Investor Education

Mutual Fund Basics

This page explains mutual funds in simple language—what they are, how they work, and what you should keep in mind before investing. It is meant for education only and not as a recommendation to buy or sell any specific scheme.

What is a mutual fund?

A mutual fund is a pool of money collected from many investors and managed by a professional fund manager. The fund invests this pool into a basket of securities such as shares, bonds, money-market instruments or a combination of these.

Instead of you directly buying individual shares or bonds and tracking them, the fund manager does this on your behalf as per the fund's stated objective. You own units of the mutual fund, not the underlying shares directly.

Key Takeaway:

Mutual funds offer diversification and professional management without requiring you to pick individual stocks. Learn more about how to choose the right mutual fund.

What is NAV and how do I earn returns?

NAV (Net Asset Value) is the price of one unit of a mutual fund. It is calculated as:

NAV = (Market value of all investments – expenses & liabilities) ÷ Number of units outstanding

When the value of the fund's investments goes up or down, the NAV also changes. Your return comes from:

Increase in NAV (capital appreciation).
Dividends / payouts in certain types of plans, if opted.

For long-term goals, the focus is usually on growth of NAV over time, not day-to-day fluctuations.

Note: Tax treatment varies by fund type and holding period. Equity funds held for more than 1 year qualify for long-term capital gains tax benefits.

Main categories of mutual funds

There are many sub-categories, but at a high level:

Equity Funds

Invest mainly in shares of companies. Suitable for long-term goals (5+ years). Higher return potential with higher volatility.

Debt / Fixed Income Funds

Invest in bonds, government securities and money-market instruments. Aim for more stability and income than equity funds.

Hybrid / Balanced Funds

Invest in a mix of equity and debt. Try to balance growth with stability. Useful for moderate-risk investors and near-goal transitions.

Within each bucket there are many SEBI-defined sub-categories (large cap, flexi cap, mid cap, liquid, short duration, etc.). Suitability depends on your goal, time horizon and risk profile. Learn how to choose the right fund.

Direct vs Regular plans – where do we fit in?

Every mutual fund scheme is available in two broad options:

Direct Plan

You invest directly with the AMC without a distributor.
Expense ratio is usually lower.
You are responsible for scheme selection, monitoring and rebalancing on your own.

Regular Plan (Distributor-assisted)

You invest via a mutual fund distributor like HRP Wealth.
AMC pays a commission/trail to the distributor out of the fund's expenses.
You receive guidance, behavioural support and periodic reviews to keep your plan on track.

HRP Wealth currently works in the role of an AMFI registered mutual fund distributor and IRDA authorized insurance consultant. Our focus is to simplify choices, align products with your goals and provide ongoing support, especially around behaviour and reviews.

Want to understand the cost difference in detail?

Read our detailed comparison

Ready to Start Your Investment Journey?

Get personalized guidance on choosing the right mutual funds for your goals and risk profile.

Talk to HRP Wealth Explore Mutual Fund Solutions

Common Pitfalls to Avoid

Being aware of these common mistakes can help you make better investment decisions:

Chasing Past Performance

Past returns don't guarantee future results. Focus on fund consistency, fund manager track record, and alignment with your goals.

Stopping SIPs During Market Dips

Market volatility is normal. Stopping SIPs during downturns means missing out on buying units at lower prices. Stay disciplined.

Over-Diversification

Having too many funds can dilute returns and make monitoring difficult. A focused portfolio of 4-6 well-chosen funds is usually sufficient.

Ignoring Expense Ratios

Even small differences in expense ratios can significantly impact long-term returns. Compare expense ratios within the same category.

Your Next Steps

Now that you understand the basics, here's a practical roadmap to get started:

Define your goals: Identify what you're investing for (retirement, child's education, house, etc.) and the time horizon for each goal.
Assess your risk profile: Understand your risk tolerance. Generally, longer time horizons allow for higher equity allocation. Take our risk assessment.
Choose the right fund category: Based on your goal and time horizon, select equity, debt, or hybrid funds. Learn more about fund selection.
Start with SIP: Begin with a Systematic Investment Plan (SIP) to build discipline and benefit from rupee cost averaging. You can start with just ₹500.
Review periodically: Conduct annual reviews to ensure your portfolio stays aligned with your goals and make adjustments if needed.

Need Help Getting Started?

HRP Wealth can help you create a goal-based investment plan tailored to your needs. Contact us for a consultation.

Frequently Asked Questions

No, NAV alone doesn't indicate if a fund is better or cheaper. A lower NAV doesn't mean better value. What matters is the fund's performance, consistency, expense ratio, and alignment with your goals. A ₹10 NAV and ₹100 NAV fund can both be good or bad depending on their underlying portfolio and management.

Review your portfolio at least once a year or when there are significant life changes (marriage, job change, new goals). Avoid checking NAV daily as it can lead to emotional decisions. Focus on long-term performance and whether your funds are still aligned with your goals. Regular reviews help ensure your portfolio stays on track.

The expense ratio difference typically ranges from 0.5% to 1% per year. On a ₹1 lakh investment growing at 12% annually, a 0.75% higher expense ratio could mean approximately ₹2-3 lakhs less over 20 years. However, Regular plans provide professional guidance, behavioral support, and periodic reviews that can help avoid costly mistakes. The value depends on whether you need ongoing support or can manage independently.

Yes, you can pause or stop your SIP anytime. However, stopping during market downturns means missing opportunities to buy units at lower prices. SIPs work best when continued consistently over the long term. If you need to pause due to financial constraints, consider reducing the SIP amount instead of stopping completely.

Mutual funds offer liquidity - you can redeem your units anytime (except in certain close-ended schemes). However, redeeming equity funds within 1 year may result in short-term capital gains tax. For goals less than 3 years away, consider debt or hybrid funds. Always maintain an emergency fund separately to avoid premature redemptions.

Mutual funds are market-linked products and carry market risk. While you can lose money, especially in equity funds during market downturns, losing all your money is extremely unlikely in diversified equity funds. Debt funds carry credit and interest rate risks. The key is to invest according to your risk profile, stay invested for the long term, and diversify across fund categories and asset management companies.

When should you talk to us?

You are starting SIPs for the first time and want a clear goal map.
You have existing policies and funds but are unsure if they are on the right track.
You are within 5–15 years of retirement and want to plan SWP-based income. Learn about SWP.
You are an NRI and want to clarify how to invest in India.
You want to understand how mutual funds can help build wealth over time. Read about wealth creation through mutual funds.

Important Disclosures & Risk Information

• HRP Wealth currently acts as an AMFI registered mutual fund distributor (ARN-342284) and IRDA authorized insurance consultant. We do not act as a SEBI registered investment adviser (RIA) as of now.
• We may receive commissions and incentives from AMCs / insurers for the products you choose. We do not charge any additional planning fee unless explicitly agreed in writing.
• All information, illustrations, and calculator outputs on this website are for education and awareness only. They are not a recommendation to buy, sell, or switch any specific scheme.
• Mutual fund investments are subject to market risks, including possible loss of principal. Read all scheme related documents carefully before investing. Past performance does not guarantee future returns.
• Final product selection, asset allocation, and investment decisions should be taken only after a one-to-one discussion where we understand your income, expenses, risk profile, time horizon, and existing portfolio.
• We do not provide intraday trading tips, guaranteed returns, or unofficial shortcuts. We never ask for your internet banking / OTP / login credentials.