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Level 8 of 13 · Mutual funds

Mutual Funds: Complete Beginner to Advanced

By the end you will: evaluate and invest in mutual funds.

Not everyone has the time or skill to pick individual stocks. Mutual funds let you hand that job to a professional, with a small amount of money. This level explains how funds work, every type of fund, and a systematic way to pick good ones. MojoStox lists every scheme in India with its official AMFI NAV, so you can check real funds as you learn. Mutual fund investments are subject to market risks; read all scheme documents carefully.

Start with 8.1: What is a mutual fund?
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How mutual funds work

  1. 8.1What is a mutual fund?A mutual fund pools money from many investors and invests it in shares, bonds or other assets, managed by a professional fund manager.
  2. 8.2Why do mutual funds exist?They exist to make investing simple, affordable and diversified for ordinary people.
  3. 8.3How do mutual funds work?You buy units at the day’s NAV. The fund invests your money. As the investments rise or fall, NAV moves. You redeem (sell back) units at…
  4. 8.4Who manages mutual funds?A fund manager (with a research team) at an Asset Management Company (AMC) makes the investment decisions, overseen by trustees and…
  5. 8.5What is an Asset Management Company (AMC)?An AMC is the company that runs mutual fund schemes: SBI Mutual Fund, HDFC Mutual Fund, ICICI Prudential, UTI and many others.
  6. 8.7What is AUM?AUM (Assets Under Management) is the total money a fund (or AMC) manages.
  7. 8.8What is an expense ratio?The expense ratio (Total Expense Ratio, TER) is the yearly fee charged by the fund, as a % of your investment, deducted daily from the NAV.
  8. 8.9What is an exit load?An exit load is a fee charged if you redeem units before a specified period, e.g. 1% if redeemed within 1 year.
  9. 8.10What is SIP?A SIP (Systematic Investment Plan) invests a fixed amount automatically every month (or week) into a fund.
  10. 8.11What is lump-sum investment?A lump sum is investing a large amount at once.
  11. 8.12What is an index fund?An index fund simply copies an index, like the Nifty 50, holding the same stocks in the same weights.
  12. 8.13What is an actively managed fund?An active fund has a manager who chooses stocks, trying to beat a benchmark index.
  13. 8.14What is a passive fund?A passive fund follows a set rule or index rather than a manager’s judgement. Index funds and most ETFs are passive.
  14. 8.15What is a direct mutual fund plan?A direct plan is bought directly from the AMC (or via platforms offering direct plans) with no distributor commission.
  15. 8.16What is a regular mutual fund plan?A regular plan is bought through a distributor or agent, who is paid a commission from the fund’s expense ratio.
  16. 8.17What is the growth option?In the growth option, all profits stay invested in the fund. There are no payouts, so NAV keeps compounding.
  17. 8.18What is the IDCW option?IDCW (Income Distribution cum Capital Withdrawal), earlier called the "dividend option", pays out part of the fund’s money to you from…

Types of mutual funds

SEBI groups funds into categories so that similar funds can be compared. Here is the family tree, then each type.

  1. 8.19The mutual fund family treeFunds are classified by what they invest in (equity, debt, hybrid) and then by style or size.
  2. 8.20Equity mutual fundsEquity funds invest mainly (at least 65%) in shares.
  3. 8.21Debt mutual fundsDebt funds invest in bonds, government securities, treasury bills and other fixed-income instruments.
  4. 8.22Hybrid mutual fundsHybrid funds mix equity and debt (and sometimes gold) in one fund.
  5. 8.23Large-cap fundsLarge-cap funds invest at least 80% in the top 100 companies by market cap.
  6. 8.24Mid-cap fundsMid-cap funds invest at least 65% in companies ranked 101–250 by market cap.
  7. 8.25Small-cap fundsSmall-cap funds invest at least 65% in companies ranked 251 and below.
  8. 8.26Flexi-cap fundsFlexi-cap funds invest at least 65% in equity across large, mid and small caps in any proportion the manager chooses.
  9. 8.27Multi-cap fundsMulti-cap funds must invest at least 25% each in large, mid and small caps (75% in total), with the rest flexible.
  10. 8.28ELSS fundsELSS (Equity Linked Savings Scheme) funds are equity funds with a 3-year lock-in. Under the old tax regime, they qualify for the tax…
  11. 8.29Sectoral fundsSectoral funds invest at least 80% in one sector, like banking, IT or pharma.
  12. 8.30Thematic fundsThematic funds invest around a theme across sectors, like manufacturing, consumption, ESG or infrastructure.
  13. 8.31Liquid fundsLiquid funds invest in very short-term debt (maturity up to 91 days): treasury bills, commercial paper.
  14. 8.32Overnight fundsOvernight funds invest in securities maturing in 1 day.
  15. 8.33Index funds (as a category)Index funds replicate an index: Nifty 50, Nifty Next 50, Sensex, Nifty Midcap 150 and more.
  16. 8.34ETFs (Exchange Traded Funds)An ETF is a fund that trades on the stock exchange like a share, at live prices throughout the day. Most ETFs track an index or gold.

How to identify the best mutual funds

There is no single "best fund". There is a best fund for your goal, chosen systematically. Use MojoStox’s Top funds ranking to practise these checks on real data.

  1. 8.35How to compare historical returnsCompare funds of the same category using CAGR over the same periods (1, 3, 5, 10 years) and rolling returns (returns over every possible…
  2. 8.36Why 1-year returns alone are insufficientA single year can be luck, one lucky sector bet, or a market-wide rally.
  3. 8.37Evaluating 3-, 5- and 10-year performanceCheck that the fund has performed well across several periods and through at least one market fall.
  4. 8.38What is benchmark comparison?Each fund names a benchmark index (e.g. Nifty 100 TRI for large caps). Compare the fund’s returns with it.
  5. 8.39What is fund manager experience?The track record and tenure of the person managing the fund.
  6. 8.40What is portfolio diversification (in a fund)?How spread out the fund’s holdings are: number of stocks, top-10 weight, sector weights.
  7. 8.41What is standard deviation?Standard deviation (SD) measures how much a fund’s returns swing around their average. Higher SD = more volatile.
  8. 8.42What is the Sharpe ratio?The Sharpe ratio measures return earned per unit of total risk, above a risk-free rate.
  9. 8.43What is the Sortino ratio?The Sortino ratio is like Sharpe but counts only downside volatility (bad swings).
  10. 8.44What is maximum drawdown?Maximum drawdown is the largest peak-to-bottom fall in the fund’s value over a period.
  11. 8.45How to evaluate expense ratiosCompare the TER of the direct plan against peers in the same category.
  12. 8.46How to evaluate fund consistencyCheck how often the fund beat its benchmark and category average across rolling periods.
  13. 8.47How to identify risky mutual fundsWarning signs of higher risk in a fund.
  14. 8.48Avoid choosing funds only because they recently did wellRecency bias is assuming recent winners will keep winning.
  15. 8.49Practical mutual fund selection checklistUse this list before investing in any fund.