The mutual fund industry in India witnessed an elite growth over the decade, with its assets under management rising from ₹11.87 trillion in September 2015 to ₹75.61 trillion in September 2025, almost over six times.
Given this rise, understanding the key characteristics of mutual funds becomes a key aspect, as it helps investors to make informed decisions, balance risk and reward, and align their objectives with long-term goals.
But what is a mutual fund? It is a pool of resources that is invested across financial securities, which aims to build a diversified portfolio.
Let’s move further and discuss the core characteristics of mutual funds in this blog.
Core Characteristics of Mutual Funds
Each characteristic of mutual funds provides unique and significant benefits. Whether it be professional management or diversification, it navigates investors towards wealth creation for a long time.
Let’s break these characteristics up!
Professional Management
Mutual funds are managed by professional and experienced fund managers who actively research, select, and track underlying securities. This saves the time and energy of investors required for managing and aligning their portfolios with the investment objectives.
Mutual funds are managed actively to beat the market or benchmark indices. While some funds are passively managed to replicate a market index, which incurs a lower cost.
Diversification & Risk Mitigation
Mutual funds invest across asset classes, securities, industries and geographies, which helps to reduce the risks arising from a single underperforming security.
Mutual funds invest across a wide variety of securities by pooling money from investors, compared to an individual investor.
For example, HDFC Balanced Advantage Fund might invest in HDFC Bank and Infosys, along with government or corporate bonds from sectors like banking, IT, and FMCG. If the IT sector faces a downturn and Infosys underperforms, the gains from banking or FMCG holdings would help to balance the overall returns and minimise the impact on the portfolio.
Affordability & Accessibility
With a lower minimum investment compared to other methods, mutual funds are accessible by different types of investors.
Through mutual funds, even small investments can gain access to a diversified portfolio, which might otherwise be inaccessible to individual investors. For example, SIPs allow investors to start investing with just ₹500 or ₹1000 per month.
Liquidity & Easy Redemption
In open-ended mutual funds, investors can purchase or redeem their investment units at any time at the current Net Asset Value (NAV) of the fund, which ensures liquidity and easy redemption of mutual funds.
It offers investors faster access to their money compared to other assets. However, redemption timelines vary for different funds, and some funds charge an exit load fee for early withdrawals.
Transparency & Regulatory Oversight
The mutual fund industry in India is regulated by SEBI, which sets guidelines for transparent and fair activities.
Due to this, mutual funds are required to disclose their portfolio holdings, Net Asset Value (NAV), and expenses regularly, which allows investors to monitor performance and protect their interests, while preventing fraudulent practices.
Variety of Schemes & Customisation
mutual funds offer a range of schemes for investors, which allows them to select funds based on their financial goals and time horizons.
The varieties include equity funds, debt funds, and hybrid funds. For example, equity funds like SBI Small Cap Fund for long-term growth, HDFC Short Term Debt Fund for a stable source of income, and hybrid funds like ICICI Prudential Balanced Advantage Fund to balance risk and return.
Tax Efficiency
When equity mutual funds are held for a long term, they receive favourable tax treatment on capital gains, which makes them more tax-efficient. For example, the long-term capital gains on equity funds are taxed at 12.5%, if the holding period is over 1-year.
Mutual fund schemes, such as Equity Linked Savings Schemes (ELSS), offer deductions on tax on the capital gains on investment amounts, under Section 80C of the Income Tax regime.
Flexibility (SIP, lump-sum, switching)
Mutual funds are highly flexible tools, as investors can either invest a one-time amount or opt for Systematic Investment Plan (SIP) to invest small, regular sums.
This flexibility to invest small amounts and options to choose between different schemes makes mutual funds highly adaptable to an investor’s objectives and needs.
Economies of Scale
Mutual funds can negotiate lower transaction and brokerage costs per investor by pooling money from a large number of individual investors.
This bulk investment allows the funds to acquire a wide variety of securities at a lower cost in comparison to an individual investor.
Convenience & Time-Saving
When an investor chooses to invest through mutual funds, the entire investing process, from research and buying to tracking and management, is handled by the fund house.
The digital platforms, online account access, and automated SIP option make investing paperless, efficient, and convenient for investors.
How These Features Benefit Investors
- Efficient entry point: Mutual funds offer a simple entry point and professional management to new investors, which mitigates the need for in-depth market knowledge.
- Lower minimum investment: The mutual funds allow investing with low capital requirements, particularly through SIPs, through which investors can start building wealth with small and regular contributions.
- Long-term benefits: Mutual funds offer the flexibility to invest regularly, which helps to build discipline, leverage compounding, and rupee cost averaging, which allows investors to work for their long-term goals.
Mutual Funds vs Other Investment Options (e.g., ETFs, Stocks)
| Features | Mutual funds | ETFs | Stocks |
| Management | Mutual funds are generally actively managed. | ETFs are passively managed by tracking a particular index or benchmark. | Stocks are often managed by the investors themselves or by portfolio managers. |
| Diversification & risks | It offers a built in diversification, and involves lower risks in comparison to stocks. | It is tied to a specific index or sector, however, the degree of risk depends on the underlying assets. | It allows diversification and involves higher risk as performance of stocks are based on both companies and market. |
| Traded on | Mutual funds are bought or sold directly through the fund house, broker, or distributors. | ETFs are traded on stock exchanges similar to regular stocks. | Stocks are traded on stock exchanges. |
| Liquidity & costs | It offers high liquidity for open ended funds, however it incurs higher expenses ratio. | ETFs are highly liquid as well as involve lower expense ratio. | Stocks are highly liquid and involve brokerage costs for each transaction. |
Mutual funds blend professional management, diversification, and flexibility to make investing simple and more effective for different types of investors. With growing participation and an impressive rise in AUM over the decade, mutual funds have proved to be one of the most efficient tools for long-term wealth creation.
Therefore, understanding the characteristics of mutual funds will help investors to align their financial goals, manage risks, and build discipline to move through market changes confidently.
FAQs
The main characteristics of mutual funds include professional management, diversification, liquidity, flexibility, affordability, transparency, and tax efficiency, which make mutual funds accessible and effective for achieving the financial goals of various investors.
Professional management involves research and analysis, selection of funds, and monitoring of securities to manage risks and maximise returns, which saves investors time and ensures their portfolios stay aligned with their objectives.
Mutual funds pool money from investors and invest it across sectors and asset classes like equities, bonds, and money markets, to reduce the impact of a single underperforming investment.
Yes, open-ended mutual funds allow investors to redeem their units any day at the fund’s Net Asset Value (NAV), and ensure easy access to funds when required.
In India, mutual funds are regulated by SEBI, which mandates regular disclosures of holdings, NAV, and expenses, which make it transparent and fair while protecting investors’ interests.
Long-term capital gains from equity funds offer favourable tax treatment compared to short-term investments. Funds like Equity Linked Savings Schemes (ELSS) provide tax deductions under Section 80C under the income tax regime.
Mutual funds offer flexibility through SIPs, lump sum options, and fund switching, which enable investors to align their strategies to financial goals, horizon, and risk tolerance.
