all transactions, irrespective of the SIP or lump sum, are executed at the closing NAV of the day. Upon a cut-off, transactions will be processed at the next business day’s NAV.
Selling (Redeeming) Mutual Funds
Most fund types will have redemption requests fulfilled at the NAV for that day, as long as the redemption is submitted prior to the cut-off time. The amount is deposited in your bank account registered with SEBI within 1-3 business days for equity funds and on the same day or the next day for liquid funds. There is a lock-in period of three years from each SIP redemption date in ELSS funds, and partial redemption is not allowed.
In many funds, a redemption after a certain period (usually 1 year for equity funds) will incur exit loads. Before you redeem early, always check the exit load!
Our guide on how to buy and sell mutual funds includes all the information about the process of buying and selling mutual funds, step-by-step instructions for redemption by phone, online, etc.
Key Terms Every Mutual Fund Investor Should Know
A handful of terms appear in every mutual fund discussion and document; understanding them makes every subsequent investing decision clearer.
| Term | Plain-Language Definition |
| NAV (Net Asset Value) | The price per unit of a mutual fund, calculated daily |
| Expense ratio | The annual fee charged by the fund as a percentage of AUM |
| AUM (Assets Under Management) | Total market value of assets the fund manages |
| SIP (Systematic Investment Plan) | A method of investing a fixed amount at regular intervals |
| ELSS | Equity Linked Savings Scheme — tax-saving equity fund with 3-year lock-in |
| Exit load | A fee is charged when redeeming before a specified holding period |
| Folio | A unique investor account number is assigned when you first invest in a fund house |
| Units | The portions of a mutual fund you hold, equivalent to shares in a company |
Understanding NAV
NAV is the price at which you purchase or dispose of one unit of a mutual fund. It’s calculated by dividing the total value of the fund’s portfolio (minus liabilities) by the total number of units outstanding. However, a fund’s NAV in itself is not necessarily expensive (higher NAV) or cheap (lower NAV); it is the rate of growth of the NAV over time that matters.
For deeper details, read more on “What is NAV in mutual funds?” You’ll understand the complete formula, cut-off timings, and the meaning of the NAV changes in your investment value.
How to Track Mutual Fund Returns
When tracking mutual fund performance, it is important to select the correct return measure, as an incorrect measure can provide an incorrect view of the performance of your investment.
Absolute Return
Absolute returns are the easiest to measure: the percentage gain or loss from the NAV you paid for the purchases to the current NAV. It works well for a ‘lump sum’ investment over a short time frame, but it doesn’t consider the timeframe. There is a significant difference between a 30% absolute return in 1 year and 30% in 5 years.
CAGR (Compound Annual Growth Rate)
CAGR is used for lump-sum investments held over multiple years. It presents the year-on-year equivalent growth rate, which makes it easier to compare the growth rates of different funds over different periods of time. CAGR is the metric most often used to present the performance of mutual funds on websites and financial platforms.
XIRR (Extended Internal Rate of Return)
XIRR is the correct measure for SIP investments. Because SIP investments are made at different times (and therefore at different NAVs), a simple CAGR calculation doesn’t capture the real return accurately. XIRR accounts for the exact dates and amounts of each investment, giving you the true annualized return on your SIP portfolio. Understanding IRR in mutual funds, including when to use XIRR vs CAGR, is a practical skill that every SIP investor benefits from developing.
Common Mistakes Beginners Make
Most of the common pitfalls associated with investing in a mutual fund are avoidable, and knowing them will save you money and aggravation.
Choosing Funds Based on Recent Returns
Last year’s top-performing fund is one of the worst selection criteria available. Performance within categories rotates significantly. A fund that topped the category last year may have taken concentrated bets that won in that specific market environment — bets that may not repeat. Consistent performance over three to five years within a category is a more meaningful signal.
Stopping SIPs During Market Downturns
The instinct to pause or stop a SIP when markets are falling is the opposite of what SIP arithmetic suggests you should do. When markets fall, your monthly SIP buys more units at lower NAVs — accumulating more of the fund at a lower price. When markets recover, those additional units amplify the recovery gain. Stopping during a downturn locks in the loss and misses the recovery.
Investing Without a Goal or Time Horizon
Investing “because mutual funds are good” without a specific goal leads to poor fund selection and even poorer exit decisions. Without a defined time horizon, investors often redeem too early — before the investment has had enough time to deliver meaningful returns — and then reinvest in something new, repeating the cycle.
Over-Diversifying Across Too Many Funds
More funds doesn’t mean better diversification. Five large-cap funds hold broadly similar portfolios — they’re not diversifying you, they’re just creating administrative complexity. A well-constructed portfolio of three to five funds across different categories and fund houses provides adequate diversification without unnecessary duplication.
Ignoring the Expense Ratio
A 10-year SIP can accumulate a huge difference in expense ratio, even if it is 1%. Many beginners just look at only past returns and forget about the cost drag that diminishes returns. Other than that, the one with the lower expense ratio should be more efficient.
Frequently Asked Questions
Complete your KYC using PAN and Aadhaar, choose a fund category based on your goal and risk tolerance, decide between a direct or regular plan, and start a SIP or lump-sum investment through the AMC website or a SEBI-registered platform. Many funds allow SIP starting from Rs. 100-500 per month, making mutual fund investing accessible at almost any income level.
Define your investment goal and time horizon first, then match it to a fund category (equity for 5+ years, debt for shorter horizons). Within the category, compare expense ratios, exit loads, and three to five year consistent performance relative to the category benchmark — not just the top return in one year. Past performance does not guarantee future returns.
Direct plans have no distributor commission, giving them a lower expense ratio and slightly higher net returns over time. Regular plans are sold through brokers or advisors who receive commission, resulting in a marginally higher expense ratio. Over long periods, the compounding effect of the lower cost in direct plans can result in meaningfully higher final corpus values.
NAV (Net Asset Value) is the price per unit of a mutual fund, calculated daily by dividing the total portfolio value minus liabilities by the total units outstanding. A higher NAV doesn’t mean the fund is expensive — performance and consistency matter more than the absolute NAV level. Units are bought and sold at the day’s closing NAV based on transaction cut-off times.
It depends on your tax bracket, liquidity needs, and risk tolerance. Debt funds may offer better post-tax returns for investors in higher tax brackets due to indexation benefits on long-term holdings, and they’re generally more liquid than bank FDs. Fixed deposits offer guaranteed returns and are covered by deposit insurance — debt funds carry some NAV risk, and returns are not guaranteed. The right choice depends on individual circumstances.
Liquid funds invest in short-term debt instruments with maturities of up to 91 days. They suit investors who want to park emergency funds or short-term surplus cash — they offer slightly better returns than a savings account, with redemptions typically processed within one to two business days. They’re not designed for long-term wealth creation but are useful as a flexible, low-risk cash management tool.
For lump-sum investments, use CAGR (Compound Annual Growth Rate) to measure annualized returns over multiple years. For SIP investments, use XIRR, which accounts for the different dates and amounts of each SIP installment to give the true annualized return. Absolute return (simple percentage gain) is useful for short-term comparisons but doesn’t account for the time period, making it less meaningful for multi-year investments.
Conclusion
Understanding how to invest in mutual funds is genuinely one of the most useful financial steps any beginner in India can take. The entry barriers are low, the range of options covers almost every goal and risk tolerance, and the SIP mechanism makes disciplined investing accessible regardless of income level.
The fundamental concepts are simple: know your goal, select the type of fund that’s appropriate for your time horizon and your tolerance for risk, choose a steady fund with a sensible expense ratio, and keep the investment in the fund over market cycles. Choosing the perfect fund matters far less than choosing a good fund and staying the course.
The next step in investing is to assess and compare options systematically. The “How to choose mutual funds” guide will take you through the process of picking a fund, including reading the fact sheets and comparing rolling returns of funds within the category.
Note: The information provided is not investment advice. Mutual fund investments are subject to market risk, and past performance does not guarantee future returns.
Looking for more? Learn more about different funds and/or SIP investing before you invest in them for the first time.
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